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

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