27 March 2013
I’m still trying to get my head around the V/JPM deal (see prior blog). As I outlined in Business Implications of Tokens, New ACH and the Visa/JPM Deal, US bank token efforts are clearly focusing on POS payments. Mastercard and Visa’s strategies are focusing on all digital wallets.
A central problem facing any token is “where to start”. What merchant would invest in capability to accept a token if consumers don’t use them? Similarly what consumer would want a token if there are no merchants that accept them? What problems do tokens solve? For Bank? Merchant? Consumer?
I think most of us clearly get the bank value proposition. If the only way to “interpret” a token is to ask your bank to resolve it.. this interaction establishes a very clear path to control.
Since I don’t have the new JPM/V agreement in front of me, I thought I would look at a few scenarios.. (which I would appreciate your comment on). Note these scenarios are not mutually exclusive.
Scenario 1 – Issuer Solution
Description: JPM takes ownership of all Visa BINs. These Unique BINs become the “token” by which JPM can assign them to either debit or credit or both. All JPM bins now get routed through JPM’s own unique VisaNet regardless of acquirer. If JPM is acquirer then it takes on-us. Represented by flows 1 and 4. JPM moves to put 100% of cards through Visa for consistency of routing. I like to think about this scenario as JPM just put its services on the Visa switch for all of its consumers… as opposed to delivering those services as an “issuer”. In one of my very first blogs (Googlization of FS, 4 years ago), I outlined how an advertising service would work from Visa’s switch.
Consumer Impact: None.. consumers have no idea anything happened. Of course in a mobile or “private label” scenario, JPM could “pre-load” a wallet with its cards.. or give its existing consumers a unique “private label” card, all with no issuance cost. Banks will refuse to accept non-tokenized cards in wallet (see blog), and networks will restrict usage of aggregators (see blog).
Merchant impact POS. ?What card am I accepting? A credit card? a debit card? a private label card? a direct link to another account type? No one knows but JPM. How can the merchant route this payment type? There are durbin rules for dual function “hybrid” cards but if card acts primarily like a credit then there is no problem.
Visa Impact. 2-4% revenue impact by 2015. Loss of JPM network fees, switching domestic payments off traditional VisaNet. Biforcating VisaNet, Loss of Rule control. On the plus side, Visa may leverage CMS services for cards they service within its hosted transaction processing.
JPM Impact. Consumer value independent of merchant agreements. Control of customer, control of card number, multi function card, new advertising capabilities, new value added services, new product differentiation, mobile wallet control, position CPT/CMS for wallet provider role (PayPal, Square, MCX, …)
Scenario 2 Merchant Only Solution
Description: Chase PaymenTech/Chase Merchant Services (CMS) work to strike special arrangements with retailers that go beyond acceptance cost to data sharing. Represented by flows 1 and 2. Currently issuers can set interchange rates for merchants (strike unique deals), however this will allow retailers to combine data and keep retail transaction data off VisaNet (Flow 1 Red Arrows). Focus is on value added services to merchants and white label programs with unique features.
Consumer Impact: None.. consumers have no idea anything happened
Merchant impact POS. Chase Merchant Services becomes new acceptance brand. Merchants that use CMS have new features available and new white label products. If JPM can do this with CMS.. why can MCX do this with First Data. It is precisely what FirstData was doing in 2006 prior to their settlement with Visa.
… on-us transactions are becoming more common among issuing banks that also operate merchant acquiring businesses. “Large banks like JPMorgan Chase, Citigroup, and Bank of America are currently doing on-us transactions now, and always have,” he said. “The more consolidation you have in the banking industry, the more on-us transactions you’ll get.” Bank of America is also rumored to be interested in creating its own card processing network.
Visa Impact. Dependent on success of new CMS acceptance network takes off and whitelabel/co brand. MAY be consistent with a V.me strategy by allowing customers to participate directly in data sharing (non JPM banks would not like this model). Loss of CMS “on us” network fees, switching domestic payments off traditional VisaNet. Biforcating VisaNet, Loss of Rule control. On the plus side, Visa may leverage CMS services for cards they service within its hosted transaction processing.
JPM Impact. Differentiation. JPM can now compete w/ Amex in virtual 3 party network for some Merchants. New white label/co brand value propositions. New retailer services (example Payment enabled CRM).
Scenario 3 – Mobile only
Description: New VisaNet is restricted to switching Chase mobile tokens. Chase does not have ownership of their Visa BINs, but rather has an “interoperability pact” with Visa to ensure Visa can route new “tokens” (see blog). The tokens operate same as BINs, but may be of different format (not 16 digits). Objective is to ensure all mobile wallets have tokens instead of PANs. Note this is very similar to scenario 1, but scope is focused on mobile POS to stop wallet providers (PayPal, Google, Square, LevelUp, MCX) from gaining traction. I also believe tokens must initially take the format of PAN in order to minimize technology risk for the ecosystem. Turnkey mobile solution to enable credit, debit, ACH, Offers, platform for other wallet providers.
Consumer impact: Number of mobile payment schemes, how your account is provisioned into a mobile wallet, bank control and protection of your information, no account number you can use.. all hidden.
Visa impact: Same as above, getting out of mobile payments at the POS… focusing on eCommerce/V.me. No revenue impact at all.
Merchant impact. Loss of consumer data, bank control, new data sharing agreements, loss of access to ACH system for settlement, payment mix cost.
JPM impact. Uniquely compete for Platform business, retailer business, become the retailers, consumer, 3rd party platform of choice.