The biggest long-term threat to rewards credit cards is declining interchange fees, as the cost to process transactions falls each dollar pushed through a card’s network is less valuable and thus less worth incentivizing with miles or other rebates.
And indeed, Chase’s interchange fee income fell 2% in the first half of 2015 despite greater charge volume. (HT: Alan H.)
In the first half of 2015, fee income in the bank’s credit and debit card business fell 2 percent from the same period a year earlier, even as the bank processed a higher volume of transactions. A person familiar with the matter said lower processing fees were a critical part of that decline.
Chase is well-positioned to grow the business, though, with a deal they signed with Visa in 2013:
A key part of the strategy came in 2013, when Chase inked a deal with Visa that allowed the bank to essentially lease Visa’s network for 10 years at what industry sources said is a fixed rate.
- Chase has a 10-year deal with a fixed cost to use Visa’s network. We now know why Chase converted all cards except the IHG Rewards Club Select MasterCard over to Visa (IHG used to be a Visa and, oddly, was moved to MasterCard’s network).
- The more business Chase does, the more volume, the lower their per-transaction costs (since their Visa network costs are fixed).
- This incentivizes Chase to grow volume, to sign more co-brand partners. It also gives them a cost advantage when doing so. Which, given the installed cardmember base, makes it all the more surprising that they lost Amtrak.
- Chase re-signed their co-brand deal with Marriott this year and added Chevron as a co-brand partner.
The Visa deal also gives Chase access to better information about consumer transactions (which becomes valuable marketing data), and lets it compete aggressively for merchant processing deals with retailers because of its cost advantage.