A Revolution in Payments

by Scott Loftesness on November 18, 2009

in American Express, Card Networks, ECommerce, Innovation, Scott Loftesness

Scott Loftesness

Today’s announcement of American Express acquiring Revolution Money caught many of us industry pundits by surprise – especially given the $300 MM price tag that Amex paid for the deal. But, upon reflection, and after listening to the Q&A section of Amex’s conference call earlier today, you can see why they were motivated to do this deal.

No question about it – Revolution Money was an innovator – indeed, they were such an extreme innovator that many payments experts dismissed what they were doing – in spite of the list of sterling investors and board members they had acquired along the way. (See also my partner Bryan Derman’s post – “This Revolution will be Televised!“)

It’s been a while since any other new payments company attracted the level of investment funding that Revolution Money did over the last four years. The most recent example that comes to mind is Pay by Touch – and that certainly didn’t end with a positive outcome!

On a Twitter post earlier today, Steve Case said “Revolution Money is great example of 3 P’s of entrepreneurship: people, passion & perseverance. Thanks to all who helped us on the journey!”

Let’s take a step back and consider the progress that Revolution Money had made over the roughly four years of its life before today’s announcement. Their primary progress was around merchant acceptance – claiming upwards of 1 million merchant locations now enabled to accept the Revolution Card. Merchant acceptance was primarily driven by a 50 basis point merchant discount fee – significantly less than traditional card products. With Fifth Third Bank initially as their acquiring partner, merchant acceptance came relatively easily. (More recently, Fifth Third also signed on to be an issuer for Revolution).

They built a new payments platform to support their business – and used a new kind of card – PIN-based, unembossed, no identifying information printed/embossed on the card, etc. They offered some unique merchant-specific card programs built on that platform – and Amex appears to have really valued the platform’s flexibility.

Beyond the platform, Revolution brings some other unique capabilities to Amex – including a person-to-person money transfer platform and the power of another brand in the marketplace.

Over the last few years as debit card usage has spiked and credit card usage has flattened, American Express has had nothing to say. They’re a charge card and credit card company – with no presence in debit. Indeed, we’ve speculated that it would be treacherous for Amex to introduce a debit product – because of what it might require them to do in terms of unbundling their merchant discount fee. Unlike traditional credit card issuers, Amex’s revenues continue to be skewed towards their merchant fees.

Here’s where the power of multi-branded payments products comes to the fore. With a new brand like Revolution, Amex can price new products (prepaid, debit, etc.) at a “Revolution-price” – separate and distinct from its traditional “Blue Box” card products. Amex can access a larger market in the process – through its GNS strategy it can enable bank partners to issue new forms of debit and prepaid products based upon the revised economics.

When we think of multibrand strategies, there are many parallels that come to mind. Visa with Interlink. MasterCard with Maestro. Discover with Pulse. PayPal with BillMeLater. Etc. Outside of financial services we think of P&G with Tide and Cheer. Or Diamler with Mercedes and Smart. Or BMW with Mini. You get the idea.

Indeed, American Express has “bought a Revolution” today. Or, is it a “sandbox”?

One of my favorite authors, Clayton Christensen, has pointed out that truly disruptive products must be developed away from the “mother ship” – or they simply won’t survive. The culture at American Express has for years been a classic monoculture. Can Revolution add some truly independent thinking to the big mother ship? In particular, can it unlock a debit strategy for Amex so that it can better participate in the growth of non-credit payments?

We look forward to seeing how this all evolves! What do you think? Add your comments below!

23 Responses to “A Revolution in Payments”

  1. Nice post Scott. In addition to your thoughts on the specific instruments that Revolution provides to Amex (PIN/Debit and P2P), there seems to be a deeper strategy here. The architecture of a platform like Revolution enables core payment services to be exposed to application developers (Social Media sites, POS software, etc.). To me, this acquisition will fall well short of its full potential unless Amex can leverage Revolution’s core technology to enable innovation on top of the Amex/Revolution payment platform; like what PayPal is doing its dev. network. The battleground is payments is shifting the edge of the network; whoever controls it wins.

  2. Great write up and good analysis why the “Revolution M” made sense for AMEX. It was not entirely clear to me from the WSJ post on how this was going to fit into the AMEX protfolio. Any thoughts on the price payed?

  3. Chris Hobbs says:

    Amex gets an expensive sandbox, but I wonder what the transaction feels like from the investors’ side. Their last round, $42m earlier this year, valued the company at about $200m. It probably features some preference rights that give it a good return. Earlier investors are getting a decent but not stunning outcome.

    For Case, it feels like a surrender of the dream to the realities of how difficult it is right now to build a major brand. A lucrative surrender, to be sure, but not the exit I think he was hoping for.

    • Bryan Derman says:

      Chris, I agree with your assessment. For all the years of talk about totally disrupting the business, they took a very early opportunity to sell out to a very traditional player. At the end of the day, this was a one-sided proposition, so they ought to be pretty satisfied with the price they got. Perhaps we’ll see some interesting applications of the very flexible platform they built over time.

