JPMorgan Chase (NYSE:JPM) is rapidly emerging as a dominant force in payments. Thanks to a 10-year exclusive agreement it signed in 2013 with Visa (NYSE:V), JPMorgan essentially rents a share of the Visa network, running payments over Visa's network as if it were its own.
This closed-loop system allows JPMorgan to provide more data to its merchants, copying the advantage that Discover (NYSE:DFS) and American Express (NYSE:AXP) have from their closed-loop networks. JPMorgan CEO Jamie Dimon described it perfectly at a presentation for analysts in which he told the crowd, "We know where you eat on Friday night."
At the February 2015 Investor Day, JPMorgan announced that "ChaseNet," what it calls its closed-loop network, was on track to generate $16 billion in annual transactions. On the most recent conference call, JPMorgan executives revealed that they expected $50 billion in transactions in 2016 alone, nearly a tripling of its volume in two years.
The greater processing business
ChaseNet is just a small part of JPMorgan's total merchant processing business. JPMorgan now processes more than $900 billion in payments annually across all of its products, putting it up there with the likes of American Express, which processes about $1 trillion of total payment volume each year.
Of course, some of JPMorgan's processing volume is lower margin debit transactions, a category in which closed-loop AmEx and Discover have essentially zero market share. But the remainder is from credit cards, and an increasing share of its credit card volume is being run through ChaseNet, which generates more revenue per swipe.
On Monday, the company announced that it was creating a competitor to Apple Pay, creating an app so that users can make payments using their phone. Unlike Apple Pay, "Chase Pay" has already found reception with merchants. A group called Merchant Customer Exchange, whose constituents represent some of the world's largest retailers and more than $1 trillion in annual revenue, have agreed to accept Chase Pay in their stores and online.
An analysis by Reuters found that fewer than a third of the country's largest 100 retailers currently accept Apple Pay or ever plan to do so. Chase managed to bring these merchants on board with its mobile payments solution by agreeing to provide volume-based discounts on merchant fees.
I'm increasingly of the view that payment processing is soon to become a lot more competitive. Already, credit card companies are competing for customers with financial incentives like cash-back rewards and airline miles. On a recent conference call, Capital One CEO Richard Fairbanks described competition among card companies as "very intense" in rewards. Fairbanks specifically pointed to so-called co-brand cards -- which are issued under partnerships with airlines or retailers, for example -- noting that competition had "increased substantially, and to a point of concern."
The next step is taking the fight to retailers, which recently won the right to "steer" customers toward lower-priced payment networks thanks to a Department of Justice decision against American Express, which forbade its customers from steering payments to less-expensive networks.
The payments industry is changing rapidly, and, at least for now, it appears JPMorgan has a huge leg up on the competition.