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If you’re a top-10 bank card issuer these days, the good times are looking increasingly tenuous; if you are one of the nation’s 17,000 other, smaller banks or credit unions, you have a chance to get your piece of the payments business back. Since a handful of big banks control 90% of the credit card action & 60% of signature-debit card revenue, just about any new transaction you get is all upside. The key is finding the pathway to pricing payments based on their value provided to users. The commoditization of the payment networks & the push from the acquiring side of the business to fairly balance compensation according to effort & risk, as discussed in prior installments of this series, are actually very good news for the industry. These trends not only enable payment options that relieve smaller merchants of the burden of subsidizing the rest of the industry, but they allow smaller financial institutions to leverage the networks they have—such as the automated clearing house & electronic funds transfer systems-to get back into the game. This opportunity is most clearly manifested in the online environment, where the traditional signature-based credit & debit card model is rapidly outliving its usefulness (and even its relevance) against a backdrop of multiplying options for making purchases: PayPal has an estimated 12% share of the online market in the US & arbitrages various bank networks to command a 62% margin on payments-while giving merchants substantial breaks in front-end pricing & back-end risk management costs. Bill Me Later has achieved substantial penetration of the Internet Retailer Top 500 merchants, & will soon be available to smaller merchants through a high-end online ISO, offering price & cost benefits plus higher tickets & frequent upsells. Google Checkout makes payments transparent to merchants that don’t want to fuss with them, & subsidizes their cost based on the ad & search spend the merchant makes. Market share & fast-growing payments volumes are obviously in play, with projections that 1 in 4 online payments by 2012 will be made with something other than signature-based cards. & so some payment options are arising for small financial institutions to help them in their fight to regain their share of the business. Nacha, which guides the fast-growing, low-cost ACH, continues to push a payment model now known as Secure Vault Payments (SVP). By authenticating & arranging payment through the consumer’s online bank, SVP offers stronger security, at a significant price break to the merchant, & available to any bank that signs up to be part of the system. One of the larger EFT networks plans to do essentially the same thing via consumer ATM debit cards. The consumer is ‘pushing’ a payment to a known merchant from a known consumer, so the risk is much narrower. Just as important, the transaction clears & processes in real time (or at least same day), so the funding risk is all but eliminated. Any financial institution in the network can participate. ATM Direct, which has new life in its reincarnation as Acculynk, can let any EFT network—and therefore any financial institution on that network-enable consumers to do online (or mobile) purchases with secure entry of their PINs via display of a host-provided ‘floating PIN pad.’ All offer decided advantages over signature-debit cards. If all costs, especially signature-debit chargebacks & customer-service costs, are factored in, any ACH- or EFT-based guaranteed payment priced above 62 bps provides the issuer with higher margins than equivalent use of the signature-debit card option-despite a much higher revenue rate for signature debit. That leaves a lot of room to offer meaningful discounts to merchants while still providing more attractive margins for processors & banks alike (even for the big issuers). This advantage has been borne out with PIN-less debit bill payments online (or via the phone)-a market that was turbocharged with DoJ’s rejection last month of Visa’s 4-year ban against accepting non-Visa transactions on Visa cards without a PIN. Here the consumer uses an ATM debit card without the PIN to push a payment to a known, certified biller, who gets a very clean EFT transaction. In return, the biller typically pays the banks capped rates of between 35c & 50c per transaction -depending on the market vertical. By 2012, 2.5b bill payments per year will be converted from mailed-in paper checks to the online & telephone channels. Big issuers would love to see those payments converting to signature-debit or credit, which could generate fees of $1 to $2 per transaction. But these options face growing resistance from both consumers & billers. The alternative payment option is ACH, which is cheap but sometimes messy for billers & consumers, & earns financial institutions little if anything in revenue. So if you’re a small bank, wouldn’t you break a leg to promote PIN-less debit all day long? & if you’re a small bank, you’d better read next week’s installment, which covers changes in association strategies, including support for decoupled debit cards by MasterCard. It’s eat, or be eaten, time now.