Chase Pay's Engine Was Years in the Making

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When JPMorgan Chase announced a 10-year contract with Visa in early 2013 to create a customized processing and end-to-end payments platform, it seemed to have little to do with the bank's mobile wallet plans.

But everything that makes Chase Pay possible is built on the foundation of that platform, called ChaseNet.

"What is ChaseNet? It is a simplification of an ecosystem. It takes a traditional five-party acquiring system and takes it down to three," said Kimberly Fitzsimmons, U.S. market president for Chase Merchant Services, during presentations last week at SourceMedia's annual Card Forum and Expo.

A traditional five-party system involves the consumer, the acquirer, the network, the issuer and the merchant. ChaseNet takes over the role of three of these participants, functioning as the acquirer, the network and the issuer.

"When you take two extra parties out of touching that system, nothing is more secure," she said.

In addition to improving security, ChaseNet also trims cost, allowing merchants to pay lower fees to accept payments.

"It is a closed-loop environment which fixes interchange," Fitzsimmons said. "It's also ... the onramp for additional functionality, hence Chase Pay."

ChaseNet was announced a year and a half before Apple Pay's announcement kicked off a wave of "Pay"-branded mobile wallets that gave life to Android Pay, Samsung Pay and, by the end of this year, Chase Pay.

The original selling point of Chase Pay was its pricing structure. "There’s no network fees, no merchant-acquiring fees, we will not charge them back for fraud once we’ve approved a transaction, and we will also give them the opportunity to drive down further their cost of acceptance based on how much volume they do with Chase," Gordon Smith, head of JPMorgan Chase's consumer bank, told Bloomberg News in October 2015.

According to Fitzsimmons, pricing is just one piece of the Chase Pay puzzle — and it isn't even the most important piece.

"We took it from the cardholder and the consumer perspective, No. 1," she said. "As consumers, we're the ones that are really driving the adoption and the change at the point of sale at the merchants."

That's why Chase Pay will have two interfaces when it launches: Consumers, not the bank, will decide how this mobile wallet is used. This strategy is already evident in the bank's deal with Starbucks, wherein the coffee chain will accept Chase Pay as both a standalone app and as a funding option within the Starbucks app, Fitzsimmons said.

This also benefits Chase Pay's second-biggest stakeholder, the merchant community, she said.

"The second slice that we looked at was the merchant value proposition because … the merchants still have to have a value proposition in order to implement," Fitzsimmons said. "Merchants are looking to preserve their own loyalty programs, so that's something that we really focused on ... not necessarily feeling that we have to have Chase Pay at the forefront."

Starbucks currently accounts for 45% of all mobile transactions, so consumers have already made their choice clear about whether to use the coffee chain's mobile app, she said.

Loyalty plays a role in this decision as well.

"Most cardholders, I think, would probably pay that way because I'll get my 'gold star' [Starbucks reward point] in my cup and I'll also get my Sapphire [Chase credit card] points," she said.

Chase Pay does rely on one older piece of technology: QR codes, which are rapidly being replaced by Near Field Communication-based contactless payments. Apple Pay, Android Pay and Samsung Pay all support NFC as their primary payment option.

To broaden merchant acceptance, Chase partnered with the Merchant Customer Exchange,  a joint venture of the country's biggest retailers, including Walmart and Target. MCX's own mobile wallet, called CurrentC, is also based on the use of QR codes.

The QR code is "old and it will evolve, but right now that's what the merchants are using … anybody that accepts an electronic coupon accepts a QR code," Fitzsimmons said.

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