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Financial Software - Wednesday, November 18, 2009

Amex Pays $300M For Paypal/Visa/Mastercard Competitor Revolution Money

Revolution Money has been bought by American Express for $300M. The startup was founded by Steve Case and Ted Leonsis in 2007 and has raised close to $100M. Jason Hogg, founder and CEO of Revolution Money, will continue in his role. Hogg, not only was a founder of MBNA Canada, now part of Bank of America, and is also the son of credit card veteran Russell Hogg, chief executive of Mastercard in the 1980s...and on the Board.

Revolution Money provides secure payments through an Internet-based platform. The company also offers a prepaid card linked to online accounts that can be used for offline payments or to withdraw cash from ATMs.

Revolution Money cuts costs for accepting credit cards by up to 75% for merchants, looking to steal market share from traditional credit-card companies like Visa and MasterCard as well as PayPal.

Besides Mr. Case, investors in Revolution Money include Citigroup and Goldman Sachs. At the time of the last funding, Revolution Money was valued at less than $200M.

Revolution Card had signed up several hundred thousand merchants as of last year but it hasn’t disclosed how many cardholders it has.

Let's take a deeper look at the math. Visa and Mastercard generated $25B+ in what are called "interchange fees" on more than $1 trillion in credit card purchases, an average of 2.2% per transaction, according to The Nilson Report, a payment industry trade publication. Debit cards charge about 1.75%.

Revolution Card charges merchants just .5% (half of 1%)? A typical credit card purchase of a $100 pair of pants costs retailers $1.80 in fees, eating into already thin profit margins. In fact, in 2003, MasterCard and Visa settled a suit filed by Wal-Mart Stores-- later joined in a class-action by hordes of other retailers— agreeing to pay back $3 billion in hefty interchange fees.

Revolution Card also works within the existing point-of-sale infrastructure so merchants don't have to buy additional equipment. Indeed, reducing the costs for merchants gives them more leeway to provide instant rewards to Revolution Card holders, instead of the profoundly complex rewards programs that have been foisted upon us for years (and take years to earn).