
American Express Says It Will Buy Revolution Money  - tcskeptic
http://www.bloomberg.com/apps/news?pid=20601087&sid=auBvYLlL7kXQ&pos=6
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shimon
Either AmEx has an incredibly long-term view here, or Revolution Money is
toast.

Rev's whole business model was this: do what the major legacy credit card
companies do, but cheaper. This is achievable because a business that used to
require massive proprietary machinery can now run on cheap commodity PCs and
networks. They'd lure retailers with transaction cost savings, and crush the
legacy credit card companies by undercutting their profit margins.

For a big retailer like Whole Foods, these transaction costs are a direct cut
of their profit. AmEx takes around 5%, Visa/MC take 2%, Revolution takes 0.5%.
If you can run the business cheaply enough, you can get a lot of retailer
market share by offering to cut these costs, and maybe even divert some of
those savings into features that make your card better for consumers.

So there are three reasons I can see for this deal:

1\. Hastening the failure of the Revolution card means AmEx can sustain its
absurd transaction costs a little longer.

2\. AmEx is thinking ahead many many years, and thinks that the Revolution
approach will get them some new markets, and are willing to accept the risk
that they'll be cannibalizing some of their existing retailer/consumer market.

3\. AmEx thinks it could save a ton of money by adopting more current
technology, and wants the folks who built Revolution to help them do it.

These are listed in order of decreasing likelihood. I would bet that the
Revolution Card's growth slows significantly, very soon. I wonder also if
there were other problems impeding the company's growth, and pushing the
investors to sell now rather than hold out until the market really was more
disrupted.

On the bright side for startup folks and consumers, this deal suggests that
now is a great time to start another credit card company based on low
transaction costs. Revolution already figured out a lot of the hitches, and
retailers ought to be suspicious now that they're owned by the industry's
biggest usurer. The industry is even riper for disruption now than when
Revolution started, and hardly disrupted at all.

~~~
notauser
In the UK there are two key factors:

\- Consumers pick the cards.

\- Retailers are (in general) barred from charging different prices for cash
vs card payments.

Therefore it makes sense for any customer to pick a card with a high
reward/cash back scheme (1% back on everything you buy is nice) as you are
essentially taking a share of the profit your card issuer is making on each
transaction, at the expense of the retailer and cash buyers.

The retailer has essentially no power to avoid this, as long as the card
issuer's take remains below the point at which it would be unprofitable to
service their pool of customers.

~~~
hristov
"The retailer has essentially no power to avoid this, as long as the card
issuer's take remains below the point at which it would be unprofitable to
service their pool of customers."

AMEX is really on the brink of this point currently in the US. A lot of places
simply do not accept AMEX and a lot of AMEX customers carry different cards
because of that. Since merchants know that the average AMEX customer usually
carries another card as well they are often ok with not accepting AMEX.

Currently the main selling point of AMEX are rich people that swear by their
black amex card and are really annoyed when somebody makes them take out their
lowly visa. So places that cater to rich people or hope to cater to rich
people usually try to take the hit and accept AMEX.

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jrockway
As the existing player, you have to kill this stuff off before it starts
cutting into your profit margin. My guess is that we won't be seeing AmEx-
branded cards with lower processing fees anytime soon.

~~~
gecko
That's not necessarily true. AmEx has always been a weird creditcard company.
Traditionally, unlike MasterCard and Visa, AmEx encourages you to pay off your
bill in full each month. They instead charge you a yearly fee, and used to
offer better rewards to cover it. While this has changed a lot with the
creation of branded AmEx cards and AmEx Blue, I could see RevoluionCard as a
return to their traditional business model--but now backed by float, rather
than monthly fees.

I could of course be entirely wrong, but there's at least the chance here that
AmEx is _not_ interested in killing a competitor.

~~~
jrockway
OK, good point. I always think of AmEx as "expensive", but not "not evil". But
they are definitely not evil, which is why they are the only credit card I
actually use. (I had a card from my bank, but I didn't use it enough and they
charged me a $30 "you didn't use it enough" fee. That is pretty evil,
especially as they had never sent me a statement until then.)

------
cameldrv
Merchant psychology has to be a big part of it. If Visa is charging you 2%,
and Amex is charging 4%, Amex looks pretty expensive. If Visa is charging you
2% and Revolution is charging 0.5%, Amex at 4% looks outrageous, and you're
going to start thinking more about dropping it. Once enough merchants drop
Amex, people get frustrated that merchants won't take their Amex, and start
reaching for their Visa first because everyone takes it.

~~~
wallflower
I was at a U-Haul and was trying to pay with my Amex card. Kept getting denied
(I don't have payment issues) and I finally had to pay cash. All the other
customers used Visa/MC. The guy at the checkout counter later told me that
Amex cards get denied _a lot_.

------
gxs
Is it just me or does it bother anyone else that as a viable alternative to
overpriced, almost malicious credit card companies begins to gain some modicum
of success, it is immediately bought out by none other than one of said evil
credit card companies?

Am I being short sighted here? Missing something? I don't view this as AmEx
eventually lowering their rates. I view it as Amex ensuring their rates can
remain high.

*spelling, typo

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tc
3 years, $300M acquisition.

As noted below, there was quite a bit of investment in the company. Breaking
into the retail payment processing industry is definitely not an easy task.
Still, the relatively quick acquisition shows there is value to be had by
taking on the incumbents. Perhaps a more capital-efficient indirect assault on
the sector would be possible.

~~~
shimon
This is a venture with high capital requirements and significant regulatory
and competitive barriers. If it were the sort of thing that a couple of
hackers could tackle effectively, we wouldn't be paying such a large fraction
of all retail transactions to a handful of companies who succeeded at setting
up payment networks in the 80s.

Don't take that as discouragement -- you should go at them, right now. Just
pick partners that know the payments industry, can negotiate the regulatory
issues, and can raise and spend the money you need to market a consumer
product that won't be profitable until it has reached very large scale.

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Tamerlin
I'm just amazed the Case actually managed to make something work, given the
way things went with Revolution Health.

