JP Morgan Chase is still considering the possibility of buying out the Discover Financial Services Network or another payment processing company even though it would be difficult to do so. Chase does not want to rule out any opportunity to minimize the the fees they incur, even though it would be difficult to make the deal during these uncertain economic times. Buying out Discover or another payment processing company would end up saving Chase money which is why they don’t want to take the deal off the table just yet.
Every time a customer uses a debt or credit card for their purchase, the bank gets paid a fee from the merchant. In return the bank also pays the company that processes the payment, like Visa or MasterCard. The idea is that Chase can bi-pass paying the processing fee to the independent company because they would own the company and miss out on paying the fee. Discover is considered to be an undervalued company, but it competes with Visa and MasterCard when it comes to processing bank transactions.
Over the years Discover has been trying to build up their international network so it can compete better with other card companies like Visa and MasterCard. The problem is that Discover does not have the same coverage as Visa or MasterCard so it is at a disadvantage. They lack in coverage because U.S. consumers can’t always use their Discover card overseas, therefore consumers are reluctant to choose Discover over Visa or MasterCard. As a result, Discover has been trying to build up their international business.
According to CNBC, Chase CEO Gordan Smith said that for now, JPMorgan Chase is using traditional negotiation methods to help minimize the fees they pay Visa and MasterCard. Chase is the top issuer of Visa credit cards, and one of the top MasterCard issuers which makes negotiation an effective tool for them. They are trying to negotiate the cost of the fees because right now is not the ideal time to make a big business move like buying Discover.
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