Tuesday, November 24, 2009

Revolution Money in an AmEx world

Revolution Money getting acquired by American Express is closing of an interesting chapter (18 Nov 2009). When this venture started, there was a lot of hope (or hype on hindsight) around the disruptive innovation Revolution Money was bringing to the staid and conservative world of payment schemes.

Over the past 10 years, many have attempted to challenge the market dominance of Visa and MasterCard (with a smaller role being played by AmEx and Discover). The only notable success has been PayPal. This speaks to the challenges of creating a new payment scheme, and the credit PayPal deserves for being the lone [recent] success. While PayPal established its business using online payments as their beach-head, Revolution Money took the battle to the stronghold of the incumbent payment schemes, the brick-n-mortar retailer.

Revolution Money with its investors and management team seemed to have the right pedigree required for such a challenge. They raised a war chest of $112 Million. It turned out that building relationships with acquirers and merchants was the easier task. They had relationships with Fifth Third and Cardinal Commerce. Leveraging these key ecosystem players, Revolution Money was able to sign up nearly a million merchants. This was the target they set themselves early on, and reached it. The challenge came in the form of signing up new customers. They had signed up 300k customers, which included signing up some with a $25 bounty. They had a target of 1 million customers as well.

With the 0.5% merchant discount rate that Revolution Money was charging, retailers had an incentive to accept Revolution Card. In verticals such as gas stations, consumers got the benefit of using their Revolution Card, lower prices at the pump. However, such instant gratification was frequent and sufficient enough to change their behavior and adopt their Revolution Card as top of wallet. Consequently, customer acquisition and transaction volumes (or lack thereof) brought down the company. In some ways, the challenging economy in the US over the past 12 months was a double-edged sword which the company could not effective wield to their advantage.

Let us look forward. Revolution Money's investor came out OK. A 2-3 times return in today's investment climate is not bad. From an AmEx perspective, they are getting a lower-cost data center which might be of marginal value. A lower-end mass market product to complement AmEx's existing product line might be the real prize. The AmEx brand would help consumers sign up for and use the Revolution card. Revolution Money might also make AmEx more relevant in the online payments space.

Having said that, like any other startup, Revolution Money had multiple product lines, including Revolution Card, Revolution Money Exchange. They were also waging battles on multiple fronts (online, money transfer, physical retailers). In the near term, there might be sharper focus to increase chances of success. Given AmEx strengths, I suspect that the focus would be physical retailers, and try to grow the customer base and transaction volume.

Where do you think Revolution Money is heading as an AmEx product?

PS: Given Revolution Money's focus on the US, this writeup has an US perspective

Tuesday, November 17, 2009

Notes from Cartes 2009 kick-off sesssion

Notes from Cartes 2009 kick-off session held on Tuesday Nov 17, 2009 (lacks editorial polishing as this was captured as the session was in progress)

Session participants included senior executives from Gemalto, Oberthur, Sagem Orga, G&D, Infineon, NXP, Hypercom, Ingenico, Visa Inc. and MasterCard

Market macro trends
Credit is down, and will stay down
- Debit and prepaid is still growing
- Electronic payments will grow even though overall economic growth slows
- Price pressure is converting volume growth to reduced top-line (near-term)
- Reduced innovation dollars available
- Customers are downgrading the card capabilities (e.g., 64kb to 32kb)

Growth areas
- South Africa & Latin America showing growth

Government e-ID initiatives:
  • An important distributor of cards
  • Competition among government to be a 'model govt', thereby helping create frameworks around privacy, data protn, post-issuance downloads
  • Govt is helping smart card industry as they engender high-level of trust among citizens/consumers. They are also helping educate consumers to bring about behavioral change
  • In some cases, they are also loading other apps (for their own services) after the cards have been issued
  • Early adopters are countries which have about 20-50 million citizens, which include Estonia, Singapore, Taiwan, Columbia, countries in the Middle-East...
Use of smart cards by government to distribute subsidies
  • Brings about efficiency in the delivery of services by the government, as well as, increase in convenience and productivity for the citizens.
  • Examples including US government issuing Visa prepaid cards in 38 states to distribute subsidies, Pakistan and Dominican Republic using prepaid cards to get subsidies to their citizens
  • Adds another demographics group as smart card users: the Unbanked
Opportunities in addressing the needs of the unbanked:
  • Nearly 30% of Kenya and Uganda are smart card users
  • Meeting needs of the unbanked is adding nearly 1% to the GDPs of the above countries

Growth areas in the smart card industry:
  • Government initiatives
  • Move to EMV
  • Unbanked initiatives in Africa, LatAm...
  • Authentication
  • Contactless deployments
  • Migration away from mag-stripe cards (4 billion market opportunity)
Please share your feedback, and any questions that you have for me to follow-up on while at Cartes.