American Express to enter market for online payments

By Frank Ahrens
Washington Post Staff Writer
Thursday, November 19, 2009

American Express on Wednesday said it had agreed to buy the online person-to-person payment provider Revolution Money for $300 million, the latest move by one of the credit card giants to add a service that has been increasingly in demand by consumers, especially younger ones.

Revolution Money is one of the start-ups under Revolution LLC, the umbrella company launched in 2005 by AOL co-founder Steve Case, who said he wanted to create companies that empower consumers. Revolution Money is an electronic alternative-payment company, somewhat like PayPal, that allows users to securely move money across the Internet. Former AOL executive and longtime Case friend Ted Leonsis is the company's chairman, and former American Express chief executive James D. Robinson III sits on the board of Revolution Money, which was founded in 2007.

The key feature that these alternatives offer is the ability of people to pay each other directly. PayPal became the dominant player in this sector thanks to its association with the online auction house eBay, which bought PayPal in 2002. Buyers deposit money in their PayPal accounts and pay for items they purchase by transferring the money over the Internet directly to the seller's account. This was a feature the four major payment networks -- Visa, MasterCard, American Express and Discover -- had not offered. Until now.

MasterCard announced Tuesday that, starting next year, it will offer person-to-person payments among its cardholders. The move is at least partly designed to capture remittance transactions -- people sending money to their families overseas -- but also to grab some of PayPal's person-to-person market.

Visa has partnered with U.S. Bank to build out mobile applications with an eye toward allowing person-to-person money transfers. In an August survey, CashEdge, an online money-transfer company that works with banks, noted an increasing demand for person-to-person payment ability among banking consumers. CashEdge has partnered with the big regional bank PNC to build such a service.

A mobile-banking future

Revolution Money has been a small player in this field, with about 300,000 customers, and has been unable to build a substantial customer base. American Express has more than 90 million cardholders worldwide, and they are wealthy: Amex customers used their cards to charge an average of $9,400 in 2008, while Visa customers charged an average of about $2,700 last year.

"New payments products and platforms are evolving rapidly, and it's important for us to keep identifying cutting-edge technologies that can extend our leadership beyond the traditional payments arena," American Express chief executive Kenneth I. Chenault said in a conference call Wednesday.

Now that online transactions have become commonplace, the next step is to move them from the PC to the mobile device. Customers in many parts of the world are accustomed to paying for things with cellphones. In New Zealand, for instance, drivers can put time on parking meters by transferring credit card payment via their phones. Mobile capability is in its infancy in the United States but is projected to grow, especially among the young, as are person-to-person payments.

A recent survey by Visa and research firm Mercatus said that mobile banking capability is currently second only to plentiful ATMs when customers are picking a new bank.

With Revolution Money, the question was always: How would it make money?

In addition to offering free online person-to-person money transfers, the company issued a credit card, which boasted an industry-low "swipe fee" of only 0.5 percent. Major credit cards charge retailers a little less than 2 percent of each purchase made with their cards. These swipe fees explain why many retailers will not take credit card purchases for small amounts. American Express's fee is 2.5 percent.

Can it make money?

Credit card companies spend much of their swipe fees on things like customer rewards and marketing. Could Revolution Money's credit card unit, which has yet to turn a profit, stay in business while charging only 0.5 percent?

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