Its tough to find time to Blog as a CEO…. Most of you my blogs are sometimes snarky and tactless (making NOT offending someone a new consideration).
I was taking a look at JPMC’s latest investor presentation and noticed that ChaseNet is gone.. Why? I’ve written on JPMC and ChaseNet a number of times over last 6 yrs. Today I’ll cover my views on the latest developments and my views on JPMC’s ChaseNet strategy. Lets recap first:
- In 2011, JPMC was justifiably upset with Visa (CEO Joe Saunders), things like forcing 20 yr old EMV on US issuers without a discussion didn’t help the relationship. JPMC was in midst of either buying Discover or moving their portfolio to Mastercard (you can validate w/ CFOs of either org). My G2 says Visa’s BOD found out about this, threw out Sanders/Buse and put in a fantastic exec (Charlie Scharf) who also had the trust of Jamie. To keep JPMC in the Visa tent, they cut a unique 10 year deal that gave them a network in a network (ChaseNet). ChaseNet gave JPMC everything they would have had in a Discover acquisition (see blog).
- The ChaseNet vision focused on an On-us network. Chase believes they can create a new “bundle” of services to bring in more retail customers, then also create new incentives for consumers to steer/market to these retailers. The ChaseNet value prop goes like this: give away processing to get commercial IB/wholesale and reduce Visa volume in “on us”. JPMC’s ChaseNet is running about $30B in volume, so there is traction, but this volume is at a loss (to what they would have earned within the V/MA structure). Is running payments at a loss innovation? While I must complement JPMC for delivering value beyond the transaction, there is a mismatch in value creation and incentives. ChaseNet is 100% a banking strategy… not a commerce, payments, mobile or consumer value creation one. Whereas Google’s value making payments invisible to consumer commerce activities (Payments in the OS), JPMC’s value is integrated across radically different commercial processes and different organizational owners.
- Is there any wonder that Walmart threw JPMC’s ChasePay under the bus 6 weeks after after announcing at Money 2020. Chase gave up the store to win footprint in MCX.. (0 bps payments to Target and Walmart). Then Walmart announced WalmartPay. Perhaps the greatest Mike Cook move of all time.
- As I outlined in Changing Economics of Payments. In its simplest form, payments are a brokering business which manages trust and value exchange between two entities engaged in commerce. Logically, a broker must be removed from the transaction to maintain the trust of both parties, and deliver value through managing the financial risk associated with the transaction. Reward schemes, impugned the neutrality of this “brokering” role by creating incentives separate from the underlying commercial transaction. However, as Europe has learned in SEPA, there must be brokering incentives.
- Value of Open (see Blog). 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 “F**K 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?
- My view is that all of JPMC’s efforts are a grand distraction. The role of a bank is to enable commerce.. not control it (see blog). Consumers work with Banks because they have to.. they CHOOSE Google/Amazon and Uber because they WANT to. To deliver a differentiated service you must SUPPORT and enable COMMERCE (not CONTROL IT). Today Chase is the hardest bank to work with on the planet, this extends from payments, to ventures, the partnerships. Start ups and the entire valley love Jamie, but run away from the rest of the team. Banks must be where their customers are.. JPMC really told my old Google team.. “Forget about our Apple deal (15bps) lets start off with how much you will pay for the privilege of having a Chase card in your wallet”. Google’s response was appropriate, we support what consumers want.. and will be glad to tell your customers that you don’t want to let them buy apps or music on Google.. (blog for more). Also see my story on JPMC/Amazon.
- Margin in payments (and in Commerce) is located at entity closest to consumer. Payments are the central “branding” and touch point with consumers.. the closest touch point.. the channel for credit.. and are at risk. While retail banks don’t care about loss of interchange (150bps), they care greatly about loss of NIM (900bps in Credit Card, 150bps Deposits). Thus, Top 10 banks consider Payments a battle they can’t lose.
- Google, Apple, Retailers all touch consumers more often and deliver more value than any bank. Banks must learn to partner and assume a secondary role in SUPPORTING commerce if they are to succeed (see partnering).
6 years of recap done.. 3.5 years left on JPMCs Visa agreement…. How it is going? JPMC has been gaining market share in both issuing and acquiring. Most analysts would say that JPMC is the top issuer, and #3 acquirer as they gaining market share in both. My view is JPMC’s brilliant performance in issuing was due to Sapphire and the enhanced rewards program that crushed Amex. CPT grew because of both new accounts and because 50%+ of their volume is eCommerce (growing 16%-20% vs 8-9% for US POS). The margin of the CPT business is compressed, particularly as they “win” chase card volume from Target and Walmart at <50bps and ChasePay at 0bps.
Back in 2012 I was the guy talking about tokens and the Battle of the Cloud. Chase’s eCommerce focus makes their role tokenization very important. Amazon, Paypal and Square all clear through CPT today. Lets take a look at Amazon. Today Amazon “tokenizes” payments internally, and manages fraud to around 3bps. At this fraud rate (Best in Class) Amazon doesn’t really give a hoot about shifting liability to banks.. they want risk based interchange. In other words their case to issuers is give us the card present rate (see Browser Tokens for more info).
Google and Apple are working to make payments invisible with ApplePay in Browser and Google’s work with the W3C. Who is to “control” how all this works? Today Visa’s VDEP and Mastercard’s MDES allow issuers to choose where their card is tokenized. Per my story above, JPMC refused to “enable” chase cards in Google’s wallet until they were paid. Issuers thus control where their cards can be tokenized, just as they can chose who prints a copy of their card, or who can be authorized to perform a transaction on it (ie merchant charge).
However, Issuers do not chose HOW their card is tokenized. This is the brilliance in Visa/MA bringing tokens into EMVco.. the network “standards group”. The 6 year, 30 bank effort with The Clearing House was an attempt to build a facility to compete here. Which made no sense to me at all.. Chase is the ONLY issuer completely bought into creating their own tokens. The networks have correctly taken the position that a Token represents a card and thus must be first routed to network for subsequent disposition by the issuer.
ChaseNet has an acquiring problem. For example how can you route a Chase card in pple Pay that is presented to a non CPT merchant “around” Visa? Today all Mastercard tokens must be presented to Mastercard (same with Visa). How can Chase route Chase Visa Cards (tokenized in Applepay) for a CPT merchant? In other words tokenization stops the ChaseNet on us benefit. Chase will not accept a token vault only solution, because this does not stop the network token routing mandate.
Network tokenization has largely defeated ChaseNet at POS (hence the QR code on ChasePay). TODAY ChaseNet “works” only is in plastic.. and for on us.. and the “win” is decreased margins in acceptance. eCommerce tokenization presents a much BIGGER threat to CPT (50% of volume and 80% of growth) and ChaseNet. Today JPMC’s CPT has structured unique eCom acquiring deals with Paypal, Amazon, Stripe, … etc. If eCom tokenization takes off then this flow will also be directed by the networks.
No wonder they have dropped ChaseNet from investor materials.
I’m open to feedback here.. but my strong view is that all of this ChaseNet effort is a complete waste of time. Time that could have been spend creating new value and partnerships in commerce.
In the example above