Payments Digest

Alex Rampell (GP at Andreessen Horowitz, co-founded Affirm) touched on an interesting risk factor for card networks like Visa during a deep dive Visa’s history and business model on Patrick O’Shaughnessy’s podcast.

[Increasingly frequent occurrences of where the issuing bank and acquiring bank are the same entity] is the biggest risk factor, and the reason why, going back to what I said before, which is the only thing that really drives Visa MasterCard’s business is issuer relationships.

Visa (and Mastercard) sit between issuing banks and acquiring banks (who maintain relationships with cardholders and merchants) to facilitate transactions. The card networks collect an interchange fee to complete the transaction. This make enough sense if a customer with a Citi-issued Double Cash Card buys a coffee from a BAML merchant services-acquired coffee shop. It makes less sense when the issuing and acquiring bank on both sides of the transaction are the same entity.

Rampell goes on:

Chase is actually the biggest acquirer of online merchants. So I believe uses Chase payment tech, which is their payment acquiring division or merchant acquiring division for online payment processing. But wait a minute, Chase is also the biggest issuer of Visa cards in the US. The credit card is issued by Chase, Chase issues the Sapphire card. They have tens of millions of customers that actually have Chase cards. Why the heck am I Chase paying Visa to talk to myself? That doesn’t really make sense. And the reason why is because it was in my contract, but when Visa says, “All right, Chase, please renew with us again for the next 10 years and don’t go to MasterCard,” Chase is like, “Wait a minute, I have an idea. I don’t want to pay you anything, if I’m talking to myself,” which is a pretty reasonable request if you think about it. This how a lot of acquiring and issuing relationships work outside the US. This is called On Us Transaction. So it’s perfectly easy to do, it’s not that hard, technically, it’s just a contractual thing, and then a very easy snippet of code to say, “Hey, 414720 go, just send it this way, the other part of our building.

This seems like a good example of how the tech part of FinTech is often overstated. As Alex stated, this is legal/contractual problem, not a technical one (i.e. Chase does not need #theblockchain to do this).

And apparently Chase sort of does this with a product called ChaseNet (which Alex mentions). From a plausible sounding reddit post:

Chase does have their own payment processing network. It’s called ChaseNet. It runs on leased space on the Visa network. So technically it is everywhere, for Merchants who bank with Chase. It is alive and well, growing marketshare. You’ll never hear about it because it’s primarly a B2B endeavor. Chase makes agreements with businesses to process Chase cards on ChaseNet which is leased space on the Visa network. What this means is that Chase is the issuing bank, Chase is the acquiring bank, and Chase is the payment processor. Because of that, Chase can charge the merchant a lower fee, yet still get a larger profit on the interchange since they don’t need to share it with as many people now than they would if the Merchant was running Chase cards on Stripe, or Paypal. Think about it like this: Chase might be getting 30% of 3% interchange fee when they run Chase cards on Stripe or Paypal, but now Chase could be getting as much as 70% of a 2% interchange fee when they run cards on ChaseNet. So in the first case, chase is getting 0.9% of the transaction on Stripe or Paypal swipes. In the second case, Chase is getting 1.4% of the transaction, even though the total interchange fee to the merchant is lower. That is the beauty and the masterstroke of the ChaseNet business. They managed to increase their interchange profit, without having to go full on Amex/Disco, by simply leasing space on the Visa network which is quite clever.

I am grasping here a bit as I educate myself about the payments space but could this be glide path to a different payments model? Instead of card networks collecting the majority of their revenues from interchange fees, they begin to shift to a model where their primary revenue model is driven by large issuer/acquiring banks leasing their network?

Question for myself: What are the technical constraints on the card networks? Is “leasing space” merely a contractual change or is it closer to the physical constraints of spectrum bandwidth?

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