Commentary

Visa, Chase Deal Personifies Payments Platform Trend

Payments has always been about platforms, of course, given the sector’s two/multi-sided structure. But the big news that broke across the industry over these last two weeks is, I think the tip of the iceberg. If 2012 was the year of the mobile wallet, 2013 will be the year of the platform play.

Platform plays are going to make 2013 a very interesting year for payments.

Payments has always been about platforms, of course, given the sector’s two/multi-sided structure. But the big news that broke across the industry over these last two weeks is, I think the tip of the iceberg. If 2012 was the year of the “mobile wallet,” 2013 will be the year of the platform play.

One might say that Discover started the whole new trend in platform plays the end of last summer when it made its platform available to others (PayPal most famously) to ignite their own payments innovations such as PayPal, Google, and Facebook. Now platform plays are starting to seem as fashionable as neon colors are for the Spring 2013 fashion season. The two biggest newsmakers of the last ten days sort of put a punctuation mark on this payments industry phenomenon.

TSYS/NetSpend is an interesting combination of B2B and B2C platforms. It gives the traditional B2B TSYS business an interesting consumer hedge. That’s important because the processing side of the payments ecosystem could find itself in the middle of its own disruption in the not too distant future.  Processors are concerned that MasterCard and Visa will encroach on their space since they, too, face competition from lots of innovative upstarts. But TSYS is also a very big prepaid processor and NetSpend is a big and pretty profitable prepaid program manager. Having NetSpend part of TSYS allows it to “go deep” in the prepaid space and create some supply chain and operating efficiencies that could logically support the development of new products with different economics and a stronger ROI – a new prepaid platform, in essence. Since NetSpend is an issuer of an alternative financial services product and TSYS has a very robust processing platform for financial services products, it seems to suggest that NetSpend customers could begin to benefit from some of those capabilities over time too. And, don’t forget that TSYS is a  merchant acquirer and can use its merchant footprint to create more distribution opportunities for NetSpend. TSYS has a very large international presence, including a deal with China Union Pay, that could ultimately extend the reach of NetSpend’s products beyond its current US footprint that could help to expand and monetize the TSYS/NetSpend customer base.

But it’s the Chase/Visa announcement of the formation of Chase Merchant Services (CMS) that got the web buzzing. It answered one question pretty directly – what’s been keeping Charlie Scharf busy these last few months  – but certainly raised a bunch more.

The other question that most people felt that the announcement answered was whether Chase would pull out of Visa and start its own system. Most of the reports last week that I read concluded that the new ten-year deal meant that Visa had stayed this off for at least that long. I disagree. Chase, thru the CMS  partnership, for all intents and purposes will operate just like a third-party network with a VisaNet element to the “custom processing” solution that will support the transaction processing for Chase/Visa branded cards. CMS will negotiate directly with merchants, strike new pricing deals with them and “offer them an additional option for consumer payments” that extricates itself from the traditional interchange arrangements for those merchants who sign on. I think this is a pretty big development.

Reports suggest that CMS hopes to capture more merchants because the deals will be better and CMS will be able to support the development and deployment of new data-driven offers/inducements and other value adds that will drive incremental consumer spend. Data is a big by-product of the CMS play since at the moment, Chase only gets to see those transactions that run over Paymentech. Now, at least it sounds like they will see all of the data from all Chase/Visa transactions that CMS supports.

So, the big questions now relate to the actual mechanics of how this will all work when it rolls out later in the year. Chase will certainly want to do what all that it can to get merchants to accept its new card option a la a three party arrangement. And, one of the big advantages of a three party system is that it is exempt from network interchange fee regulations. But, as you all know,  it is able to charge a merchant discount that, in theory, has no limit (operative words, in theory.) This fee/discount, as all of you also know is the inducement that is offered to issuers. So, if, as reports claim, CMS will mean reduced prices on the merchant side, it will have to sort out how it incents the issuing side of Chase to play along. Now CMS can of course, be very selective about who gets the sweetheart deals, but the system economics won’t really work if CMS reduces or eliminates the merchant discount on a wholesale basis and doesn’t replace it with something else. Certainly,  the new CMS gig can identify other sources of revenues, say from the interest on outstandings, (which according to the Fed now is up from 2011to roughly $7k per household with 47% of Americans now revolving their credit card balances) or from new loyalty/payment schemes a la LevelUp that eschews interchange for a piece of the incentive offered to consumers to increase their spend at a merchant, or from creating an entirely new model suited for mobile only transacting. Regardless, the existence of CMS suggests that a new business model must be on the drawing boards in order to both preserve platform equilibrium and leverage the new opportunities that its new operating model and assets can support.

Other questions?

