Payments Views

American Express

A Revolution in Payments

Today’s announcement of American Express acquiring Revolution Money caught many of us industry pundits by surprise – especially given the $300 MM price tag that Amex paid for the deal. But, upon reflection, and after listening to the Q&A section of Amex’s conference call earlier today, you can see why they were motivated to do this deal.

No question about it – Revolution Money was an innovator – indeed, they were such an extreme innovator that many payments experts dismissed what they were doing – in spite of the list of sterling investors and board members they had acquired along the way. (See also my partner Bryan Derman’s post – “This Revolution will be Televised!“)

It’s been a while since any other new payments company attracted the level of investment funding that Revolution Money did over the last four years. The most recent example that comes to mind is Pay by Touch – and that certainly didn’t end with a positive outcome!

On a Twitter post earlier today, Steve Case said “Revolution Money is great example of 3 P’s of entrepreneurship: people, passion & perseverance. Thanks to all who helped us on the journey!”

Let’s take a step back and consider the progress that Revolution Money had made over the roughly four years of its life before today’s announcement. Their primary progress was around merchant acceptance – claiming upwards of 1 million merchant locations now enabled to accept the Revolution Card. Merchant acceptance was primarily driven by a 50 basis point merchant discount fee – significantly less than traditional card products. With Fifth Third Bank initially as their acquiring partner, merchant acceptance came relatively easily. (More recently, Fifth Third also signed on to be an issuer for Revolution).

They built a new payments platform to support their business – and used a new kind of card – PIN-based, unembossed, no identifying information printed/embossed on the card, etc. They offered some unique merchant-specific card programs built on that platform – and Amex appears to have really valued the platform’s flexibility.

Beyond the platform, Revolution brings some other unique capabilities to Amex – including a person-to-person money transfer platform and the power of another brand in the marketplace.

Over the last few years as debit card usage has spiked and credit card usage has flattened, American Express has had nothing to say. They’re a charge card and credit card company – with no presence in debit. Indeed, we’ve speculated that it would be treacherous for Amex to introduce a debit product – because of what it might require them to do in terms of unbundling their merchant discount fee. Unlike traditional credit card issuers, Amex’s revenues continue to be skewed towards their merchant fees.

Here’s where the power of multi-branded payments products comes to the fore. With a new brand like Revolution, Amex can price new products (prepaid, debit, etc.) at a “Revolution-price” – separate and distinct from its traditional “Blue Box” card products. Amex can access a larger market in the process – through its GNS strategy it can enable bank partners to issue new forms of debit and prepaid products based upon the revised economics.

When we think of multibrand strategies, there are many parallels that come to mind. Visa with Interlink. MasterCard with Maestro. Discover with Pulse. PayPal with BillMeLater. Etc. Outside of financial services we think of P&G with Tide and Cheer. Or Diamler with Mercedes and Smart. Or BMW with Mini. You get the idea.

Indeed, American Express has “bought a Revolution” today. Or, is it a “sandbox”?

One of my favorite authors, Clayton Christensen, has pointed out that truly disruptive products must be developed away from the “mother ship” – or they simply won’t survive. The culture at American Express has for years been a classic monoculture. Can Revolution add some truly independent thinking to the big mother ship? In particular, can it unlock a debit strategy for Amex so that it can better participate in the growth of non-credit payments?

We look forward to seeing how this all evolves! What do you think? Add your comments below!