Coming on the heels of JPMorgan’s acquisition of Bloomspot, JPMorgan and Visa recently announced a partnership that essentially claws out a closed-loop merchant services proposition, “Chase Merchant Services.” The structure for this arrangement looks similar to the AMEX model in that Chase merchant terminals will treat transactions initiated on JPMorgan-issued Visa cards in a differentiated and more flexible manner. The Justice Department antitrust settlement with the card associations may have been the first nail in the coffin for association operating rules. The JPMorgan/Visa partnership may be the final nail – and the resulting economic flexibility will radically redistribute profits across the industry.
The Economic Driver
While details of the arrangement are limited, the economics of the card business are so powerful – and so lopsided in favor of the card issuer – that it’s pretty easy to discern where this arrangement is heading. A closed-loop approach will enable JPMorgan cards to settle through JPMorgan terminals with greater flexibility around solution scope and pricing. This will enable JPMorgan to optimize the card business by aligning the economics to individual merchants and the overall profit drivers of its issuing card portfolio. Because interchange on issued cards drives the economics of card, JPMorgan can effectively use its base of merchant clients to drive higher card usage by its customers, thus increasing revenues and margins.
Card Association Implications
For Visa, the first mover advantage enables it to secure increased volumes from JPMorgan, a major scale player on both sides of the industry (issuing and acquiring). The agreement leaves MasterCard left out in the cold to look for alternative propositions to leapfrog the Visa move, to scramble to copy this deal with other large card players (e.g., Bank of America) or to cobble together a consortium approach to try to mimic these benefits for smaller processors and card issuers.
For AMEX, this move poses considerable threats. AMEX has historically used its high interchange rates to drive greater cardholder rewards, offsetting its lower acceptance rate. As compared to Visa and MasterCard, AMEX has also been more nimble and aggressive in pursuing social media tie-ins to drive card traffic. While analysts speculate that the JPMorgan/VISA agreement will focus on price discounts, the closed-loop network also gives JPMorgan the possibility of offering a premium Visa brand with AMEX-like benefits or entirely new benefits – with a stronger economic basis for funding these rewards while still retaining the greater merchant level acceptance of VISA versus AMEX.
Merchant Acquirer Implications
For merchant processors, the JPMorgan/Visa partnership poses considerable risks. The economics of interchange will motivate JPMorgan to drive merchant capture volumes to boost JPMorgan issued card transactions – in essence subsidizing the card issuing business with merchant processing as a loss leader. JPMorgan could discount its merchant processing business not only with price discounts, but also with value-added services for merchants – especially services that leverage the data scale JPMorgan enjoys around the spending habits of its cardholders. First Data, Vantiv and other processors may find themselves at a distinct disadvantage because their proposition does not include the attractive economics of card issuing interchange.
The economics of card have always been lopsided and now they have come home to roost. The JPMorgan/Visa proposition will appeal greatly to scale-driven merchants such as retailers, who are looking for more flexible, responsive economics – but it will also drive smaller merchant business to the extent that JPMorgan can leverage its more flexible economics to drive greater value – either in lower costs or higher value-added services. For companies that accept significant card volumes, card issuers, card merchants, and the card associations, it’s time to revisit strategy and economics.