ChasePay Thoughts (Don’t sell Visa Stock Just Yet)

09 Nov 2015 Updates

  • I did a Morgan Stanley call this week with Smittipon Srethapramote, ChasePay was a central topic. Evidently Chase is positioning this as a way for CPT to gain volume. Value Prop: we will clear ChasePay transactions at 0bps. Given that ChasePay and MCX don’t exist yet it may be a little pre-mature to take a bet against First Data. What is actually happening is that MCX retailers will be switching ChasePay transactions to Chase. So.. CPT may gain a few merchants.. and a little bit of incremental volume.. but it will be at 0bps. Also remember that FD has Citi, BAC and WFC as customers.. and they can do anything that CPT can do.
  • Problems with a merchant switch. The merchant switching on debit is outlined below.. not much issue here given Durbin’s requirement for dual routing. In essence debit can not be treated as PIN debit and routed directly to issuers/retail banks. However there are BIG problems with ChasePay as credit IF IT IS A VISA ACCOUNT.
    • ChasePay as a Credit must be routed through Visa and then to Chase’s ChaseNet. Merchant switching does not appear to be allowed. In other words ChaseNet Credit in an “on us” would only work if MCX merchants moved 100% of volume to ChaseNet.
    • ChasePay at MCX must be an approved card present method (CHIP or NFC). QR code is not an accepted method therefore it would be treated as CNP. Now Chase could set new unique rules on this transaction that would enable them to own the fraud, but they would need to own the acquiring as well. To own the acquiring they need more than just a “switch” from the merchant for ChasePay transactions only.
    • Tokens, VDEP and MDES. Chase is prohibited from discriminating against wallets in the new VDEP/MDES rules. Chase cards will be in ApplePay, SamsungPay and Android Pay. So consumer confusion will abound.. but also the advantages (liability shift, ubiquity, consumer experience) will make ChasePay on MCX hard to gain traction.
    • Creating ChaseNet as a new Visa. The issues above could disappear if Chase was able to create a completely new 3 party network (per section below).  But Chase has many hurdles to cross, as merchants AND CONSUMERS would both have to accept the terms of the new network and forsake the benefits of Visa. Chase is nibbling on the periphery and trying to enable a new semi closed network within an open 4 party one.
    •  Chase can deliver 0 bps payments anytime it wants to with any card it owns today. Issuers have always held this pricing flexibility. Now acquirers will pass on their fees, but this is only 20-30bps.
  • Chase has created a Visa war plan and I don’t understand why. Chase is the only major bank pushing The Clearing House to develop a token facility, they were also a driving force behind Early Warning’s purchase of ClearXChange… which is well positioned to be an EXTRAORDINARY new debit network.

As background, back in 2011 I told Gordon and Todd that they didn’t understand the dynamics of MCX. They believed they would win MCX because of relationships.. my prediction has turned out to be accurate. I said that I went in as Google and offered MCX 0bps payments with a potential of PAYING MCX to take GoogleWallet and MCX still said no . The margin in payments is in the long tail. The driver of ANY INVESTMENT here is in changing consumer behavior OR in delivering services beyond Payment.  Chase certainly has no credibility here. Payments and banking are ENABLERS to commerce.. they are NOT THE CENTER (see blog Tilting the Networks… a MASSIVE Change)

My top questions/unknowns

  1. Will ChasePay Credit be a Visa Card. If not will they acquire both consumers and merchants?
  2. Does chase believe that a ChasePay credit can run on 2 networks at once?
  3. Does Chase believe merchant based switching/LCR is permitted under its Visa Agreement
  4. What volume does Chase believe it will obtain through this product (BEYOND 0bps payments).

 

29Oct

This quarter Chase has been a favorite target of my blog (ex What should JPM do). Coming out of money 2020 it looks like my timing was pretty good. branding nascar

I just don’t get it…. WHY!?

