JPMorgan splits the ranks for credit cards

The dictates came from Jamie Dimon during a closed door meeting at JPMorgan Chase headquarters in November. Faced with growing pressure from smarter fintech companies, the CEO of the largest US bank has pushed the leaders of its two largest divisions to put aside any differences and work together to develop a new payment processing system.
“If I feel that neither of you are sharing information with each other, or that you are withholding information, you are fired,” Dimon told about 15 executives who gathered for the meeting in New York, according to two people familiar with. the statements.
Dimon released his statement in his usual witty way, but it reflected the challenges big banks face as they try to modernize their technologies.
The new system developed by JPMorgan’s Business and Investment Bank will allow merchants to receive payments directly from consumers, eliminating the need for debit or credit cards and posing a threat to the profitable commissions earned by banks and dominant Visa and card companies. MasterCard.
The belief in some divisions of investment and investment banking that this “pay through the bank” product has the potential to replace plastics has created inevitable strains with JPMorgan’s consumer and community banking division, which has recorded over $ 5 billion. of card returns in 2021.
However, Dimon said it was better to risk existing revenue than to let non-bank competitors lead JPMorgan to punch the fist.
This has already happened, said Dimon, that JPMorgan had to build its mobile payments platform for merchants before Square, the fintech company co-founded by Jack Dorsey and now renamed Block.
“Jimmy wants to discern which products could pose a threat to banking institutions,” said one of the project insiders. “If bank payment is widely adopted, the bank needs to be on high alert. If it fails in the long run, it’s kind of an insurance policy.” “.
Discussion at the six-hour event last November focused on how JPMorgan’s many powerful internal interest groups would split the bank’s payment project among themselves. Among the CEOs in attendance were Daniel Pinto, president of the bank and president of Business and Investment Bank, as well as Marian Lake and Jennifer Bibzak, recently promoted to co-manage the Consumer and Community Banking division, replacing the more influential Gordon Smith in 2021.
Pinto and Smith appear to be in a friendly competition, joking at corporate events that their division is the largest in the bank, citing different metrics. The two also temporarily headed the bank in 2020 after Damon underwent emergency heart surgery.
When Smith left JPMorgan, Pinto became the sole president. Although Smith was on par with Pinto, Lake and Bibzak did not receive the same title.
The emerging plan was to let the Business and Investment Bank hire the technology and build relationships with merchants, while the Consumer and Community Banking division worked to clarify customer protections in the event of abuse or fraud.
JPMorgan declined to comment on what happened during the meeting, which also touched on other payment projects at the bank.
Takis Georgikopoulos, JPMorgan’s global head of payment technology for Business and Investment Bank, said the bank spent “a significant amount of time” working on bank payments by talking to merchants and understanding consumer protection.
“The relationship between the consumer and community banking division and the business and investment bank is closer than ever,” Georgikopoulos told the Financial Times. “We all know that payment innovation is one of the company’s greatest opportunities and we are committed to this.”
JPMorgan’s move to bank payment is in response to demand from merchants like Amazon and Walmart, which anger banks and card companies using interchange fees averaging 1.8% per transaction in the US, according to the consultancy. for CMSBI payments. “In the European Union, the maximum exchange fee is 0.3% for credit card payments and 0.2% for debit cards.
Withdrawing a small amount of money for each pass of a card raises a large amount. According to the Nelson Report, in 2020, US merchants paid about $ 110 billion in processing fees for $ 7.6 trillion in card transactions.
Bank Pay, which will allow sellers to receive payment directly from a customer’s bank account, is part of the growing movement towards “open banking,” enabling consumers to securely provide financial service providers with access to their financial information.
JPMorgan already allows account holders to instantly pay each other via Zilla, a mobile app launched by major US banks in 2017. However, Zilla’s use of retail payments is still very limited. Bankers said this is partly due to the app being run by a separate company owned by a consortium of lenders.
Wire transfer payments have proliferated in countries like the Netherlands and India, but US consumers have been slower to accept their use.
This is partly due to the unreliable interbank automated clearing system, a network that settles payments in days rather than seconds and has its roots in the 1970s. That could change next year with the US Federal Reserve’s goal of launching FedNow, a new fast payment service for major banks, another reason JPMorgan is moving towards bank payments.
In the short term, JPMorgan sees bank payments as an alternative to rent payments and bills of exchange, as well as expensive cash, debits and checks, rather than credit cards, according to project participants.
However, in the long run, the bank makes sure it is prepared for the potential demise of credit cards.
JPMorgan isn’t the first to try to disrupt the credit card industry. In 2012, a consortium of major US chains, including Walmart, Target and Best Buy, unsuccessfully attempted to push the product into beta before it was sold to JPMorgan in 2017.
Executives of major credit card companies remain privately skeptical of the bank’s elimination of credit cards in the U.S. in the near future given deeply ingrained consumer habits, generous reward programs and fraud protection more clearly articulated compared to competing payment options.
But despite their trust, credit card companies have taken steps to improve their ability to facilitate face-to-face transactions, including Visa and MasterCard’s recent acquisitions of fintech companies Tink and Fincity, respectively.
Banks like JPMorgan – which have long been incentivized to maintain the status quo because they deserve most of the exchange fee from card payments – are also protecting their bets, hoping that cross-payments will replace at least some of that threatened revenue.
That’s why Damon stepped in and urged his teams to overcome the tensions and prevent any unrest.
JPMorgan now aims to launch a direct bank payment service next year and is in talks with at least one fintech firm for a partnership deal to provide infrastructure support, according to people familiar with the plans.
The Business and Investment Bank and the Consumer and Community Banking Division are still collaborating on the project. In July, the bank held its “Senior Payments Leaders Outside Business” meeting, during which some 40 senior executives from both divisions gathered at Cipriani, a luxury Manhattan restaurant.
This time, Damon didn’t see the need to come, let alone issue warnings.

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