  4. Derek, thanks for your comment. I agree that the platform aspect of this deal could be very important. What’s missing, of course, is that – while Revolution talks about their platform – they have done nothing, near as I can tell, to expose it to developers. PayPal, on the other hand, along with Amazon have truly opened up their payments platforms. Will Amex/Revolution really “walk the talk”?

  5. Chris, a friend reminded me in an email earlier today that Steve Case was a “master at selling companies”. Obviously, Revolution has secured a significant position on the merchant acceptance side. Their challenge was on the consumer side – what’s the consumer value proposition to use the card (other than the security features)? Based on what I heard on the conference call today, they’re looking to Amex for major help on the consumer side – and, presumably, Amex thinks they can be helpful without cannibalizing their existing consumer card relationships!

  6. Dan Stiel says:

    A good strategic buy for AMEX. RM was good at signing up merchants through acquirers, but did a very poor job at cardholder acquisition / activation / usage / retention.

    The RM option was a cost-effective alternative for merchants. We’ve already received two calls from our merchant clients wondering how long the 50 BP merchant discount fee will last.

  7. jd says:

    No one ever accused Amex of making great acquisitions. Has anyone ever even seen a Revolution Card? I think the jury is still out on whether or not Amex is getting anything with this acquisition.

  8. Eyal says:

    Revolution Money is no revolution and now will even disappear…the promise of lower interchange is gone so is its potential value for merchants and customers.

  9. Kevin Gallagher says:

    This was completely shocking. Not only the acquisition, but the price they paid. They have no consumer or merchant adoption or awareness at all. They keep saying they have 1 million merchant locations that can accept the card, but all they have done is certify to 5/3 and Chase Paymentech to “enable” someone to potentially use the card. Doesn’t mean anyone does or has. Just ask them how many transactions they did last month… They will not tell you. Revolution had to do something, they were burning through a ton of cash fast and profitability was nowhere in sight. Good for them that they got a great deal out of it…

  10. Bruce Shirey says:

    Scott, thoroughly enjoyed your post. I’ve been following Revolution since its inception and to camp on to your comment “Revolution Money was an innovator – indeed, they were such an extreme innovator that many payments experts dismissed what they were doing” seems rather reminiscent of when PayPal emerged on to the payments scene; and look where they are now.
    I agree with Derek’s comment about the potential and power of Revolution exposing their platform to application developers as PayPal just announced at Innovate09.
    My take away from the recent PayPal conference in San Francisco and the fresh AMEX/Revolution announcement is “open payment platforms and alternative payments will blur the lines” between Brick and Mortar, Mobile and eCommerce. The buzz during the Innovate09 conference was astounding. It was interesting to observe, at least from my perspective that Silicon Valley has descended into the payments business.
    Since AMEX is both issuer/acquirer and a closed loop system, the Revolution deal makes perfect sense. You are spot-on about multibrand strategies; this acquisition allows them to step in cleanly without disrupting their core model and hit the ground running with an alternative payments strategy.
    If the AMEX strategy folks took the time to put this deal together, then hopefully Revolution, by virtue of its name and disruptive intent, will be allowed to continue as an innovator and an exemplar in the emerging alternative payments space under the AMEX flag. The $300M paid for Revolution seems to be rational investment to enter a market with a functioning system and platform – just think back on how much money, effort and time it took PayPal to gain solid footing.

  11. Dale Blotter says:

    I had the opportunity over the past several years of meeting and working with some of the Revolution team on a few projects. They are great people with a great vision of what their product could become. I was surprised as everyone else it seems with this acquisition by Amex and I really hope that having the strength of that company behind them will help them move to the next level. Like many of their predecessors such as Pay by Touch and Tempo, they had great numbers for merchant acceptance but that was a hollow achievement without any significant numbers of actual cards in consumer hands and being used. A lot of retailers were really excited by the prospects of a legitimate competitor to Visa/MasterCard especially with their 50 bps merchant discount model but that excitement did not translate into any significant activity. I believe a major merchant adoption of their product for a private label card offering could have been a real game changer but unfortunately none stepped out to lead the “Revolution”. I think Amex will be making a mistake if all they do is imitate Visa/Interlink, MasterCard/Maestro or Discover/Pulse in using Revolution as just their foray into debit cards. The major brands have all but killed the PIN debit model for many merchants with fees now virtually on par with signature debit and their ever increasing security requirements (i.e Triple DES) for acceptance at the point-of-sale. To keep merchants interested they’ve got to continue to build on the attributes that made Revolution unique, the low merchant discount and fraud prevention attributes (i.e PIN based, no embossed numbers). If they can then build card issuance to where it starts to be a viable competitor to the other brands then I think they will really have a great product. Anything else will just be another forgotten product in the pantheon of electronic payments history.

