When Chase rolled out Chase Pay late last year, it risked customer confusion because it was adding a new payment mechanism to the Chase mobile packages already offered. Chase customers already have a Chase Visa card and, based on Chase’s recommendation, more than a million of those cards are already loaded into Apple Pay. Now Chase Pay will be automatically added to the Chase mobile app that already has 21 million active Chase customers, which guarantees there will be a significant overlap with the users of Apple Pay. The goal of Chase Pay is to have all 21 million Chase customers use Chase Pay with their existing Chase-issued credit, debit, and prepaid cards for in-store payments, which of course means they will need to learn how to use Chase Pay.

Cardholders will retain all the same rewards and consumer protections using Chase Pay as they have with their existing cards. Currently the Chase web site identifies the primary benefit as merchant discounts. But Chase customers that already have Chase cards provisioned into Apple Pay or Android Pay will confront an impossibly confusing choice relative to acceptance.

Since Chase Pay will have a limited acceptance footprint that is different than the limited footprint associated with the NFC-based competitors, it strikes Mercator that a customer will simply become even more unsure what mobile app is accepted at which merchant locations and will revert instead to the tried and true physical card.

Beyond the acceptance problem, Chase will need to educate consumers regarding a new payment behavior at the POS. Chase Pay uses barcodes, so now a customer must choose between swipe, dip, tap or scan a barcode. In the opinion of my colleagues here at Mercator, a properly designed barcode will always be less convenient than a properly designed NFC payment app. We believe the CurrentC pilot has proven that barcodes are reliable and Starbucks Coffee Co.’s success with a barcode shows that customers can be trained to use them and will adopt them.

But we also believe MCX is already considering alternative approaches including NFC and BLE. Chase Pay will likely follow that same trajectory over time, so it is likely that barcodes are simply a medium term speed bump to consumer adoption. But of course, given the right level of discount or incentive, consumers will do just about anything.

Unfortunately, no details were announced regarding the incentives that will be offered to encourage use of Chase Pay. Because incentives and discounts are key consumer drivers for adoption, this aspect of Chase Pay remains the most important unknown. It may be that Chase works with merchants to implement extra incentives to drive volume to the app, or it may be that Chase relies on the rewards built into the customers’ underlying cards, or perhaps a combination of both. It is even possible that the lost interchange associated with a Chase Pay transaction will be replaced with merchant funding associated with merchant incentives. Either way there is clearly a significant cost associated with deploying a new acceptance network and mobile app and it remains unclear how Chase will recoup that investment.

The fact that the card can be associated with any merchant’s card on file solutions suggests that the Chase Pay could also be able to interact with existing Apple Pay, Samsung Pay, Android Pay and private wallets such as Starbuck’s. That said, it is unknown if Chase will enable merchants that process transactions implemented on their own wallet against a card on file to sign up for Chase Pay acceptance. It is entirely possible that Chase would want the Chase customer to always utilize the Chase wallet. So the question is this: Would Starbucks incent their customers to use the Chase Pay wallet, which integrates directly to the Starbucks loyalty, to get a discount on the cost of card acceptance? Said another way, which is more important to the merchant, ownership of the application or the cost of acceptance (with the assumption that the merchant’s loyalty program is delivered equally well in either scenario)?

In implementing a negotiated acceptance cost structure for each merchant it becomes possible for Chase to develop a strategic plan to penetrate specific merchant categories and/or geographies, but of course no such strategy was announced. If Chase offers steep discounts to every participating merchant, it raises the question of how Chase loyalty programs will maintain a high level of reward when every transaction collects a lower merchant fee, unless a new, unannounced, funding mechanism becomes available.

To receive the reduced cost associated with the Chase Pay bundled pricing (which establishes a single fee for all Chase Pay card types), the merchant must have a direct relationship with Chase Commerce Solutions. This however may not be true for merchants that accept CurrentC from MCX. It is likely that the CurrentC app will present the MCX barcode just as it does today. The transaction will be routed to the MCX backend where the transaction will be routed to ChaseNet for approval. Mercator expects that Chase will settle directly with MCX and that MCX will then settle with the merchant that originated the transaction. If this payment scenario is correct, it suggests that the Chase Pay app is not accepted at participating MCX merchants, only CurrentC app is accepted. The Chase Pay credential is simply added to the CurrentC wallet. This in turn indicates that merchants that wish to accept the Chase Pay app directly at the POS will need to enter into a separate relationship with Chase Commercial Services and update their POS software to accept the Chase Pay credential.

The Chase Pay acceptance footprint announced at Money 20/20 consists of merchants that participate in MCX, but merchants that utilize Chase Paymentech today and have Paymentech provided terminals that support barcode readers, should be well positioned to accept Chase Pay quickly, as will merchants that utilize Paymentech for online acquiring or recurring payments if Chase is willing to extend Chase Pay’s bundled pricing to those Chase cards held on file. If a merchant is not a Paymentech customer it will need to establish that relationship to accept Chase Pay.

Chase Pay is built on top of ChaseNet, the proprietary network that Chase operates on top of the Visa network. ChaseNet is considered a closed loop implementation because Chase is both the acquirer and the issuer for these transactions. So Chase Pay is only available to Chase customers and merchants when the merchant is acquired by Chase Commercial Solutions

While Chase Pay may fall under the three-party network exemption because Chase is the issuer and the acquirer, that decision isn’t crystal clear given that a decision must still be made by the Visa network to route the ChaseNet transaction appropriately. In theory some entity could challenge Chase Pay by arguing that this minimal Visa routing still constituted debit routing as defined under Durbin. That said, we should point out that this routing issue could also spell regulatory compliance trouble for MCX. It appears clear that MCX will be a debit network as defined under Durbin because MCX directly accesses bank DDA accounts via the ACH. It is also clear that MCX must route the transaction from the Merchant accepting CurrentC to the appropriate bank account. So even if the new MCX network offers better pricing for the merchants, this may not enable MCX to avoid compliance with the FRB regulations under Durbin. Perhaps even MCX will be required to offer the merchant two unaffiliated networks.

Tim Sloane is the VP for payments innovation at the Mercator Advisory Group.