When Closing Accounts Is Counter-Revolutionary

Revolution Money Inc. has become the latest credit card company to shut down a slice of cardholder accounts, an unusual move for a fledging network trying to gain share and visibility.

The St. Petersburg, Fla. company, which started its RevolutionCard two years ago, started telling some cardholders this month that their accounts had been closed to further use "as part of the process of adding an additional banking partner to our network."

Revolution would not identify the new partner or explain why its addition led it to close accounts. But that action, though not out of step with the card industry retrenchment trend, is counterintuitive for a company that has spent the past two years establishing itself as an alternative to traditional networks like Visa Inc. and MasterCard Inc. and their issuers.

A year ago, Revolution was "making a lot of speeches, a lot of inroads. A lot of people were talking about them because they had a different model for merchants," said Brian W. Smith, a former general counsel at MasterCard and a former chief counsel at the Office of the Comptroller of the Currency who is now a partner at Latham & Watkins LLP. But "this is a very difficult time for the card companies, and the extension of consumer credit. With the new regulations, compliance costs are going up, and there's the increase in delinquencies. … I could see where it would be a very stressful period to get moving."

Revolution has tried to compete with the traditional networks by offering a relatively low transaction fee to merchants; its 50 basis points per transaction is generally lower than the interchange rates set by Visa and MasterCard. It has also pitched consumers with discounts at retailers and greater security features; unlike conventional credit cards, the RevolutionCard does not bear the user's name or account number, and instead of signatures, transactions are authorized with a PIN.

Revolution's only disclosed issuing relationship so far is with First Bank and Trust in Brookings, S.D., a unit of Fishback Financial Corp. And First Bank has stayed largely behind the scenes: Revolution is a network like Visa or MasterCard, but it also functions like the main provider of the cards, similar to prepaid companies or retailers who outsource their private-label cards. For example, Revolution's brand name or those of its merchant partners dominate the cards, and First Bank's name appears in small print on their backs. (Revolution's Web site still identifies First Bank as the issuer of all its cards; Fishback did not return calls.)

But Revolution, a unit of AOL co-founder Steve Case's Revolution LLC, also has acquiring and underwriting relationships with banking companies including JPMorgan Chase & Co., Royal Bank of Scotland Group PLC, Fifth Third Bancorp and Citigroup Inc., the latter of which is also an investor. A Citi spokesman said it is not the new banking partner, and a spokeswoman for Fifth Third reported "no change" in its relationship with Revolution. A spokeswoman for Citizens Financial Group Inc., RBS' U.S. arm, also reported no change in its relationship with Revolution. JPMorgan Chase did not respond to queries.

A statement from a Revolution spokesman said, "Customers, most of whom have inactive accounts, were informed that they no longer qualify for the existing credit line offered by our company. This policy change impacts only 2% of account holders."

But its e-mails to cardholders, not all of whom were inactive, gave differing impressions. Revolution told some cardholders that it was shutting down some products as part of the transition process, and it invited these cardholders to reapply. Other cardholders were given different reasons — and not invited back.

"As part of this transition, we have made changes to our existing credit policies and programs," Revolution informed Lisa Scheer, an Ohio resident who opened a RevolutionCard account about six months ago, in an e-mail last week. "A review of your account, prompted by these new policies, indicates you no longer qualify for the line of credit previously established."

Scheer, who said she rebuilt her credit after a bankruptcy in 2005 and now has a FICO credit score of 740, said she was never delinquent on her RevolutionCard account; in fact, she said she paid her balance, usually about $100, in full every month. That might be exactly the problem, according to industry observers. For Revolution's partners, "how do you make money on an account that doesn't carry a balance as an issuer? Your interchange is almost nothing," said Eric Grover, a former Visa executive and the principal of the consulting firm Intrepid Ventures.

"A new bank partner's going to have the same issue: a couple hundred bucks, you never carried a balance," he said, and as the bank, " 'we've got statement costs, we're losing money, so we don't want them.' "

Bruce Cundiff, a director of payments research and consulting at Javelin Strategy and Research, agreed that cost could be a factor — as well as the industrywide desire to clean up credit card portfolios. Shutting down 2% of accounts is "in line with industry numbers, and having inactive, unprofitable accounts open is really just a drain on cost," he said. "It's not going to have much of an effect on the brand equity that they haven't much established yet."

Indeed, while Revolution's decision might not help it expand its relatively tiny consumer base, that same size issue could help insulate it from the sort of large-scale backlash felt at other issuers that have cut back on consumer accounts this year. "The good news is, it's … 2% of a very small universe," said Bryan Derman, a partner in the consulting firm Glenbrook Partners LLC who has questioned Revolution's ability to attract customers during the downturn.

"What they're doing is probably no worse than what any other card issuer is doing as it reviews its portfolio, and I'd almost argue it will have less impact," since RevolutionCards are probably not "anybody's primary card. … It almost minimizes the reputational damage. You'd almost rather clean this up while being relatively unknown."

But for some customers, the reputational damage has been done. "As part of the process of adding an additional banking partner to our network, we will be discontinuing certain RevolutionCard credit card programs," Revolution told Arthur Robinson in an e-mail on Sept. 3. "We apologize for the inconvenience and hope you will reapply for a new RevolutionCard as we roll out exciting new promotions this fall."

When asked by e-mail whether he would reapply, Robinson was unequivocal: "Not after them cutting me off."