ratisCard, a credit and debit card brand, debuted at the Prepaid Card Expo Wednesday, Feb. 28. The instant-approval card will be issued to consumers at the POS, enabling each card to also carry the merchant's brand.

Using encryption and a unique back end operating system, the authorization and settlement process will employ the largest multipacket switching network: the Internet.

The card brand will charge merchants 50 basis points, depending on the size of the merchant, and no interchange fees. GratisCard will let processors and ISOs keep a basis-points share on transaction volume. Sub-ISOs and merchant level salespeople will have the opportunity to earn points and share revenue from new cards their merchants issue.

GratisCard will earn and share revenue with its bank and ISO partners from the interest charged on revolving credit accounts.

Jason Hogg (pronounced hogue), developed the system with assistance from his father, Russell, former Chief Executive Officer of MasterCard (1980 - 1989), Hogg told The Green Sheet in an interview. His father is also a member of GratisCard's board of directors.

In order to protect cardholder information, the device does not carry the cardholder's name or account number, which is known only to GratisCard. Each device is labeled with a card number that is not the account number.

"The dissociated card number enables us to have inactive plastics to issue at the point of sale," Hogg said.

Working with multiple issuing-bank partners, GratisCard will provide instantaneous approval decisions for most cardholders, from sub-prime on up, "so we don't have high turndowns at the POS," he added.

The system works with a merchant's installed base of POS terminals. Rather than pushing cardholder data to the processor, the merchant's POS terminal transmits the card number and the merchant ID; the back-end system then pulls data to the POS via the Internet. "It's like a chipless smart card," Hogg said.

All-in-one card

GratisCard can be a credit, debit and stored-value card in one. "We've built the solution to enable the consumer to tailor which feature sets to utilize when it pertains to their account," Hogg said.

GratisCard can be considered an alternative to "a wallet full of other vehicles." Its feature set includes the ability to create subordinate accounts for the cardholder's relatives. Cardholders can attach specific dollar limits to those accounts and restrict the types of merchants at which the sub-accounts may be used.

Within the next 60 days, the company expects to announce at least one large merchant-acquirer partnership. GratisCard will partner with acquirers that, in turn, supply the company with the serial numbers and IP addresses from their merchants' POS terminals, enabling communications links.

GratisCard then pushes its software to those terminals. The acquirers will receive negotiated basis-point revenue on sales.

ISO basis point 'gravy'

Rather than competing with ISOs, GratisCard "is co-opting them," Hogg said. "We're partnering with ISOs because I don't want to be an ISO acquirer, and I don't want to go one merchant at a time.

"We're not trying to make money off our discount fees. So sharing a portion of [basis points] with them to proliferate the technology is the best thing. Partnering with five of the major ISOs or acquirers can be that type of proliferation." GratisCard has built a solution that does not require ISOs to process for the company, he said. "It's a very big difference."

Processors will be able to easily sell the system to merchants by advertising the relatively low basis-point expense, of which the processors receive a cut. When asked if processors will resist the card lest it cannibalize their traditional credit card revenue, Hogg said, "It's not an either/or." With margins squeezed, processors are netting basis points comparable to what GratisCard will share.

With the new brand, "They are locked at [a negotiated number of] basis points, without having any of the overhead expense. It's five basis points of pure gravy for letting us know the address of the box," Hogg said.

Sub-ISOs may also receive basis points. But they can negotiate a small portion of the company's revenue from revolving credit account balances derived from new cardholder accounts their merchants generate.

The company will also enable merchants to apply online for GratisCard acceptance.

Encryption and wrappers

"Utilizing the Internet as the transmission network, versus a closed-loop network, radically reduces our infrastructure costs and enables us to scale the system accordingly," Hogg said.

But the Internet made security a special concern. The system's features include two stages of encryption: 128-bit secure sockets layer encryption and a secondary encryption "wrapper."

Like the cardholder's account number, the merchant's code number is known only to GratisCard. PINs are not encoded into the mag stripe. Hogg said cardholders get only three attempts at entering the correct PIN.

All information is stored in encrypted form in the company's separate databases. When information travels across the Internet, GratisCard breaks it into individual packets, sending them in different directions and re-associating them at the back end. Each encrypted packet is in an encryption wrapper. Hogg said attempts to hack into packet information destroy the code in the process.

Flyers and sixers

Already in use as a co-branded vehicle with the Philadelphia 76ers and Flyers sports teams at their stadium, Hogg said, applicants have adopted the card at a rate six times that of traditional sports co-branded cards.

"We are operating on multiple platforms, including [the stadium's] concessions, restaurants and their online shopping cart," he said. The installation is testing the card's activation rates and "spend," he added. "The upshot is we've experienced [credit]-approval rates of a little over 3.5 times their previous program's rates."

GratisCard plans to enable an e-tailer "self-provisioning" shopping cart feature as a standalone payment option or for online merchants already using PayPal. Self-provisioning refers to user-downloadable customization capability.

"In April, we will launch a solution akin to PayPal that eliminates any fees for transferring money from one person in the network to another," Hogg said. The feature will allow individuals to easily remove funds from the GratisCard system using the automated clearing house.

Union State Bank has signed on as the merchant bank for GratisCard. FirstBank & Trust is the issuing bank partner and prime receivables lender. BankFirst is a stored-value and person-to-person partner. CompuCredit is the sub-prime receivables lender. Merrill Lynch may partner to enable GratisCard to scale its receivables. Hogg said more bank-partner relationships will be announced in coming months.

Oedipus next

Hogg grew up watching his father, Russell, help build the MasterCard network. "He was kind of a progenitor of interchange," Jason said. Getting his father to vet his ideas for GratisCard was problematic. "At first there was a natural apoplectic reaction from someone who was one of the original" founders of the traditional bankcard system.

"Over time, he's been a fabulous asset" whose role has been to point out potential weaknesses in the system as the concept evolved. "He's been a wonderful sounding board and confidante for me," Hogg said. Russell Hogg has been a strong supporter of the system for the past five years.