People have implied that this opens Visa’s door to a similar knock on it by Bank of America. That seems less likely. Yes BAC does have BAMS but the majority shareholder isn’t BAC, it’s First Data. Maybe rather than knocking on Visa’s door, BAC could decide to organize its own three party network instead. It’s right behind Chase in terms of credit card volume in 2012 (~$250 billion according to Nilson) and given its First Data stake has the potential for international acceptance too. It could also make some interesting acquisitions (which I’ll keep to myself for now) if it wanted to go that route.

Then there’s the question that CMS raises for the future of ClearExchange, the ACH-based P2P network that Chase, Bank of America and Wells formed in 2011. Many thought that was laying the tracks for a bank-owned payments system. ClearExchange operates by moving payment information (not funds) between people or businesses by only using an email address or a mobile phone number and checking/savings account. Powerful, when one considers that these three FIs account for something like 80% or more of the consumer debit accounts in the US. But doing that would, in many ways, be like going WAY back to the bank-association model future that was wrought with antitrust issues – and one big reason why that model doesn’t exist anymore. But ClearExchange seems intent on doing something with those assets so will be an interesting one to watch.  Will CMS change the focus of ClearExchange moving forward, say from a potential retail payments play to a C2B and B2B network perhaps?

And how about the questions related to Visa itself?  Cynics say that the CMS deal was the lemonade out of lemons outcome for them since they may not have been in the strongest bargaining position. With CMS, they’ll still get paid on transaction volume, but what they get paid will be a negotiation. And sure, they’ll benefit for the next ten years if Chase brings more volume onto the network, and the partnership has allowed it to avert the direct loss of its biggest customer from its portfolio, but perhaps only for the next decade. There’s nothing to stop CMS from deciding in ten years that it doesn’t need Visa, having used that time to beef up merchant acceptance of the Chase card option and building lots of platform capabilities that are attractive enough to merchants and consumers to hang on.

Outside of CMS directly, there are both questions and potential new platform power plays taking shape too.  For instance, FIS/PayNet is a new payments network infrastructure that wants to breathe new real-time life into the ACH system that has been around for decades and make it a more viable network for innovators to leverage. There are other players with similar assets and ambitions. All are contemplating their next moves recognizing that the combination of mobile, new technologies and merchant dissatisfaction with the existing networks makes the potential of new networks more doable yet just as tough as ever to ignite.

Then, perhaps some of the biggest questions remain around a couple of existing payments players and their next moves in the midst of the CMS development and the new opportunities  that all of these new platform plays are making possible. Take MCX. What seemed like a slog before seems like a real tough slog now since I’ll bet anything that the CMS merchant short list is the MCX merchant prospect list. I can also imagine that those sitting on the MCX fence right now might just lean in to listen carefully. The MCX business model has always been a big mystery to me for the reasons I stated earlier – the funding for the system has to come from somewhere and if not from the merchant, from where? CMS has deeper pockets and a built in customer base with cards in their non-digital wallets to make that discussion a lot tougher really tough for MCX to counter, I would think.  And, ISIS and Google? Yikes. Sure, both are moving (or have)  away from NFC to the cloud but they still need merchants who now have even more options to consider and whose latest courter suitor brings consumers along with them. It also seems completely infeasible reasonable to think that CMS isn’t is going to blow out a mobile wallet solution early on that can more easily be deployed at merchants given their acquiring relationship and potentially different business model to get merchants and consumers interested.

It will be interesting to see how MasterCard responds too – it remains the only true worldwide payments network (Visa Europe is a separate entity).  For Citi,  this just seems like another in a long series of setbacks on the retail payments side.  They are MC’s biggest single issuer, and an enormous global financial services entity, but have no acquiring/processing asset to leverage and a more narrow set of options than most other players to consider. Then there’s AmEx. AmEx and Chase are bitter rivalries – many of the Chase senior exec team have AmEx blue in their veins. It’s always had a solid franchise anchored by its corporate travel program, rich cardholder rewards, and outstanding customer service. And, it’s done a lot of innovative stuff on the retail payments side wrapped around social media (Twitter, Facebook and other promotions), and is the most profitable card issuer of the bunch. But, its ability to leverage the Serve network to innovate outside of that has been more of a struggle. AmEx’s recent restructuring efforts are designed to keep costs down and margins intact, but what impact could CMS, PayPal and these other emerging efforts have to on its retail payments business if they all start to get traction and merchants are enticed by better deals and consumer traction?

Now you see why I think this 2013 is the year for platform plays!  Here we are, only two months into a new year and so many big things a foot. But, surely nothing is cast in stone yet, but these two announcements are but a few of things that foreshadowing of how the tectonic plates that are the payments industry are likely to shift this year and recast the sector.

So, if payments had a Richter scale, how would you rank CMS in terms of its impact on the future of the industry?

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