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:
- Traditional marketing channels are not working, or are performing noticeably worse – particularly direct mail
- 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)
- The value of points/points programs are being diluted, especially airline miles
- 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!