Is Chase Merchant Services an Omen of a Diminished Role for Merchant Acquirers?

Could the new Chase Merchant Services (CMS) processing entity announced Feb. 26 by JPMorgan Chase and Co. and Visa Inc. be a harbinger of a major change in the way bank card payments operate? The payments industry is abuzz with talk about how CMS could shake things up by enabling more direct links between card issuers and merchants, although it could take years to determine its effect.

JPMorgan Chase is the nation’s leading issuer of Visa and MasterCard credit cards and one of the top debit card issuers, and it also owns No. 2 merchant processor Chase Paymentech. The giant bank is licensing a version of Visa’s VisaNet network in order to offer its merchants, through CMS, favorable pricing and its cardholders cash discounts or other perks when they use their Chase cards at Chase merchants.

“It’s funny this came up, because this is exactly the way the world is going,” says Henry Helgeson, chief executive of the big Boston-based independent sales organization Merchant Warehouse. “How do we do more with a card than just the payment?”

Merchant Warehouse in recent months has been rolling out what it calls its Genius platform that handles multiple payment types and aims to drive traffic to the ISO’s merchants through promotions and loyalty programs.

Indeed, the whole premise behind many new developments in payments, especially mobile payments, is do do more than just boring old payments. Merchants say they want the ability to give discounts, rewards points or other perks to loyal customers. Many consumers, notably those with smart phones, seem to be responsive to such offers given the success of Square Inc. and Starbucks Corp. with their mobile offerings.

By using CMS to create more or less of a direct link between its issuing and merchant sides, Chase could upend the traditional “four-party” model of bank card payments that encompasses the cardholder, card issuer, merchant acquirer and merchant. “The writing’s on the wall for acquirers,” says industry consultant Steve Mott, principal of Stamford, Conn.-based BetterBuyDesign. “Acquiring is a millstone from a prior era. You don’t need the four-party model anymore.”

That may be a bit of a stretch; even Mott says acquirers will be needed for “merchant boarding and underwriting.” But beyond those core functions, CMS could represent a future in which the acquirer’s traditional role is reduced.

Although many details about CMS remain unknown, what Chase gets out of the deal seems clear: more freedom to set merchant pricing and control over operating rules in exchange for paying Visa a certain amount of money, and an opportunity to forge closer ties between its cardholders and merchants.

A major question CMS raises is how much the model could be exported to other card issuers, particularly if they don’t have acquiring operations. Some observers say the most natural candidate for a similar deal would be Minneapolis-based U.S. Bancorp, which is a sizable credit and debit card issuer and has a big merchant-acquiring subsidiary, Elavon, which uses its own technology platform. Other mentioned candidates include Bank of America Corp. and Wells Fargo & Co., both very large card issuers. They also have major acquiring operations, but they rely heavily on processor First Data Corp., as do many smaller acquirers, which could complicate matters.

“Anybody else that’s meaningful [beyond U.S. Bank,] you’ve got to do a deal with First Data,” says consultant Eric Grover, principal of Minden, Nev.-based Intrepid Ventures.

Visa, Grover adds, is taking a risk with CMS even though the venture enables it to remain in good graces with its biggest client and show a new flexibility at a time when relations between the card networks and merchants are strained over what merchants say are high card-acceptance costs.

“It undermines network value, it diminishes the network brand, it increases the power of individual issuers,” he says. “If Chase could eliminate the Visa brand, they would.”

Grover explains that Chase, BofA and Citigroup Inc. collectively account for about 60% to 65% of bank credit card charge volume, and CMS seems likely to only strengthen Chase. Networks and other stakeholders in payments, however, would be better served with a stronger base of issuers below the top tier, he says.

“Fundamentally, the better world, the ideal world for the network is more payment share dispersed among more medium and small issuers,” says Grover. “The nightmare world is literally where a handful of Goliath issuers have all the share.”

But Helgeson says Visa is responding to the changing realities of its industry. “Visa knows that they have to offer more than payments,” he says. “Any time you’re creating value, you’re creating revenue opportunities. For them it is as much defensive as it is offensive.”

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