  1. Why would JPM want a consumer to pay through ChasePay in MCX and not use their Visa card?
  2. Why would any consumer want to accept new terms of a new network (ChaseNet) to use their account in new wallet (CurrentC) with another new network (MCX). Why not just use your Visa card?
  3. Why would I want yet another acceptance brand when Visa’s network fee is so incredibly small (5-15 bps). Branding at the POS is beginning to look like a NASCAR

Back in March 2013 I wrote 2 blogs: Visa’s Golden Goose on the Menu, and JPM/V Scenarios… Which one is it? This was only 4 months after Charlie left JPM and took the top job at Visa. Most of you know I’m very high on Visa now (see Tilting the Networks a MASSIVE change).  As I’ve stated before, the story (all pure speculation) is that Chase was furious with Visa in 2011 and either buying discover or moving their entire portfolio to Mastercard or buying Discover. JPM’s BOD found out about this and threw out Saunders/Buse, hired in Charlie and gave JPM everything they wanted in a DFS purchase (thus bi-forcating VisaNet).. hey but what do I know.. (go ask the CFOs of DFS and MA.. ). Visa must feel pretty screwed over here.. after giving JPM everything they wanted, JPM still looks to create their own brand, product and network.

Value of OPEN

JPM looks caught in a “I want to be AMEX” moment… at a time where Amex itself is looking to re-invent. The value of OPEN is huge.. and it is unfathomable that the largest issuer in Visa doesn’t see it. (See Building Networks and Openness)

The funny thing is that JPM’s efforts are only crystalizing other banks to work MORE CLOSELY with Visa. Quote from top 3 issuer “FU*^& Chase, makes me want to work with the existing networks even more…”. Now we know why Visa worked with Citi on Costco and not their “friends” in Columbus. MCX will not allow any network branded cards in their wallet.. and ChasePay certainly gives chase better interchange than ACH.. but do I really want to encourage a new acceptance method that is at a lower cost? I would if I’m facing prospect of 0 fees.. but is JPM really that circumspect on the value and behavior of Visa card use?

For the model of interaction, looks like I was close in estimating what the product would look like

2013

MCX JPM

2015 (post Money 2020)

ChasePay flow

 

Chase Pay? An account with two identities?

chasepay Options

I must admit to total confusion to ChasePay.. Hopefully the community can help in the comments. The only way this can bypass visa (see blog on wrapping) is to have it run under completely new rules. Will a consumer really understand that a single account runs under 2 different rule sets? On my Apple Phone with CurrentC installed what do I use at an MCX merchant that accepts NFC (ex CVS)? Or worse if Chase does indeed allow Chase cards on SamsungPay they have created yet another conflict with MCX (because of MST mag stripe emulation).

Chances of ChasePay Success?

The MODEL above makes complete sense for PayPal, Amex and MCX. To be clear I am very very high on MCX.. but this product? Perhaps Chase cards have a loyalty I just don’t know about. Or there is something missing in my assumptions. There are 3 models of ChasePay Interaction

  1. ChasePay within MCX Wallet
  2. ChasePay within the Chase Mobile App via MCX QR Code Directly (I think this will be prime)
  3. ChasePay presented via NFC/MST (ex Samsung Pay??)

Will Consumers accept new terms for a new product operating in a new wallet with a new network? Is that really innovation? Innovation is NOT ABOUT rewiring your assets, it is about designing a great experience for the consumer.

Sorry for the short blog, spent all my time drawing the pictures.

 

13 thoughts on “ChasePay Thoughts (Don’t sell Visa Stock Just Yet)”

  1. What about the possibility that ChasePaymentech, as part of the deal, gets the right to connect to every MCX merchant so they can process Chase Pay transactions. What about the roll of the MCX settlement Bank becoming JPM. What about deals on xobrand and PLCC portfolios as icing on the cake.

  2. Tom,

    Pretty much agree. From the UX perspective customers aren’t going to shift payment behavior to please JPMC/MCX. Once habituated, whichever wallet they have adopted will be the wallet they use…for everything.

    There is one opportunity for JPMC with MCX that isn’t getting a lot of talk…Chase is now in a position to acquire with every MCX member, regardless of the acquirer/processor relationship that is in place. The camel’s nose is in the tent, to cite a cliche.

    1. Hey Thad, Chase PaymentTech (CPT) is not part of this deal. Per the picture above, the MCX Least Cost Routing Facility in FD/FIS just routes this new product to Chase as issuer. The LCR facility can also route directly to Chase for “on use” given the Visa agreement that enables “ChaseNet”. CPT is not set to acquire.. I have strong first hand knowledge here.

