By exiting from a longstanding joint venture, JPMorgan Chase & Co. is signaling its intent to expand its focus on the merchant acquiring and processing side of its cards operation.
The New York financial company announced Monday that it and First Data Corp. would break up by yearend their Chase Paymentech Solutions LLC venture.
The banking company is one of the largest card issuers and said it had decided that handling its own acquiring and processing was a core part of its payment cards strategy. The joint venture's contract runs through 2010, but the move to break it up had been widely expected by analysts, who said that bringing the merchant operations in-house would let the company reduce its costs, notably by handling some transactions internally rather than passing them off to third-party processors.
"We very much have a philosophy of controlling things that we view as being core to the business," Paul Hartwick, a spokesman for the Chase card services unit, said in an interview Tuesday. Chase Paymentech currently handles all of the banking company's merchant processing.
Gordon Smith, the chief executive of the card services unit, said in a press release: "With emerging opportunities in the global payments business, it makes good sense to bring our stake in the Chase Paymentech business fully in-house. Merchants are moving beyond traditional payment vehicles, and we expect to be at the forefront of the industry." (Mr. Hartwick said Mr. Smith was not available for an interview Tuesday.)
Brian Riley, a research director at TowerGroup, an independent market research unit of MasterCard International, said that, because JPMorgan Chase is such a large issuer, handling its own merchant processing would let it settle a substantial share of its payments "on us."
"They've got advantages from processing both sides of the transaction," he said.
However, the new business model will create challenges, such as maintaining a sales team to land and maintain merchant contracts.
"Merchant acquiring is a very different business from the issuing business," Mr. Riley said. "Very few banks have juggled that well."
Citigroup Inc. sold its merchant acquiring unit, Citi Merchant Services, to First Data in 2005. Citi had attracted 14,000 merchant customers, and "was not of the scale that we had hoped it would become," a Citi spokeswoman said at the time.
David Robertson, the editor of the card industry newsletter Nilson Report, noted that JPMorgan Chase has already taken a step down this path. Last year it began handling its own credit card processing, a task that it had previously outsourced to Total System Services Inc. The banking company "believes it can derive additional value from in-house operations," Mr. Robertson said.
Brian Mooney, the president of First Data's merchant services group, said the processor's purchase last September by Kohlberg Kravis Roberts & Co. had opened a door for JPMorgan Chase to quit the partnership early.
As talks with the banking company progressed, "we found it was in the best interest that we each pursue the merchant business separately," he said.
First Data continues to provide JPMorgan Chase with other services and still has similar, though smaller merchant acquiring joint ventures with more than 25 other U.S. banking companies, he said.
Mr. Robertson said that First Data is likely to approach some of its other joint venture partners to reinforce those relationships.
First Data and JPMorgan Chase plan to split the venture proportionally, based on their ownership stakes. JPMorgan Chase is to retain 51% of the venture's assets, including most of its employees, its Canadian and European operations, its Dallas headquarters, and the Chase Paymentech name.
First Data is to get 49% of the assets and is to take over the venture's agent bank and independent sales organization unit, integrating these operations into its own merchant acquiring business.
Michael P. Duffy, the president and chief executive of Chase Paymentech, said the two owners plan to divide the venture's 600,000 merchant clients largely based on the processing systems they use.
Unlike most of First Data's merchant acquiring joint ventures, which use First Data's processing systems, Chase Paymentech has developed its own technology. Merchants that use it will stay with Chase Paymentech, and those that use First Data's systems will go to First Data, said Mr. Duffy, who is to join JPMorgan Chase after the venture's dissolution.
"There isn't any conversion of merchants that needs to happen," he said. This arrangement will "minimize disruption to the merchants. First Data will be our customer the way we have been First Data's customer."
