Credit cards are an absolutely cuthroat business. Issuers are constantly looking for even the smallest competitive advantages. According to a recent article from Reuters, JPMorgan Chase is looking to build a big competitive advantage that will enable them to shore up falling fee revenue.
“Chase, which generated roughly $3.6 billion of revenue last year from those fees, is increasingly occupied with fending off banking rivals like Citigroup Inc, as well as Silicon Valley companies such as Paypal Inc and Square Inc.
Chase’s revenue from those fees is showing signs of eroding. In the first half of 2015, fee income in the bank’s credit and debit card business fell 2 percent from the same period a year earlier, even as the bank processed a higher volume of transactions. A person familiar with the matter said lower processing fees were a critical part of that decline.”
To stem the decline, Chase is assembling a vast array of parts into what will become either a brilliant machine or a makeshift disappointment.”
The most important part of that machine is being provided by Visa.
“In 2013…Chase inked a deal with Visa that allowed the bank to essentially lease Visa’s network for 10 years at what industry sources said is a fixed rate.
When a retailer uses Chase to process its credit card transactions, it can now sign up for a service known as ChaseNet, which means that when a consumer buys something with a credit card issued by Chase, the bank will process the transaction from start to finish, essentially serving as all three links in the chain.
When that happens, Chase can charge the retailers lower fees for processing partly because of terms it negotiated with Visa, although the details of how much lower the charges can be have not been disclosed.”
ChaseNet gives may give JPMC an important pricing advantage in a market that is increasingly price sensitive.
“Having the chance to cut fees for retailers is important now because many merchants are pressing on every front for lower processing costs. Retailers have won court cases against card companies over pricing in recent years. Mark Horwedel, CEO of the Merchants Advisory Group, said merchants expect more concessions because they have seen regulators in Europe move to cap fees on credit cards at about 15 percent of U.S.”
Still, it is unclear if this “high volume approach” will be an effective long-term strategy given that Chase’s credit card fee revenue has been declining despite steady transactional growth. Perhaps the real long-term benefit will come from a different source alltogether.
“Longer term, the deal with Visa will allow Chase to corral more information about what its customers are up to, said Mike Passilla, the Chase executive running this effort, in an interview.”
Overview by Alex Johnson, Sr. Analyst, Credit Advisory Service at Mercator Advisory Group
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