American Express Says It Will Buy Revolution Money | Hacker News Reader

American Express Says It Will Buy Revolution Money

bloomberg.com

26 pointstcskeptic19 comments

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.

My guess is your third option. If AmEx can continue charging 2.5% while reducing their operating costs to a point that would make 0.5% profitable, that's lots of moolah for them.

I'm sorry that I'm just now hearing of the Revolution card. I use AmEx for no good reason at all, and a not insignificant number of merchants won't take it because its fees are so high. Of course, AmEx could also solve this problem by just reducing their percentage to 2% with the new technology.

AmEx absolutely reams merchants, but it's probably in your interest to use one if you can, because they provide a lot of nice benefits to the buyer. This includes extending warranty coverage, travel and rental car insurance, accepting returns if the merchant won't, and actually having decent customer service if something goes wrong or a merchant rips you off.

What I'd like to see is a merchant that actually splits the transaction cost savings with you, so e.g. if you use a Revolution card, your groceries cost 1% less (and cash saves you 1.5%). This probably violates their merchant agreements with the other card vendors, though.

This probably violates their merchant agreements with the other card vendors, though.

It does. There is a clause when you setup a merchant account that you cannot discriminate against one card over another (or, inversely, incent customers to use a particular card).

I've asked the Swedish Competition Authority (konkurrensverket) by email why such agreements are legal. A merchant obviously has more to lose by not offering card payments, so they're in the weaker position.

The authority seemed to be uninterested, like they didn't want to do anything that impede the grow of card payments over cash. Cash being quite expensive since it is "robbable".

The price of a product is set with product cost + average transaction cost. If I pay with a card that has a transaction cost under average, I'm paying for the benefits given to owners of cards that have transaction costs above the average.

Hence, I have much to win from getting a card that has a very high transaction cost and gives me many fringes. Merchants see average transaction costs rise...

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.

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

As I understand it, here's how it works in the US:

- Amex says: "You can charge a card fee if you do for all the cards you accept."

- Visa and Mastercard say: "No card fees, but you can offer a discount for cash transactions."

"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.

I think what AMEX is doing here is just making sure that Revolution does not cannibalise the AMEX business. They can sort of control which merchants revolution is accepted at, by carefully aiming their marketing efforts and offering different businesses different deals. Thus, they can target revolution only at those stores that do not accept AMEX because of their high fees. So they can have revolution undercutting visa/mc but not undercutting AMEX.

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.

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.

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.)

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.

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.

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

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.

More than $100 million was invested in the company over those 3 years.

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.

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

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