WOW.. New 10yr JPM/Visa “Partnership”

26 Feb 2012

JPM Investor Day. Major news in the payments space. See Gordon’s presentation on JPM’s investor relations site. 

New 10-yr Visa agreement with MAJOR implications.

• Chase can create a sub-network to Visa… for “on us” transactions consistent with my blog yesterday
• Transactions don’t need to be routed through JPM.
• Enables consumers the benefit of having 100% acceptance at all Visa locations, and merchants the flexibility of leveraging JPM’s new payments scheme for lower cost if they use Chase Paymentech.
• This is fantastic for Chase…
• Key deal elements:  Token Switching, On Us, No Bug, Dual function Cards, Visa Net “License”

Thoughts…

• Payments seem to be evolving to dumb pipes. JPM can white label Visa, Paypal can white label Discover…
• Who owns the customer?
• Who owns the merchant?
• Who owns the rules?
• Who owns the routing
• Who can see the customer data?
• What entity is really capable of DELIVERING VALUE to the consumer?
• CAN THE CUSTOMER CHOOSE?

Chaos reigns… As one Treasurer just asked me “does ACCEPT ALL CARDS still apply when I have a JPM card that MAY use Visa’s network?”

Updated 22 March ———————————-

US mobile payments will have a new “network”, a system to use tokens which are neither V or MA card numbers. Thus Banks need not route these transactions through either V or MA, but will be able to leverage same acceptance infrastructure. Tokens will be bank numbers that banks resolve.  JPM’s is first to align w/ plastic, leveraging common authorization authentication and other services. Banks are putting in place “controls” around ACH debit and card rules which will “encourage” token adoption.  Watch out payment start ups.. rough seas ahead. As I stated: Banks will WIN in payments.

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Back in 2007 Visa prepared for IPO by mandating all transactions route (or report to) VisaNet (American Banker). This of course made sense, from AB in 2005

On Tuesday the association told members that it would require the use of Visanet for any transaction made with a card that bears its logo and is not authorized using a personal identification number. The primary effect of the rule is to remove an exception that Visa had extended for “on-us” transactions, in which the same bank is the card issuer and the merchant acquirer. Prior to the change, the association had permitted in-house processing….

“Processing every Visa transaction is important … to ensure that Visa is in a position to stand behind all Visa-brand transactions,” Mr. Steele said in an interview Tuesday.

…Some processors, most notably First Data Corp., have used the “on-us” construction to skip Visanet for card transactions in which it represented both the issuer and the merchant acquirer. When First Data announced in 2002 that it planned to conduct as many as 15% of its payment card transactions that way, Visa sued and called for a moratorium on the practice. The case is still unresolved.

Also remember the 2006 First Data/Visa settlement that stopped FD from continuing with “on us” strategy.. this is just JPM turning it back on again. (American Banker 2006)

… 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 took this same approach with China Union pay back in 2010 when it demanded that VisaNet route all (international) transaction when its bug was on the card… subsequently loosing all business to Mastercard (see FT Article).

It looks like Visa is treating JPM like China Union Pay… only domestically. Chase now has ownership of its BINs.. and can do what it wants off Visa.. in it’s own “version” of VisaNet.

Notes

– Visa tells analysts that JPM is licensing VisaNet.. yeah.. Visa endeavors to spin this positively.. but this “partnership” is more like a pullout…

– Very important to parse Visa’s words in describing this deal. My position is that Visa will receive NO TRANSACTION revenue for on the new Chase visa*net but rather a flat licensing fees. This fee, plus new volume will mean no revenue impact through 2014.. however once Chase ramps up its acquisition machine Visa will be substantially impacted.