Steve Case Takes On the Credit Card Giants

His new GratisCard slashes fees via Net-based transactions. But can he wrest market share from the likes of Citigroup, JPMorgan, and Bank of America?

by Brian Grow

A decade ago, America Online (TWX) co-founder Stephen Case helped bring the Internet to the masses. Now, he hopes to create a similar buzz with millions more consumers hungry for another product: credit. BusinessWeek has learned that Case's latest venture is a new payment system called GratisCard, which will use the Internet to lower transaction fees paid by retailers and, Case hopes, increase access to credit and debit cards for lower-income shoppers as well as consumers with bad credit.

Revolution, the private investment company which Case launched in 2005 with $500 million of his AOL fortune, is the largest shareholder in GratisCard, which is based in St. Petersburg, Fla. GratisCard will be formally launched in April.

Case's GratisCard aims to loosen the grip of Visa, Mastercard (MA), and their bank partners, on the payment industry. Retailers complain the card giants charge them high fees—known as interchange fees—when their cards are used in stores. In 2005, Visa and Mastercard generated $25.1 billion in fees on more than $1.1 trillion in credit card purchases, an average of 2.2% per transaction, according to The Nilson Report, a payment industry trade publication. Visa and Mastercard debit cards charged fees at a rate of 1.75%.

Confronting a Juggernaut

To entice merchants to accept GratisCard, the company plans to charge a fraction of that amount: just 0.5% of the cost of a purchase. "If you assume merchants are really irritated by interchange, you have to assume they'll have a friendly ear," says David Robertson, publisher of The Nilson Report. Case and GratisCard declined to comment.

Friendly or not, derailing the credit card industry juggernaut could be the biggest challenge of Case's post-AOL career. Last month, Washington (D.C.)-based Revolution launched Revolution Health, a Web site that provides medical data and services. Its Flexcar unit rents autos—with gas and insurance included—by the hour. And Revolution has also invested in luxury resorts.

But in credit cards, he faces banks and card associations that have existing relationships with a huge swath of U.S. consumers: Just the top three card issuers, JPMorgan Chase (JPM), Bank of America (BAC), and Citigroup (C), have nearly 330 million credit card accounts. And they can keep those customers loyal with lucrative incentives like frequent-flier miles. "They start with economies of scale," says Nilson's Robertson.

Attracting Subprime Customers

Still, the prospect of cutting transaction costs is alluring to Joe Croce, senior vice-president of sales for Comcast-Spectacor, a Philadelphia joint venture which owns the National Basketball Assn.'s Philadelphia 76ers and the National Hockey League's Flyers. In a quiet test at recent games, Croce says "several hundred" customers per night have signed up for GratisCard, enticed by 20% off their first purchase of food and beverages.

But the real attraction, Croce says, is slashing the nearly $2 million that the 76ers, Flyers, and their arena, the Wachovia Complex, paid Visa and Mastercard in interchange fees last year. "If you save half of that and use it for ticket promotion, it's still a win-win," says Croce, adding that the company does not plan to stop accepting Visa and Mastercard.

For consumers with low income or bad credit who are often charged high interest rates and fees, or denied credit altogether by banks marketing traditional credit cards, GratisCard could mean more opportunity. That's because the card plans to join with both prime and subprime banks, according to a source familiar with the matter. And lower transaction costs charged by GratisCard to retailers would make it profitable to accept the card for small purchases.