‘A Major Pivot’ for Revolution Money As It Shifts Its Focus to Issuers

There's some evolution going on at Revolution Money Inc., the low-cost PIN-based credit card and electronic-payments venture. In announcing on Tuesday that Fifth Third Bancorp would be a RevolutionCard issuer, Revolution Money revealed a new focus on building its cardholder base and disclosed another $20 million venture-capital investment on top of the $42 million it received last spring. Cincinnati-based Fifth Third is now Revolution Money's main issuer for so-called prime consumers, those with the highest credit scores, chief executive Jason Hogg tells Digital Transactions News. The bank's merchant-acquiring arm, Fifth Third Processing Solutions, already had been offering Revolution Card acceptance to merchants. The addition of Fifth Third marks a shift by St. Petersburg, Fla.-based Revolution Money from building its merchant base to a focus on card issuance. “From our standpoint this is a major pivot,” Hogg says. Revolution Money's PIN-based credit card charges merchants a flat 0.5% per transaction. That saves merchants money but produces far less fee income for issuers than Visa and MasterCard credit transactions, which average a bit below 2% in interchange, the fee paid by the acquirer to the issuer. Acquirers typically pass on the cost to merchants. So what's in it for Fifth Third? “It brings new relationships to us, we will get new customers, card customers, out of this partnership,” Jon Groch, Fifth Third Bank director of Bankcard Services, tells Digital Transactions News. Fifth Third already issues about 1 million credit cards, with $2.3 billion in receivables, and 4 million debit cards. Fifth Third's RevolutionCard will have no annual fee and variable interest rates beginning at 11.99%, depending on the customer's credit history. Emphasizing a point Hogg makes, Groch also notes that Fifth Third's operating expenses will be lower than those of a conventional credit card program. Revolution Money and its merchant partners typically do the heavy lifting in finding cardholders, and merchants fund customized rewards programs from the money they save on interchange. “Interchange is only one component of the overall P&L,” Groch says. “The acquisition costs are lower. One of the major offsets in terms of expenses we have as an issuer is rewards expenses. With this card we don't have that.” Revolution Money's issuers own the receivables, but Revolution handles all transaction-processing and back-office functions and gets a share of the risk-adjusted margin: an issuer's profit after funding costs and credit losses. “Issuing banks are looking for less expensive models; telemarketing and direct mail are saturated,” Hogg says. Fifth Third joins Revolution Money's original stable of issuers: First Bank & Trust, a small bank in Brookings, S.D.; Citigroup Inc. for prime customers; and CompuCredit Inc. on the subprime end. All those remain with Revolution Money, Hogg says, and more issuers will be added. He describes the company as switching from an organic-growth model in which issuers were essentially wholesalers to one in which the issuers are more like partners. Hogg wouldn't say how many RevolutionCards are in issue, but he says the company itself has “several hundred thousand” customers. Besides cards, Revolution Money also offers RevolutionMoneyExchange, a person-to-person payments service. But the recession has battered Citigroup and decimated the subprime sector, and it wasn't immediately clear how much emphasis Citi and CompuCredit have put on their Revolution Money business. Despite the new focus on issuance, Hogg isn't ignoring the acceptance side. He says the company now has acquirers representing nearly 1 million merchants, and he's aiming for 2 million by the end of 2010. Besides Fifth Third, Revolution Money's acquirers include Chase Paymentech Solutions and RBS WorldPay, with gateway services provider Cardinal Commerce Corp. enabling e-commerce merchants to accept the card. Meanwhile, merchants continue to design rewards programs for RevolutionCard holders; a new example is Murphy Oil Co. offering an 11-cent-per-gallon discount, Hogg says. Hogg also reports that Revolution Money has raised another $20 million from insiders, Goldman Sachs, U.S. Venture Partners, and RRE Ventures LLC. James D. Robinson III, the former chairman and chief executive of American Express Co., is an RRE general partner and a new member of Revolution Money's board of directors. Last spring Revolution Money, a venture of Revolution LLC, an entity whose investors include America Online founder Steve Case, raised $42 million.