  3. I believe this is a great move for ChasePay because they can now control both the transaction and what gets stacked on top of it value-wise. This is an intermediary model (the FonWallet model I might add) and is perfect for for enabling LCR capabilities and route each engagement to their best interest (based on cost, time, value or some other benefit).

    The point to remember is they are now in a powerful position because they will control what value is stacked on top of each transaction and that I believe is the future. It is NOT really about the payment transaction itself but about controlling how that transaction is routed and what is added to that transaction that will define the future. My two cents.

  4. I’d like your thoughts on the possibility that Chase is betting that ChasePay’s mobile-only risk and routing model is different (and better) from their traditional Visa transactions, and that they are betting on MCX merchants to deliver higher volume with lower revenue per trans without giving up contribution margin for these mobile transaction?

    1. Walmart has loyal customers. They buy every week from Walmart… they bank with chase. Chase makes $0.21 + 5bps on debit and probably around 140bps on credit. Having consumers use a ChasePay “card” that is lower than Visa interchange is revenue loss. Chase can’t gain volume unless they get more chase customers ( from other banks). Even if they get more chase customers to shop at wal-mart it is a revenue loss.. as these customers already by goods from another store using the Chase Visa card.

      1. Completely agree. I am assuming that MCX would pull customers from other payment methods to the embedded ChasePay in CurrentC, not just push their existing cardholders onto yet another mobile wallet app. Loss of top line revenue, yes, but if (a big if) new customer transactions are as a whole more profitable due to lower refund and fraud numbers then it makes economic sense. Even if it is existing cardholders, if the cost of servicing the transaction deceases by more than the loss of revenue, it’s a win, right? Also, not only Walmart. Plus the comments made by Todd to form the basis to overlay value added services.

        1. Rob.. not a lower cost at all. Chase owns the fraud for Visa card transactions in card present, chase owns the fraud for ChasePay transactions in card present.. There is no difference in fraud costs for chase between the two products. Thus the new product can never be more profitable for “refund and fraud” perspective. Chase Payment Tech is no in this loop.. they have no ability to deliver offers UNLESS it was presented in Chase’s mobile app. I believe that presenting ChasePay within Chase’s mobile app is the ONLY path toward incremental revenue (through Offers, …etc).

          Chase may choose to look at this as a “defensive win”, as Chase consumers using MCX Currency would be linking ACH accounts and that would be 0 bps.. but all together Chase is just helping to steer consumers to something less bad than ACH.

          1. Tom, I agree the cost is the same between the two products when there is fraud, but if the rate of fraud is lower for mobile-only transactions, wouldn’t that make them, as a whole, more profitable since the rate of fraud is reduced? If MCX was able to convince ChasePay that their app could provide data at the time of the transaction that Chase needed to reduce the instances of fraud for ChasePay transactions that initiated in the CurrentC app, wouldn’t that be interesting? I don’t think there is enough transaction level detail to know for certain, but I know this is something that mobile wallet vendors have been touting, and might have been on the table during negotiations and is something retailers want to hear.

          2. Not when the margins go from 220bps to 50bps.. they lose money when there is fraud and break even when there is none. The MCX quote “they will lose money on us, and need to figure out a way to make it up somewhere else”

  5. Lovely….

    if ChaseNet is in a position of fixing pricing and rules for acquiring….then what role does FD play (additional cost?) for switching (as per your diagram).

    good job as always….

    Mustafa

  6. Tom,

    I agree with you on this one. Can’t really understand why would Chase invest in a service that in order to get merchant adoption, would have to yield lower revenue than MIF. Everyone is trying to get rid of the networks, but they forget that the assessment fees – roughly 8% of the Merchant Discount – actually come as a cheap price, accounting for all the value unlocked by the network effects within these platforms.

    What’s even worse, is that everybody thinks that’s easy just to get out of their domain of expertise and develop “innovative” products that are going to “disrupt” card networks and overtake the World, but in reality this is what happens: MCX is 5 years old and barely working, Square card case is dead, Dwolla is 7 years old and selling B2B services, Bitcoin serves only speculators, and the list could go on…

    With that being said – yes, I’m still long on V/MA…

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