Payments Upstart GratisCard Aims to ‘Eliminate’ Interchange

A well-financed startup company staffed by experienced card and marketing executives plans to launch in April an all-in-one, PIN-protected credit-debit-prepaid card with an acceptance cost that may resonate favorably these days with interchange-weary merchants: 0.50% of the sale. “One of our core tenets is to eliminate interchange altogether,” said Jason J. Hogg, chief executive of St. Petersburg, Fla.-based GratisCard Inc., during a presentation he made on the nascent program at a prepaid card trade show in Las Vegas late last month. GratisCard, whose merchant-branded product can be used online as well at the point of sale, plans to work with bank issuers, acquirers, and independent sales organizations to help it reach merchants and consumers. Its software works on existing Internet Protocol point-of-sale gear, which runs on Web connections, to move transaction messages back and forth. To entice usage, consumer rewards will be doled out on the spot. “We want to provide consumers with immediate gratification, with discounts and rewards at the point of purchase,” Hogg said. Whether there will be transaction fees to consumers for GratisCard remains unclear, though the company says on its Web site that there will be no annual fees. The company is backed with funding from Revolution LLC, a venture-capital firm founded in 2005 by America Online Inc. co-founder Steve Case, who put $500 million of his AOL gains into Revolution, according to a BusinessWeek article appearing on Wednesday. In addition to Revolution's deep pockets, GratisCard has a management team with long experience in payments and related industries. Hogg, a former executive with card giant MBNA Corp., is the son of Russell Hogg, MasterCard's president in the 1980s. Other top GratisCard executives hail from MBNA (now part of Bank of America Corp.), credit-reporting agency and marketing-services provider Experian, Marshall BankFirst Inc., AOL, and other firms. GratisCard, which did not immediately make an executive available for an interview, is in the midst of the formidable task of lining up merchants and merchant processors as it builds what its Web site calls a “new payment transaction system and credit operating platform that utilizes proprietary technology and the Internet to provide a superior method of payment to merchants, consumers, and financial institutions.” Key to the system is its comparatively low acceptance cost, about a third or less of what most merchants pay today to accept bank cards. “Everyone is receptive to a product that cuts costs by 75%,” says Trent Sorbe, president of First Community Financial, the national products affiliate of GratisCard issuing bank First Bank & Trust of Brookings, S.D. Privately held Fishback Financial Corp., also based in Brookings, owns both firms. Much about how the system works and whether it's based on a profitable proposition remains to be seen. So far, its only listed merchant is the Wachovia Center sports and entertainment complex in Philadelphia, home of the National Basketball Association's Philadelphia 76ers, the National Hockey League's Philadelphia Flyers, and American Hockey League's Philadelphia Phantoms. There, GratisCard is accepted at the Fan Gear store and concession stands. Cardholder applications on the GratisCard Web site offer cobranded cards for the Flyers, 76ers, and Phantoms with the lure of a $20 credit upon approval, good at Fan Gear and the concession areas. Some national merchant acceptors may be announced at the card's formal introduction next month. A big part of GratisCard's pitch is security. The oblong, PIN-based card offers anonymous transactions, as it has no name or account number on the front. The back has a 16-digit verification number, a bar code, and a magnetic stripe that does not store actual cardholder data. The stripe has values that enable GratisCard to link transactions to the legitimate cardholder. Using GratisCard's Web site, cardholders will be able to choose just one or several different PINs if they want, depending on their security desires, according to Sorbe, who has different PINs on his own card for different weeks of the month. He doesn't believe the issue of multiple PINs will deter cardholders from using GratisCard. “We think cardholders are more sensitized to the security risk than ever before,” he says. But although the system is still under development, plans currently call for cardholders to have different PINs to activate the different payment forms on the card?credit, debit, or prepaid. “We see increasing fragmentation in payments,” Hogg said at the trade show. “People have a desire to simplify this fragmentation, to have it all on one card.” GratisCard is “well-funded, and they see an opportunity to lead the interchange path downward,” says consultant and former MasterCard executive Steve Mott, principal of Stamford, Conn.-based BetterBuyDesign. Mott, who doesn't have inside knowledge of the company, says GratisCard won't gain much share until merchants and banks determine its operational systems, including risk management and chargeback resolution, work well. But the low acceptance costs will get merchant attention, he predicts. “Fifty basis points will certainly get some movement if all other things are basically equal,” he says. Dan Schatt, senior analyst with Boston-based researcher Celent LLC, also sees potential value in GratisCard's lowball acceptance pitch to merchants. “Merchants are already doing a lot of PIN steering [on debit cards] because they recognize payment-processing costs are cutting into their bottom line,” he says. But he says much depends on what the product ends up costing consumers, particularly underbanked customers, who make up the primary market for reloadable prepaid products. “When you add up all the fees [on existing prepaid cards], the reload fee, the POS fee, it gets to be cost-prohibitive for an unbanked person,” Schatt notes. “If [GratisCard] can make this a lower-cost proposition on the consumer side, it's got potential.”