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Amex Revolution (update 4)

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Amex Acquires Revolution Money – $300MM (Update 4)

18 November 2009

QUICK Take Analysis

Company Website

Investor Webcast – Amex Acquisition


Card Holders: 300,000
Merchants: TBD
TPV (FY 2009 Estimate): $200M-$400M

Revenue (2009 Estimate)
Interchange:   $1.0M (Est 50bps)
Fees:                 $0.30M *Est
NRFF:               $0.60M *Est
Other:               $0.20M *Est
Total 2009 Rev:  $2.1M (Estimated)

Invested Capital
Series A – $10 (Estimate)
Series B – $50M 9/07 Deutsche Bank, Morgan Stanley, Ted Leonsis
Series C – $42M 4/09 Goldman Sachs, Steve Case, Ted Leonsis, David Pottruck, David Golden, Citigroup, Morgan Stanley.

Total Invested Capital: $112MM (Estimate)

Post Money Valuation – Series C $200M (April 09) *Est
Purchase Price: $300M (11/18/09 Press Release)

Deal Analysis
• 142.8 times Forward Revenue
• 2.68 times Invested Capital
• Profitability. Assuming ACH funding costs of 42bps, gross margin on TPV is less than 8bps. If consumer fees remain consistent,  and merchants bear marketing costs, break even is TPV of $1.9-2.5B (12x+  current TPV). Note PayPal TPV is $60B.

Bank License: First Bank & Trust
Partnerships: Chase Paymenttech, 5th 3rd

Business Overview

The most telling data on this business is from the conference call above. CEO said “I don’t know what the numbers are, and if I did I probably wouldn’t tell you”. Revolution efforts to date, and their value proposition, are heavily merchant focused.  Early vision was to own the rails and act as both issuer and acquirer. Realizing that this was too much to bite off for a small company they chose to focus on a platform and partner w/ acquirer, selecting the most cost effective network (PIN Debit) as “rails to ride”.

Revolution has “tested” the platform, a platform which provides unique cards that resemble US Bank’s existing PIN Debit (ATM) card plus some additional security features.  Given the break in their acquisition strategy, Revolution’s margins are extremely compressed, with merchants provided a flat 50bps MDR. All accounts are funded by ACH transfer and no interest is paid to customer on funds held.  Payments funded though ACH typically carry a flat processing fee, usually less than 25c (this represents cost of less than 40 bps on an average PayPal transaction of $62). By comparison, PayPal’s funding mix includes option for credit which carries funding cost of 200-250bps.

Under existing US regulations (Reg E/ Reg Z) merchants suffer heavily in losses on Card Not Present (CNP) fraudulent transactions.  Visa and MC networks have had challenges implementing improved CNP risk controls as 4 parties (issuer, acquirer, merchant, network) have very different incentives. Revolution’s enhanced security controls attempt to address merchant liability in CNP fraud , and could lower costs for merchant, and issuer (Revolution).

Consumer Fees


  • 140x revenue represents a significant premium for a business model that has not proven itself, only “tested” its platform, requires substantial changes to consumer behavior, and leverages bank networks without providing bank incentives. It will take a 500%+ annual growth rate for this transaction to be accretive in a 5 year view with current pricing structure. American Express acquisition may be able to accelerate merchant growth, but marketing costs remain a challenge.
  • Current MDR and Consumer fee structure will likely remain until a TPV of $2-$3B to drive merchant adoption and offset merchant costs associated with integrating (and marketing) a new payment instrument.
  • Merchants may distrust AMEX intentions here as AMEX’s MDRs are among the highest of any payment type. Internally, AMEX will be challenged to allocate resources to Revolution’s given cannibalization issues surrounding fee structure. It may however, align with AMEX recent activity to form a deposit business.
  • Amex merchant connectivity may be able to provide the low cost rails that were initially envisioned in Revolution’s early business model. Internal incentives will prove challenging.
  • Price driven product. As the head of payments at a top 4 bank told me last week, what about this can I not do? The margins in this model have not driven earnings, and pricing will likely increase to support a sustainable business. A key element to pricing (and adoption) will be the degree to which merchants take ownership of marketing, loyalty and consumer adoption.
  • Companies like LifeLock have demonstrated that there are profitable consumer segments that care deeply about security. Uptake of Revolution money may be influence heavily by customer awareness. Under Reg E and Reg Z, maximum consumer liability for a fraudulent Credit Card transaction is $50. The liability for a PIN Debit is much different (note below). If consumers realize that their existing card liability is superior (then this instrument), it may impact adoption.
  • As with any new payment instrument, consumer adoption often proceeds much more gradually than predicted. PayPal solved a critical problem for an emerging market. Paypal’s ability to manage fraud and losses may justify their higher take rate (300-350bps), as the PIN debit model does not address merchant liability (see Chicago Fed Overview).
  • It is Critical that Chase Paymenttech stay engaged in merchant acquisition, as they are the leading acquirer for online merchants (addressing CNP issues).
  • (Aug 2010) learned that Revolution paid acquirers $1-$2M to integrate product.
  • Message to banks and issuers: set aside $10-$30M to invest in solutions to address CNP fraud.

Banks have invested enormous capital in building the ACH and PIN Debit (ATM) network, Revolution money leverages ACH to to fund their accounts, and then leverages the ATM PIN Debit network to conduct transactions. This flow of funds completely eliminates Debit card interchange revenue for “originating” banks (~150bps). Banks have not acted to date as current TPV is not of concern. In the event that TPV expands significantly, expect Bank involvement in restricting both the funding of accounts and use of PIN debit network. NACHA members have been very active in enforcing limits on clearing of non-bank payments, particularly if total transaction volume exceeds bank’s assets.

Non-bank money transfer services are typically a regulated activity. In addition to regulatory challenges, the unique regulatory environment (Reg E, 3rd party sender to ODFI) in the US may prohibit international expansion of this model. Another unique aspect to the US market is the card issuing business is typically separate from the merchant acquisition side (exceptions are American Express and Discover). Internationally, banks with both issuing and acquisition businesses are in a much better competitive position.

American Express will likely look to supplant role of Chase Paymenttech in merchant acquisition. Chase Paymenttech has several unique capabilities that will be challenging for AMEX to match. Look for AMEX to provide incentives for continued Chase Paymenttech involvement.

Value proposition is heavily merchant focused. Merchants may bear marketing costs to drive consumer adoption given the enormous cost benefits, however an integrated (merchant funded) marketing campaign will be challenged. Branding payments will eventually provoke a bank reaction. Paypal supported bank profitability through some interchange (50% funding mix w/ ACH). This model completely disintermediates banks (all while leveraging network in which they have influence/ownership).

Fraud does not typically attack a new payment system until it reaches critical mass, as fraud perpetrators must invest time to explore weaknesses and develop new tools. PayPal suffered losses of 7.4% of Revenue (over $300M gross fraud last year). This would obviously impact a business model with a margin of less then 10bps. The funding of the initial account is certainly a key weakness in this arrangement, as witnessed by both “direct banks” and transfer agents like Cashedge. Cashedge has a dedicated team of 30 risk analysts that have developed tools over 5 years to address fraud. See Mule Accounts.

Is the merchant value proposition strong enough that merchants will invest in building business teams that are capable of creating marketing and loyalty plans that can drive consumer adoption?


Written by tomnoyes

November 18, 2009 at 9:19 pm

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