Are banks trying to send credit-card-processing fee-gougers Visa, MasterCard et al. the way of Friendster?
The crypto world went into a tizzy when J.P. Morgan announced “JPM Coin.” They thought that the bank had switched sides finally, after CEO Jamie Dimon had blasted cryptocurrencies as “fraud.” Given my own blistering rants about cryptocurrencies – such as Bitcoin Plunges to $3,738; Whole Crypto Scam Melts Down, Hedge Funds Stuck – I was asked what I thought about JPM Coin. And so I expanded my answer to others in the payment-processing industry, and what they may be trying to do to fee-gougers, such as Visa and MasterCard.
Here’s what JPM Coin actually is not – and is.
JPM Coin is not a cryptocurrency. It cannot be “mined.” It cannot be traded. It doesn’t need an exchange or a “wallet” or anything like that. It won’t make anyone suddenly rich or poor. It’s “not money per se,” J.P. Morgan explained.
Instead, it’s a “digital” coin that serves exclusively as a system to “transfer and settle money for clients around the world” via a blockchain network.
It represents US dollars, “held in designated accounts at JPMorgan Chase N.A.” and is “1:1 redeemable in fiat currency held by J.P. Morgan (e.g., US$).”
It’s a prototype to be tested “with a small number of J.P. Morgan’s institutional clients.” The pilot program “is currently designed for business-to-business money movement flows,” and if it works out, the test may be expanded. “We don’t have plans to make this available to individuals at this stage,” J.P. Morgan says.
It was created so that J.P. Morgan could use the blockchain technology for payments. Processing payments over a blockchain “requires a digital currency, so we created the JPM Coin,” J.P. Morgan said.
In other words, there is no cryptocurrency-magic to it. It’s just an instantaneous payment system that works over a blockchain network. You have to have the dollars in your J.P. Morgan account before the transaction. You exchange them into JPM Coins 1:1 and then send those coins to another J.P. Morgan account holder who exchanges the coins back into US dollars 1:1. All within a very short time.
Funny thing is: I can already do all this without blockchain, and for free.
There are already instantaneous payment systems in use by banks that are free for both, senders and recipients, and are not limited to J.P. Morgan account holders. Free for senders and recipients is the key.
Zelle (successor to clearXchange which got started in 2011) is one of them. It’s a digital payment system “between almost any U.S. bank accounts typically within minutes,” Zelle says. From my own experience, a payment is completed usually within seconds. It doesn’t need cryptocurrency-anything, and it doesn’t need blockchain. Users just need to have a smartphone or PC. You can send money in your bank account via your smartphone or computer to anyone else’s bank account on the system. The recipient is identified by phone number – not bank account number – and neither party needs to know the other party’s bank account number.
For J.P. Morgan account holders, this works too. And they can even send money to Wells Fargo account holders.
It’s free for both the sender and the recipient. It’s instantaneous. It’s easy. And the recipients get near-instant notification that the money has arrived in their accounts. This money can be used immediately, and the recipient doesn’t have to wait one, two, or three business days as is the case with checks or other payment forms. Senders cannot cancel payments they made to a Zelle participant (though they can cancel it if they tried to send the payment to a non-participant). It works – I use it regularly.
The system is owned by Bank of America, BB&T, Capital One, JPMorgan Chase, PNC Bank, US Bank, and Wells Fargo. Over 200 banks and credit unions are currently participating in the system, and more banks are signing up. In Q4 2018, the network processed 135 million transactions for $35 billion. But there are still some inconvenient limits, including that payments can only be processed between US banks and credit unions, but not foreign banks.
There are starting to be other systems out there that work, are safe, easy to use, and that are free for senders and recipients. And that’s good. Other countries are way ahead of the US in that regard.
Getting rid of the fee gougers.
If you ever dealt with PayPal as a recipient, you realize what a gouge it is. And if you’re merchant or restaurant owner and take credit cards, you realize what a gouge they are – and they’re going to be an even bigger gouge starting in April because Visa, MasterCard, and Discover are going to raise their processing fees.
It’s about time modern instantaneous payment systems that are free for the sender and the recipient replace those gouges we have. So I applaud any effort to get there, whether this is via blockchain or some other technology.
Let the best solutions prevail. And if people don’t have the money to pay for things and need to charge it, banks can create a loan account attached to their payment system, so that folks can use these new methods and throw out the credit cards that are taking a cut out of every transaction.
Customers may not see that cut directly since merchants pay it, but they feel it because merchants pass that expense on to their customers via the prices they charge. And even cash-paying customers feel that fee in their wallet because they pay the same price.
It is interesting that the biggest banks are behind Zelle, and that the biggest banks are also working on blockchain-based payment systems. They’re the ones that handle credit cards, and they too pay Visa, MasterCard, Discover, et al. a fee for each transaction. Visa Inc. booked $21 billion in net revenues in 2018; MasterCard $15 billion. These $36 billion in revenues for just the two combined are largely the fees the banks pay them for processing credit-card transactions. But these companies carry no credit risk – the banks do.
Banks would love to avoid having to pay these fees. And all these payment systems they’re working on would be free for banks. It may be that once they get the kinks worked out of whatever payment systems prevail, blockchain-based and/or other, those credit card companies are going the way Friendster.
Consumer exuberance maxed out last summer and has since changed direction. Read… Why I’m Not in Panic Just Yet over the “Dreadful” Retail Sales that “Fell Most Since 2009,” But Nervously Look at the Trend
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