  12. Jay says:

    Two thoughts….

    a) What a shame! I had high hopes for Revolution, but they have taken a nominal payout and run for cover. I suspect that they found the work was too hard and the barriers to entry too high. The price may be okay for the recent valuations, but to a true entrepreneur, I suspect that they sold out waaaayyy to early and for a pittance of what it eventually could be. This company was on a track to be valued in the billions. RIP Revolution.

    b) I suspect that Amex bought it to bury it as much as anything else. I do not believe their statements about their intent. BUT, even if they are honest about their intent, the net result will be the withering away of Revolution. This situation reminds me of the various times that Xerox bought exciting companies with exciting and valuable niche products, but NIH syndrome set in and the purchased companies withered away through neglect and/or intent. You just cannot take the “culture of a revolution” and get it to fluorish in one of the stuck-in-the-mud old-line companies.

    I hope I am wrong, but I don’t think I am.

    It is a sad day.

    P.S. As long as I am shooting my mouth off, I predict that in the next few years, the eBay-PayPal rolls will reverse and PayPal will become the primary company. eBay is such a train wreck — if you don’t believe me, talk to 50 eBay sellers and see what they say — that PayPal will sell it off just to be rid of it and so they can focus on making the real money.

  13. brian says:

    Does anybody know if Revolution was making money on its own? Hoovers pegs 2008 revenue at $8.1m with no mention of profit. That doesn’t seem right to me at all.

  14. Jay says:

    To me, this is another example of how desperate VC firms are to find an exit strategy on their investments made prior to the global credit crisis. Mint and Revolution Money are being sold at very early stages of their development (“3 year olds”). Revolution could have stayed independent for another few years, fully develop the products with consumers, issuers/acquirers, and merchants, and sold at much higher prices ($1 Billion+) … just look at the valuation BillMeLater got when it was sold as a more established business (“10 year old”). This will turn out to be a great investment for AMEX if they can keep it as a standalone “start-up” business and provide it with enough capital to fuel future growth.

  15. Jim Bruene says:

    Interesting discussion. Thanks Scott for getting it started.

    In listening to the conference call Q&A, there was a lot emphasis on using RM platform for reloadable prepaid card play, aimed presumably at Gen Y segments. Seems like the existing AmEx gift card could fill this void a lot more efficiently.

    But AmEx is a rational company. While $300 mm seems like a lot for this platform, given the RM brand is virtually unknown (so far) and end-user numbers are tiny, it sounds like an IT decision. AmEx did a make vs. buy analysis on adding new features (mobile, P2P, pin-based card, etc), and it was cheaper to buy RM than build in house.

    Anyway, looking forward to seeing what they do with it. I’ve been an AmEx fan for 20 years and have been hoping they’d become more innovative online.

  16. Here’s a fun 2 minute video on the Innovator’s Dilemma.

    http://techdirt.com/articles/20091116/2307256958.shtml

    Is this what Amex is up to with Revolution?

  17. Eric Grover says:

    Scott,

    Dr. Pangloss I presume. Ken Chenault paid $300 million for some technology and a management team. There’s no business, no viable business model, no meaningful clients, and virtually no revenue.

    I too am a great fan of Clayton Christiansen. In his Innovator’s Dilemma disruptive technology proves itself outside of dominant status quo players. Steve Case he can still create buzz, but he didn’t prove Revolution Money is disruptive. Inside Amex anything that might have been disruptive is likely to be smothered.

    Eric

  18. Ben Weiss says:

    Great insight Scott (and all the commenters)…

    Knowing AXP, and their thirst for an entry into more mainstream credit, debit and prepaid solutions, I am not surprised by this deal in the slightest. In essence, they’ve been trying to expand their internal prepaid business (Travelers Cheques and Prepaid Services) into an almost alternative brand, which can allow for a separate discount rate for merchants, while sustaining the premium rate for their traditional charge card businesses. However, the prepaid business was difficult to decouple (particularly because of the longstanding Travelers Cheques business, associated with luxury travel), as has most GNS issuer business, simply because the branding has been the same, and the clientele have continued to fit the required profile. This has limited their entrance into lucrative prepaid markets, such as payroll, government benefits, etc., because having a mixed customer base would likely hurt their premium discount rate.

    Enter Revolution Money, and you now have a 2nd brand that can finally allow AXP to compete in the lower rungs of the credit and debit card markets. As other commenters have suggested, I think Ken and Co. bought this company for the brand, and its affilation with low cost. If handled correctly, AXP can offer Revolution Money as its “Tiger Airways” to AXP’s “Singapore Airlines” (low-cost, no-frills brand and luxury-brand under the same parent). This can be a brilliant win for AXP, if they can execute and keep the brands separate.

    I also agree with Derek that AXP should not squander the ‘open API’ element of the flexible payment system that Revolution built. I don’t think Paypal has cornered the market, since they only recently opened their API, so there should be room to maneuver. I think an AXP/RevolutionMoney offering could be compelling to the best developers, particularly if their pricing is comparable or lower to Paypal.

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