RevolutionCard, an upstart consumer credit card brand, disputes a recent report that suggests new card brands would need "deep pockets" to build their own processing networks on a scale large enough to compete with established brands.
However, while RevolutionCard suggests start-up brands like itself can gain a foothold in the industry by using proprietary processing systems and not the established networks, they still must overcome additional hurdles, including gaining mass acceptance from merchants and consumers, observers say.
ISOs, which earn the bulk of their revenue from traditional Visa and MasterCard branded credit and debit card transactions, may see decreased revenue if RevolutionCard succeeds in gaining enough merchants and consumers to compete with Visa Inc. and MasterCard Worldwide using its proprietary, low-fee network.
"It's a threat to [ISOs'] income. No doubt," says John Castle of York, Pa.-based ISO Merchant Bankcard.
The report "MasterCard and Visa: Profitable Toll Takers" by Berwyn, Pa.-based Turner Investment Partners suggests MasterCard and Visa "are relatively free to raise fees and earn superior profits" because of high barriers to entry and their approximately 80% combined payment-card market share.
"The thesis that a new entrant in the card space would require extraordinary investment assumes that a new processing network would be built based on the same strategies and technologies as those that exist today," St. Petersburg, Fla.-based Revolution Money, which owns RevolutionCard, notes in a statement responding to the report's findings.
Revolution Money tells ISO&Agent Weekly it has built a flexible, Internet-driven operating system and proprietary payment network. "By building our own network with the latest technologies, we have squeezed significant costs out of the operation," Revolution Money states, adding that the consolidation of major transaction processors and merchant acquirers provides Revolution Money with the ability to increase scale quickly and efficiently.
Start-Ups Face Hurdles
In the past, alternative networks have been moderately successful in signing major merchants, which can be attracted by the lower payment-service fees such networks may offer, says Ken Paterson, director of credit advisory service with Maynard, Mass.-based Mercator Advisory Group.
RevolutionCard charges merchants a processing fee that equals 0.5% of each transaction amount. Cardholders authenticate themselves by providing a personal identification number and not a signature, according to a company spokesperson.
While independent sales organizations' revenue may be at risk if RevolutionCard succeeds on a mass scale, third-party sellers are unlikely to see effects in the near future because the company has multiple hurdles to overcome, according to industry observers.
The challenge for fledgling network brands is moving beyond major merchants to smaller merchants. "Mass acceptance is a huge task," Paterson says.
Gaining widespread merchant acceptance is one of the biggest hurdles, agrees Jim Avondent, senior vice president of sales at EZ Cash Capital, a Garden City, N.Y.-based provider of financial services for businesses.
Another difficult task for start-up payment systems is mass issuance to consumers, Paterson says. "It's easier to sign up merchants than to get cards in consumers' hands," he says.
A lack of third-party sellers may be an additional challenge for RevolutionCard, says Paterson. "Third parties are very important to getting into mass issuing and mass acceptance," he says.
RevolutionCard does not have a direct ISO program, according to a company spokesperson, who did not answer questions regarding whether the company is considering adding such a program. The brand works with third-party processors to enable acquirers to accept the cards, states the spokesperson.
RevolutionCard likely can gain a foothold in the market without using merchant-level salespeople, says Merchant Bankcard's Castle. The company is going to "get a percent of the market" if it works solely on the Internet and with some institutions, he says, "but they will still have to get to the merchants on the street some way or some how" to expand and compete effectively with Visa and MasterCard.
RevolutionCard estimates it will reach 1 million merchants and 1 million cardholders by year-end, according to the spokesperson. More than 150,000 merchant locations accept the card, says the spokesperson, who did not say how many cards the company has issued.
RevolutionCard gained its retail locations in February when it signed a merchant-processing agreement with Fifth Third Bank Processing Solutions, the first merchant-processing deal for the brand. Under the deal, 156,000 retail locations accept the card through Fifth Third's Jeanie electronic funds transfer network.
Building A Brand
The merchant benefit–lower transaction fees–is easy to see, but what is the incentive for consumers to use the card, asks Castle. "You could have 1 million cardholders at the end of the year, but will people use the card?"
Consumers like using credit cards with rewards, he says, adding that RevolutionCard needs to educate the public about the benefits of transacting with the brand.
RevolutionCard is building brand awareness by increasing use of a fee-free online person-to-person funds-transfer service called Revolution Money-Exchange, says the spokesperson. Providing sign-up and referral incentives that permit the company to acquire accounts at affordable levels generates growth, says the spokesperson.
Ultimately, merchants and consumers are comfortable with brands they are familiar with, such as Visa and MasterCard, says Avondent. "Visa and MasterCard have decades of branding. Merchants and consumers like what they know," he says.