Faster payments is a buzzword in retail banking which typically does not include credit card payments. The movement of money in retail banking usually involves transferring funds from Bank A to Bank B, in a transaction that might be similar to me sending you a P2P payment when we have accounts at different banks. Here is a Mercator Advisory Group report which explains the topic in detail. Credit cards do not fall under the guise of faster payments. Chase, the largest credit card issuer in the U.S., and the owner of Paymentech, a full-service acquirer, is disrupting the credit card posting lag through a fintech business it acquired in December 2017.
Credit cards post and settle through private payment networks, such as Mastercard and Visa. There is an intentional lag time from the time you make a transaction until the time the merchant receives their funds as electronic cash flows between counterparties.
TechCrunch covered the WePay acquisition by noting that the acquisition was not an investment, but rather a way to grow Chase’s already dominant presence in credit card processing.
- Banking giant J.P Morgan Chase is taking another step into tapping fintech startups not just for investment, but for growing its business more directly. The company has officially closed its acquisition of WePay, the payments startup that powers payments for crowdfunding platforms like GoFundMe and competes with the likes of Stripe to provide payments infrastructure to any business that makes transactions online.
The rapid settlement model was what appealed to Chase.
- “Most of the time with merchant providers, it’s between two business days to a week to get the money into your account,” he said. End-of-day and other “real-time” settlement services that do exist tend to come at a premium. Square, for example, offers a faster option, but it’s priced at one percent of the total deposit amount, which really can add up if you’re an SMB. “We think with some of these capabilities we can rapidly increase settlement times for our customers,” Clerico added.
Here’s Chase’s big news today in a CNBC report on how Chase can perform intraday merchant settlement, which is a breakthrough in credit card settlement and clearance.
- P. Morgan is rolling out same-day deposits to customers of its WePay platform who have bank accounts with the firm, according to Bill Clerico, CEO of WePay.
- At fintech competitors including Stripe and Square, payments take one to two business days to complete. Both companies charge fees for faster service.
In other words, if you are a Chase merchant and maintain a Chase banking relationship, funding can accelerate to near real-time on credit card purchases.
- “With other payment processors, when a small business is looking to get paid, it can take 24, 48, sometimes 72 hours over the weekend for that payment to hit,” Clerico said in a telephone interview. “Because we are a bank [as well as a payments processor], we can deposit their credit-card proceeds the same day, including weekends, at no additional cost.”
- The feature, available to some users already and spreading to all of its platforms by year-end, eases a cash bottleneck faced by many businesses.
In a practical example, the company notes:
- A restaurant, for instance, can receive credit-card payments for happy hour drinks later that day. Payments received by 5 p.m. Pacific Time on Sunday through Friday will be deposited to user accounts by 9:30 p.m., according to WePay. Payments made on Saturday will be posted by Sunday at 4 a.m.
- This is a threat to fintechs like Square and Stripe who can do this but charge high fees for the service.
- That could give it an edge as it faces fintech competitors including Stripe and Square, fast-growing companies that have taken the payments world by storm. These nimble firms have benefited as more commerce goes online, alarming the old guard.
- Both companies say payments take one to two business days to complete and both charge fees for faster service. Stripe, for instance, charges 1.5% to make an instant payment, according to its website.
Do the math on the 1.5% service charge. If you accelerate the settlement by two days and charge 1.5% for the service, the rate annualizes at more than 200%.
Chase is not the only one making a change in this arena. Mastercard recently acquired a Denmark-based firm with similar aspirations, and Visa is undoubtedly on top of it.
For the fintechs, this can be a learning experience.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group