Interview with Jason Hogg, CEO of Revolution Money

by Allen Weinberg on September 29, 2009

in Allen Weinberg, Card Networks, Credit Cards, Debit Cards, Revolution Money

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I jumped at the opportunity to interview Jason Hogg, CEO of Revolution Money, parent company of Revolution Card. My colleagues and I at Glenbrook Partners are frequently tapped as a source of information about the very latest goings on in the world of “alternative payments”, but unfortunately, Revolution doesn’t share a whole lot of key information and metrics with payments industry consultants and analysts like myself. So I was very eager to talk to Jason Hogg.

Just to give you a refresher on Revolution, they’re a four or five year old, relatively self-contained payments network that is shooting to be the “4th card system” in the US.  At least that’s how one of their executives described themselves to me when they first launched.

Originally positioned to appeal to the extremely security conscious market segment, all transactions are PIN-based, riding over the debit networks’ rails using a proprietary BIN range (PINs for ecommerce transactions are entered in the CVC2/CVV2 field). Cards are not embossed, and do not have the cardholder name printed on the card or encoded on the mag-stripe.  In addition, the number printed on the card is different than the number encoded on the mag-stripe, adding some level of additional risk management.

Today, the value proposition for the key constituencies are:

Merchants: 50 basis point all-in merchant discount, which would represent a savings of anywhere from roughly 120 to 180+ basis points relative to MasterCard and Visa products.  Revolution urges merchants to put that savings into merchant-centric rewards.  Note that Revolution is putting forth the argument that instead of funding loyalty to the issuer or the issuer’s co-branding partner, merchants would be better served by using the savings to engender loyalty to themselves.  Accordingly, merchants can issue cobranded Revolution cards.

Cardholders: Instant rewards/savings when used at merchants offering such (note that while the Revolution card is accepted at hundreds of thousands of merchant locations, only a small subset offer rewards)

Acquirers:  With ever-increasing pressure on margins, acquirers stand to make a fair amount of money on each transaction since Revolution allows the acquirer to keep a rather significant portion of the 50 basis point merchant discount.  The good news for acquirers and their merchants is that Revolution transactions look like just another PIN debit transaction going through and settling via their systems.

Issuers:  Revolution essentially sources new accounts for its issuers, who compensate the network with a fee per new account plus an undisclosed revenue share on the portfolio.  Revolution scores the applications and allocates the accounts out to those issuers that have are willing to take on accounts within a given range of FICO scores.  Who are their current issuing bank partners?  They’re not telling, but did mention that they’ve been piloting with a few and are “about to make a big announcement soon”.

Mr. Hogg noted that credit card issuers are seeing four key trends that make Revolution an attractive source of new accounts:

  1. Traditional marketing channels are not working, or are performing noticeably worse – particularly direct mail
  2. The squeeze in the ABS (asset backed securities) market has caused balance sheet and liquidity constraints (note that the ABS market may be coming back, but it has been flat for a while)
  3. The value of points/points programs are being diluted, especially airline miles
  4. Merchants are fighting interchange much more aggressively than in the past, especially in lower margin verticals.

So what’s in it for Revolution?  During our conversation, Hogg stressed a number of times that Revolutions revenues were somewhat akin to Visa and MasterCard, if not richer in some respects.  Revolution takes a portion of the 50 basis point merchant discount; if indeed akin to Visa and MasterCard’s merchant assessments, that would equate to between 9 and 10 basis points.  In addition, as noted above, Revolution participates in the cardholder revenue stream (i.e., the finance charges).

As I mentioned at the outset of this post, I was particularly eager to talk to Revolution’s CEO since the company hasn’t talked publicly about its progress other than citing acquirer agreements.  In the electronic payments business there are a number of standard metrics that we use to gauge the success and trends of a payment scheme.  When we spoke Hogg provided a few:

  • Putting 5,000 – 6,000 new accounts on the books each day
  • 80%+ activation rate
  • Key segments: petroleum, convenience stores, pharmacy, wholesale, online retail
  • Not surprisingly, they’ve been experiencing very little POS fraud; in addition, if online merchants are breached, the fraudsters get the printed number, not the number on the mag stripe

Unfortunately, Mr. Hogg wouldn’t release any information re: their credit vs. debit/stored value mix, other than to say that their skew is changing towards debit just like the rest of the industry

One of the things that I could never figure out about Revolution was how the system could support convenience users (those cardholders that pay off their balances each month).  In the Visa/MasterCard world, interchange fees can largely mitigate issuers’ cost of carrying cardholders that don’t revolve balances.  However, with Revolution, the issuers don’t have such fees.  Mr. Hogg asserts that convenience users are tolerated by issuers since the account acquisition costs are so low ($50 vs. $220).  Also issuers aren’t funding loyalty programs (the merchants are) so the cost of carrying them are limited to the free period cost of funds.  More importantly, he states that since Revolution gets a percentage of the overall yield on the issuers’ portfolios, the impact on issuers are somewhat mitigated.

