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Shifting environment in fees, security breeds Revolution

Well-financed new card/payment system seeks to challenge giants

By Jason Aycock

Credit card customers are awash in choices, able to pick from any number of customized rewards programs, affiliations, fee structures -- even the images decorating the front. But an upstart player is taking on the card network giants, hoping that its innovative features and security -- combined with a deal it hopes merchants can't refuse -- can cut through the noise to find a home in your wallet and on your computer.

The RevolutionCardRevolution, the investment company launched for $500 million by AOL founder Steve Case, has introduced a new credit card to compete against the behemoth card associations Visa and MasterCard, and, through its Revolution Money unit, an online payment system to compete against eBay's PayPal.

Revolution's founders know they can't get a foothold looking or acting the same as everyone else in a crowded market. For security, the card doesn't have the cardholder's name or account number, either on its face or stored in the magnetic stripe -- all transactions are PIN-based rather than signed. The company aims to disrupt the big card associations' fee structure by charging merchants just 0.5 percent of a sale, compared with an existing 2-3 percent.

As fights over those fees roil behind the scenes between retailers and credit card companies, RevolutionCard may face an enthusiastic reception from merchants -- and a serious challenge to reach a critical mass of consumer cardholders.

The credit card offering debuted in November 2007, and already more than 100,000 merchants accept it, including Barnes & Noble, says Alexis Wilson, director of RF/Binder, the PR company Revolution retains. Revolution says it hopes that 1 million merchants will accept the card by September 2008 and that 7 million merchants will take it by 2010, says Wilson. Revolution Money Exchange -- a PayPal-like service for sending and receiving money online -- also rolled out in November 2007.

A prime target? Embedding into social networking and instant messaging. "We want to be to social networking what PayPal is to eBay," Revolution Money Chairman (and former AOLer) Ted Leonsis told the Web 2.0 Summit in San Francisco in October 2007.

Tackling online and offline life
Part of what Revolution Money hopes to address is what CEO Jason Hogg thinks of as too many separate hassles when it comes to moving money around.

"Right now you've got what I call payment fragmentation," he says. "You have all these devices in your wallet -- credit card, debit card, ATM, stored value -- and you don't need to do that. And you also have a PayPal account. Over time I think there will be a consolidation that takes place."

The company promises to remove barriers between online money exchange, credit lines and debit accounts, meaning the card could be a credit card, a stored-value card, and an ATM card all in one.

Revolution Card quick facts

• Based on a new payment network to compete with Visa, MasterCard, American Express and Discover.
• Bone-shaped card has no name, number or other information embossed on front.
• Magnetic stripe does not contain customer's name or account number.
• All transactions involve entering a PIN; that, combined with numbers in the stripe, allows the payment to be processed.

Keys to that vision are online management tools and the company's person-to-person payment system. Revolution Money Exchange, like PayPal, lets people e-mail money transfers to friends or merchants via their checking accounts.

Unlike PayPal, however, the company is aiming not for eBay, but the underserved area of social networks and instant messaging.

"We're trying to get people, while they're doing other transactions, whether it's digital content, sharing of information, whichever, to not have to go off to a disparate system in order to complete the financial aspect of the transaction," he says.

The security of anonymity
The most noticeable immediate difference in the Revolution Card is the face of the card itself. Apart from the Revolution name and logo and a distinctive bone shape, it's blank -- no embossed name or account number. (The magnetic stripe doesn't hold the customer's name, nor does it have the account number -- just a number associated in Revolution's computers with the account number.)

The cards are similar to the stacks of gift cards found near stores' checkout counters today: They have no value apart from when they can be connected, with numbers and PINs, to the owner in a given transaction.

Amid increasing concern about mass data theft from merchants, including a breach at TJX Companies that compromised millions of card numbers at the beginning of 2007, a card with no discernible connection to its user might hold new consumer appeal.

"I argue if the credit card networks mandated a PIN on every transaction, then 90 percent of the fraud problem would go away," Avivah Litan, vice president and distinguished analyst at Gartner Inc., says. "It wouldn't matter if thieves stole all the data; they couldn't use it without the PIN."

An anonymous card helps address the challenge of getting the card into consumers' hands, Hogg says.

"What's unique about us is, not only can we take the application up, we can render an instant decision and actually issue plastic, sweep and go, at the point of sale," he says. "In certain merchant locations, we're rolling out kiosks where people can go up, apply for the card, and the card spits out at the bottom when they get approved."

But with massive and growing rewards programs dominating the industry, PIN-based security may be a tougher sell for consumers, says Rob Drozdowski, senior director at the Electronic Transactions Association.

