• Business Week, Wednesday, March 14, 2007 11:45 AM

Revolution--America Online co-founder Stephen Case's private investment company--is launching a new payment system called GratisCard next month that aims to loosen the grip of Visa and MasterCard on the credit and debit-card industry. GratisCard 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.

To entice merchants to accept GratisCard, the company plans to charge just 0.5% of the cost of a purchase. Visa and Mastercard debit cards charged fees at a rate of 1.75%.

Facing banks and card associations that have existing relationships with U.S. consumers is a huge challenge: Just the top three card issuers--JPMorgan Chase, Bank of America, and Citigroup--have nearly 330 million credit-card accounts. And they can keep those customers loyal with lucrative incentives, like frequent-flier miles.

Besides, cheaper transaction costs, sources familiar with GratisCard say, it will offer consumers and retailers another hot feature: better security. GratisCard is anonymous. Cards contain only a 16-digit verification number and transactions are encrypted.

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