We understand that Visa recently revised its rules to permit US issuers and merchants to offer immediate discounts at the point of sale to encourage and reward the use of different types of Visa cards. Visa’s prior rule barred such point-of-sale differentiation among Visa cards. While the rule change could have a broad impact, we speculate that it also may relate to the recently announced letter of intent between Visa and JPMorgan Chase to launch “Chase Merchant Services,” a payments platform intended to “create more differentiated experiences for its merchants and cardholders.” (See Visa’s press release.)
The prior rule tended to limit discounting at the point of sale, thereby promoting ticket size and per-ticket interchange. The revised rule will likely have the opposite effect, affording merchants reduced per-ticket interchange, but potentially also permitting issuers to make up lost interchange through increased volume.
The revision could be especially beneficial to financial institutions that are substantial players on both the issuing and processing sides of the card business. By virtue of their existing processing relationships, these institutions already have contractual privity with many merchants and obtain substantial volumes of cardholder transaction/preference data that could be useful in targeting discounts. (Moreover, under certain circumstances, these entities are permitted by federal law to share the data for rewards purposes, see Regulation P, 12 C.F.R. 1016.14(b)(2)(iv).) And by virtue of their issuing operations, these institutions could link rewards – customized to the card, merchant and cardholder – to the use of the cards they issue. For example, they could agree with Merchant A to offer one cardholder 5% off specific purchases at Merchant A on Card X, while agreeing with Merchant B to offer another cardholder 5% off specific purchases at Merchant B using Card Y – both Cards X and Y being Visa cards issued by the financial institution’s card-issuing bank.
Chase Merchant Services
The new discount rule would appear to offer open-loop issuers some of the advantages historically enjoyed by closed-loop issuers such as American Express and Discover. Chase appears to be the first mover in exploiting these advantages. A few weeks ago, Visa announced it had entered into a letter of intent with Chase to establish Chase Merchant Services, a Visa-supported payments platform that will process Chase Visa-card transactions at merchants enrolled with Chase Merchant Services. These merchants will be able to provide differentiated rewards to their customers in connection with such customers’ use of Chase Visa cards. As indicated in the Visa press release, Chase Merchant Services is not only intended to “create more differentiated experiences” for Visa/Chase merchants and cardholders, it is specifically designed to “build direct relationships with merchants and give enhanced benefits, such as targeted offers and discounts to Chase Visa cardholders.” Without the rule change, Visa merchants would have been prohibited from offering such targeted offers and discounts, at least without a coupon.
We expect substantial activity as other financial institutions and networks react to these developments. We will report further as events warrant.
(We understand that the new Visa discount rule has not yet been incorporated in Visa’s current International Operating Regulations, but should appear in Visa’s next release later this year.)