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The Revolution Card – Times are ripe for change but the going will be tough
Revolution Money’s announcement of $42 million in fresh funding was the big payment systems news last week. Revolution offers a credit card with dramatically lower processing fees, a flat 0.50% compared to the greater than 2% typically paid by merchants, as well as MoneyExchange, a free online payment service similar to PayPal. While many are excited by the prospect of an alternative payment system, considerable doubt exists about whether Revolution will be able to succeed.
Revolution has financial support and executive leadership from major players in the financial services industry, including top credit card issuer Citigroup, and backing from AOL co-founder Steve Case, but building a competitive payments system will be no easy task. While the payments system has evolved over the decades, pioneer Diners Club is a relatively minor player now and upstart PayPal has become a serious competitor in recent years, the established participants have a significant edge at this point and it will take considerable resources and ingenuity to compete successfully.
How to attract merchants and cardholders to a payment system is the classic chicken and egg problem. Existing card networks have chosen to make merchants bear the bulk of the costs. Cardholders who pay off their balance in full each month, not only pay nothing for the service but can earn significant rewards from using their cards. In contrast, the Revolution Card is far more attractive to merchants than consumers. The low, flat rate for processing the Revolution Card is incredibly beneficial to merchants but leaves Revolution with little room to offer the same sort of rewards and benefits cardholders have come to expect from their Visa or MasterCard. Instead, the company encourages merchants to offer their own customer incentives. While this enables merchants to be more flexible and customized about passing on the benefits from lower processing fees to customers, it creates a far more complicated and unpredictable reward scheme for cardholders. Revolution has built a sizeable list of major merchant participants such as Whole Foods and Office Depot, but the Revolution Card website lists incentives for only 8 merchants which appear to apply only to their co-branded cards rather than the primary Revolution Card. The main cardholder benefit emphasized by the company is enhanced security due to pin-based authentication. However, it seems a stretch to imagine many cardholders will consider this sufficient compensation for the loss of generous rewards.
Nonetheless, it’s certainly an interesting time in the payments space as issuers cut credit lines and raise interest rates on loyal customers. Perhaps enough disgruntled cardholders could turn the tables in Revolution’s favor. Stay tuned as we investigate the life of a Revolution cardholder further …
One Comment
May 28th, 2009 Kristina Hidalgo says:
I find that the problem is, that most people do not understand, that the offers other credit cards offer are actually already paid for by them, and that there is no savings. Unless you are a retired person, and can fly any time, plus own a business which buys on that credit card for at least $10,000 a month, you will be out of luck. How can Revolution overcome this myth ?