Chase earns over $5 billion in revenue from its credit card portfolio per year, but they’ve made it a corporate priority to build a product that’s intended to kill the credit card business. And CEO Jamie Dimon threatened to fire senior leaders who get in the way.
Facing growing pressure from nimbler fintechs, the chief executive of the biggest US bank pushed the leaders of his two largest divisions to put aside any differences and collaborate on a new payments processing system.
“If I hear that any of you aren’t sharing information with each other, or you’re hiding information, you’re fired,” Dimon told the 15 or so executives who had gathered for the meeting in New York, according to two people with knowledge of the remarks.
Chase is building a direct payment system – intended to route funds from a customer’s account straight into a merchant’s account and going live next year – bypassing credit card processing networks while running much faster than the current electronic funds transfer system. They internally refer to it as a “pay-by-bank” product. The commercial bank is building the product that competes with credit cards from the consumer bank, hence the concern over internal resistance to the project.
- This is meant to be ‘creative destruction’
- There’s going to be innovation, no point in ignoring that
- So they want to be the one that innovates
In some sense this product already exists, and Chase is a part-owner of it: Zelle. However it hasn’t been broadly adopted by merchants. Chase sees their new system displacing payments “for rent and bill payments as well as cash, high-priced debit and cheques,” and not merely for credit cards, but “the bank is making sure it is ready for the potential demise of credit cards.”
Credit cards bundle payments, consumer protections, and lending – and are sticky not just because of habit but also loyalty marketing, they reward customers for their loyalty with rebates and benefits, sometimes from the bank and sometimes from their favorite brands.
Consumers also benefit from the credit card float – buy today, pay a couple of weeks after the end of your billing cycle. That’s not just free financing, it’s especially helpful for those putting business expenses on their cards and waiting to get reimbursed. (One of the greatest features of the old Diners Club card was 60 days to pay, precisely so you didn’t have to worry about whether your employer processed your reimbursement before the bill came due.)
Direct payments serve only one of these functions, though Chase is ‘working through’ what consumer protections would look like. While lower-cost to merchants, they almost certainly entail consumers giving up the same level of protections and rewards and unbundle the option for lending. While I don’t think you should focus on rewards if you aren’t paying off your credit card each month, for those who do revolve on cards it’s frequently better than the alternative.
At the same time, new payment technologies will compete down the cost of interchange – in ways that regulation won’t. Bipartisan legislation to regulate interchange exempts banks with under $100 billion in assets from caps. Market competition doesn’t exempt smaller banks, where credit cards would gravitate towards under mere legislative caps.