Chase’s Big Cost Advantage Makes it Possible to Fund Rich Rewards, Re-Sign Partners

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.

Key takeaways:

  • 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.

Chase just re-upped its Southwest deal, and its fixed-cost deal with Visa should also position it well to re-sign United MileagePlus, the next big loyalty card offering on the market.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. What puzzles me is how come AMEX can offer good deals (like $50 off $250 Westin) but none of the other issuers ever offer anything.

  2. @jason word is that citi may be playing with something like this

    @anon – thinking at the time was that the lower united-only award pricing is something we have chase to thank for (ie it was going to be worse!)

  3. Interesting. the future goes to the biggest fish. However, the Reuters reporter (and you) have clearly missed something. If Chase has this advantage, how the heck did it lose the Costco bidding to Citibank? Hint: for the next several years, Citigroup has a tax advantage that outweighs Chase’s network fee advantage. Chase is in a real street fight if it plans to grow market share.

  4. My Ink Bold is still a MasterCard even when it went under forced conversion from a charge card to a credit card 10 days ago.

  5. I saw this story yesterday about declining processing earnings at Chase despite the 10-year preferential Visa agreement, which indeed seems counter-intuitive. I came to a different conclusion. Maybe Chase found they paid too much for the Visa deal, so they’re installing more hurdles for new applicants for in-house credit accounts.

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