"There's obviously value for the consumer who really values privacy and information security," he says. A system like that already exists in the Visa/MasterCard world (Verified by Visa and MasterCard SecureCode) that hasn't gained that big an acceptance. Banks have done a good job of insulating consumers from fraud on their account, to the extent that most people are comfortable using their cards on the Internet, Drozdowski says.

"I don't think it's a priority for consumers," says Brad Stroh, co-CEO of Bills.com. "It's still ease of use, the terms of the card -- including fees -- and rewards. Then a very large drop-off before you get to security. Do people in the industry think it's important? No question ... I just don't think it will drive consumer adoption."

Chicken and egg
The new card faces the classic credit card "chicken and egg" problem: Merchants may not hassle with accepting a card customers don't have, and consumers won't apply for a card nobody accepts.

But observers say it's not an impossible problem to crack, provided a newcomer has new features, a new model and enough financial capital to break in.

"Discover was the last company that successfully entered the industry in a big way, back in the 1980s," says David S. Evans, founder of Market Platform Dynamics and co-author of "Paying with Plastic: The Digital Revolution in Buying and Borrowing." Discover, which was founded by Sears, had the advantage in that it could leverage the Sears cardholder base and begin with a large group of cardholders, Evans says. Within five years Discover was considered one of the greatest business success stories of the 1980s.

"You just have to recognize that you're going to lose money at first, because you need to invest in getting the different groups on board," Evans says.

"There are billions of credit card offers made annually," Stroh says. "Credit cards are marketed very aggressively and the amount of noise in the marketplace is extremely strong. To acquire new consumers with a brand-new credit card line in the midst of that noise, and those marketing dollars, is a Herculean task."

Despite established competition for each, Hogg sees strength in the combination of the card and the online payment network.

"The combination of the two provides us with a chicken and an egg, essentially, at the same time," he says. "Our products in combination leverage a whole host of things from convenience to security to instant rewards and more."

The fight over fees
On the merchant side, the heart of the card battles is a tug-of-war with card companies (card associations and issuing banks) over interchange fees -- a portion of each transaction (usually 2-3 percent of the purchase price) that merchants pay to process it.
 
Frustrated merchants say they sometimes lose money on small purchases in particular.

Others argue retailers simply add that percentage into their prices, and that there's no incentive to keep those fees down, resulting in an unseen "tax" on all consumers.

Lawsuits over the fees are piling up in the U.S. court system, and the issue has drawn attention from Congressional committees as well as the Department of Justice.

Hogg -- who cites his father Russell's experience as President and CEO of MasterCard in the 1980s -- says the fee structure is a vestige of the proprietary networks that Visa and MasterCard built, and that by using PINs and the Internet, Revolution can profit on far less.

The Revolution Card isn't lacking in banks issuing the card. So far, Citigroup (the No. 3 overall card issuer), Morgan Stanley and Deutsche Bank are on board.

Still, while discounted fees have merchants taking notice, it's also not the strongest sell for the consumers the company needs to sign up to get a foothold.

Ordinary banking fees -- checking account and online banking charges, for example -- are present in consumers' minds when they shop for a bank. But when it comes to credit cards, interchange fees are mostly invisible to consumers, Litan says.

"All [credit card] payments are free to consumers, generally speaking," she says. "So they're not driven by fees. ... They're driven by convenience, security and loyalty. I don't think Revolution can compete until the merchants are tying it to loyalty programs."

Hogg promises that consumers will see the difference in those fees, plowed back into incentives for which they don't have to save up points.

"What we're trying to do is provide tangible benefits to the consumer at the time of purchase," Hogg says. "So instead of aggregating thousands and thousands of points, which the average consumer doesn't do, we're actually giving them something right when they make their purchase.

"We have a couple of deals that we're announcing where the consumer will use a card and get 10 cents off a gallon of gasoline. Or use the card and get free pay-per-view in their cable bill. So we're working with merchant partners to redirect and utilize those fees for benefits and services for the consumer."

Even facing consumer inertia and the massive investment required, the increasing digitization of finances may provide enough of a foothold for a new network.

"The other systems are indeed based on platforms developed in the '70s and early '80s ... there's room for someone to come up with a more creative way of doing things," Evans says.

"The important thing is that you don't need to be a very big player in percentage terms to have a very profitable business," Evans says. "Discover has a 5 percent share of the business and that's a big, profitable entity. If someone comes along and captures a 1 to 2 percent share, that's still a very successful entrance."

Published: January 9, 2008


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