A 10-Year Visa-Chase Deal Will Include Direct Issuer Links to Select Merchants

Visa Inc. and banking giant JPMorgan Chase & Co. on Tuesday announced a 10-year partnership that promises to shake up the merchant-acquiring world by creating direct links between card issuers and merchants. Chase, which owns the nation’s second-largest acquirer, Chase Paymentech, is licensing a private version of Visa’s VisaNet transaction-processing network that will anchor a new entity to be called Chase Merchant Services (CMS). With the new platform, the bank says it will be able to directly negotiate card-acceptance pricing and operating rules with merchants.

Chase will pay Visa an unspecified amount of revenue under the new plan, which is to take effect by year’s end or in early 2014. The pact also calls for Chase to commit more credit and debit card transaction volume to Visa. The bank issues MasterCard-branded cards in addition to Visa credit and debit cards.

According to Chase, merchants using the CMS platform will, through Paymentech, be able to offer Chase cardholders point-of-sale discounts or other perks such as targeted deals and pay-with-points offers.

CMS apparently is the first fruit of a new strategy formulated by new Visa chief executive Charles Scharf, a Chase veteran, to mend fences with merchants in the wake of seemingly unending controversy  and litigation over what merchants say are excessively high card-acceptance costs and restrictive rules. Visa, the largest card network, recently loosened a rule that prevented merchants from offering point-of-sale discounts to cardholders of specific issuers rather than to all Visa cardholders.

“This is a continuation of that rules change,” says C. Marc Abbey, managing director of Linthicum, Md.-based First Annapolis Consulting Inc. But he adds that CMS arises from more than just one change in the rules. “This is a major shift in strategy for both companies,” he says.

Neither company would make executives available for interviews on Tuesday. For Visa, CMS creates a new model that at first glance promises to keep its network revenues flowing while keeping its financial-institution customers happy by giving them more freedom over card matters and creating new opportunities for them to deepen relationships both with cardholders and merchants.

“Visa is focused on innovating to allow clients of all sizes to differentiate based on their strategy, priorities, and customer needs,” William Sheedy, Visa’s group president, Americas, said in a news release. “This effort with JPMorgan Chase is one example of Visa’s increased flexibility and desire to partner with financial-institution and merchant clients to provide greater service to cardholders through tailored and value-added solutions.”

For Chase, the partnership enables the bank to leverage its big cardholder and merchant bases as well as get more control over the pricing and rules governing its merchant portfolio. “By licensing a private version of VisaNet, Chase will be able to work directly with merchants to negotiate pricing and certain operating rules,” the bank said in a statement to Digital Transactions News. “Chase plans to offer merchants more flexible pricing and more simplified operating rules. Additionally, Chase and the merchants will be able to offer Chase Visa cardholders special offers at these merchants.”

Under the traditional bank card model, merchants pay interchange to card issuers as well as various fees to the card networks. Although neither company would say so directly, CMS apparently gives Chase a degree of control over the network aspect of acceptance pricing as long as it pays a specified amount of money to Visa.

Visa would not say if it has similar deals pending with other big customers, such as Bank of America Corp. and U.S. Bancorp, that are both major merchant acquirers and Visa card issuers. But industry consultant Steve Mott of Stamford, Conn.-based BetterBuyDesign says he “absolutely” thinks variants of the CMS model are coming, though he warns its uniqueness could be diluted if too many merchants begin offering deals under it. “The question is, how far do they go [in terms of merchants]?” he says. “Do they go to the top 200 merchants?”

MasterCard Inc., the No. 2 network, did not respond to a Digital Transactions News request for comment, but Mott says, “MasterCard has been hinting around at the same things without coming out and saying it.”

CMS’s birth is somewhat ironic given Visa’s opposition to a similar idea more than a decade ago. Visa sued First Data Corp., the leading merchant and cardholder processor, after it tried in 2002 to create its own closed-loop network called First Data Net, which Visa said would have diverted transaction traffic from VisaNet. First Data countersued, but the two companies settled their disputes in 2006, with First Data Net never being heard from again.

The name Chase Merchant Services also is not new. It was the name of the old First Data-Chase joint merchant-acquiring operation that was dissolved after Paymentech majority owner JPMorgan Chase in 2008 bought out First Data’s 49% share of that processor.