Another of my big questions centered around customer acquisition strategies.  Sure, some retailers will sign up some cardholders, but that approach certainly won’t get them to be the “4th network”.  Mr. Hogg didn’t want to talk about their strategy right now, but alluded to private label type deals on credit, stored value, and decoupled debit.

Generally speaking, when payment startups like Revolution come out with a large bang and then go silent and refuse interviews, I tend to think the worst.  So I really was quite happy to learn a bit more about Revolution’s progress.

BTW, it’d be great to get your opinions on Revolution – please feel free to comment below!

10 Responses to “Interview with Jason Hogg, CEO of Revolution Money”

  1. Bruce Shirey says:

    Would Revolution be in a prime position to take on and inspire the (under $3) micropayments market?

    • Allen Weinberg says:

      The merchant discount would be negligible (assuming they keep their 50BP pricing) so from that perspective, why not?! The issuers probably won’t care that much assuming they don’t get killed with customer service inquiries…

      • Steve Klebe says:

        It would be highly unlikely they could tolerate the dispute and customer service costs around micropayments with their current pricing scheme. p.s. I was original Revolution Money customer, tried it once, paid off the bill and just got my Dear John letter cancelling my account. Not that I was ever going to use it again, anyway….so who cares. This is likely to go way of PayByTouch.

  2. Greg Smith says:

    I applied for a Revolution Card and received it a few months ago. I had not used it yet and last week I received a notice in the mail that they shut down my account! I was shocked considering that I am a heavy card user not to mention a payments analyst. Seemed odd to me and somewhat insulting since they already went through the process to verify my credit history. Why not market to me in order to get me to use the card?

  3. Ken Boekhaus says:

    I think Revolution Money has 3/4 of a great concept. VISA, MasterCard and American Express have exposed themselves to competion at the lower interchange end by continually increasing credit and debit card interchange. Revolution Money’s product should be appealing to the merchants who are tired of paying inflated interchange and funding the loyalty programs of the issuers. Yet they can’t force consumers to use it because they must still take the Big 3’s cards to remain competitive.

    Where their marketing falls down is that there is no motivation for the consumer to apply for a Revolution Money card. I would rather use my Amex card and get my annual rebate than use a card that gives me nothing but saves the merchant money. (WIIFM!) They are so close to the solution that is right in front of them, yet they don’t see it. It’s a shame!

    • Allen Weinberg says:

      My sense is that some merchants are issuing their own cobranded Revolution cards that offer instant rewards/savings at POS. That’s still a pretty small number now, so while the card can be physically used at hundreds of thousands of locations, only a narrow subset offer incentive for cardholders to use it. Ergo, to your point, at most merchants, consumers would need to use other cards to get rewards.

    • Where their “marketing falls down” is at the point-of-sale – where both of the following must be present to have any opportunity of achieving the scale required to become the “4th network”.
      1. A message (logo signage) to alert existing cardholders that Revolution Card is an available payment option.
      2. A message to alert prospective cardholders to the benefits of applying for a Revolution Card.
      The “chicken or egg” debate in the payments business was settled long ago. Evidence of widespread merchant acceptance is the critical generator for card demand and issuance.

      • Allen Weinberg says:

        I did touch on those points with the CEO, specifically opining that relying on merchants to sign up cardholders en masse was not going to get them to mass market/”4th network” status. His response was along the lines of “stay tuned”, there are big announcements to come. Soooo, I guess we’ll all have to wait and see.

        I really appreciate your comment re: POS signage. It’s funny, these days those Visa/MC/Amex/Discover decals on the doors and at POS are getting harder and harder to find. As consumers, we almost assume that merchants will take cards unless they tell you otherwise (usually with a hand lettered cardboard sign near the door). On one hand, the card brands can declare victory in a way, in other respects I have to wonder about brand value….

        • Same subject / different subject – why is it that so few see, or are willing to acknowledge, what’s beyond dispute? The total value proposition associated with bankcards – for cardholders, issuers, acquirers and merchants – is a compelling one. So compelling, in fact, that our bankcard payment system continues to dominate the payments landscape and is among the greatest of all American product innovations. The only “alternative payment” options that have gained any traction have been those that have ridden the rails of the bankcard system. As to whether the pricing is “fair” – the free market (or what’s left of it!) has spoken. Interchange does exactly what it should do …. i.e. – it provides an efficient method by which to balance the interests and transfer the costs between the financial institutions associated with any given payment transaction.

  4. Anand Goel says:

    Our experience reflects Ken Boekhaus’ sentiment. We have few large merchant clients who accept Revolution Card but the percentage of sales through these cards is less than 0.001% of all credit/debit card sales.

    The value proposition for many consumers isn’t as strong as traditional credit cards.

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