Nov. 18 (Bloomberg) -- American Express Co., the biggest credit-card issuer by purchases, will buy Internet-based payments network Revolution Money from America Online Inc. co- founder Steve Case’s investment firm for about $300 million.

Chief Executive Officer Kenneth Chenault is acquiring a startup that bills itself to merchants as a low-cost alternative to AmEx, Visa Inc. and MasterCard Inc. Revolution, whose backers include former American Express CEO James D. Robinson III, offers free online money transfers and PIN-based cards that assess merchants fees at a fraction of what the leading networks charge.

“We want to provide a range of options and choices for our customers and our merchants,” Chenault said today in a conference call with reporters. The purchase provides his New York-based company “the opportunity to offer a debit product, not only through AmEx, but also through bank partners,” he said in a Bloomberg Television interview.

U.S. banks deduct fees averaging about 2 percent of purchases made with most cards, and Revolution sought to capitalize on retailers’ discontent with those costs by charging a half-percent. AmEx’s so-called swipe fees average more than 2.5 percent, the highest of the four biggest networks, including MasterCard, San Francisco-based Visa and Discover Financial Services, based in Riverwoods, Illinois.

Revolution, whose cards are accepted by almost 1 million merchants, has said it signed up more than 300,000 customers since Case’s St. Petersburg, Florida-based investment firm, Revolution LLC, took a controlling stake in 2007. Retailers that accept the cards include Whole Foods Market Inc. and Barnes & Noble Inc.

‘Big Potential’

“We see Revolution Money as a small acquisition, but one with big potential,” Chenault told reporters.

AmEx dominates the market for affluent customers, with individual card purchases averaging $9,392 last year, compared with $2,699 for Visa and $2,269 for Purchase, New York-based MasterCard, AmEx said in August, citing company reports.

While the acquisition likely won’t have a “big impact” on AmEx in the short term, Revolution’s Internet platform eventually may give AmEx an edge over competitors, said FBR Capital Markets Inc. analyst Scott Valentin.

“I think they wanted the technology that Revolution has,” Valentin said in an interview. “Strategically it’s interesting.”

Jason Hogg, 38, who founded Revolution Money in 2005, will stay on as president and CEO, and Ted Leonsis, the startup’s chairman who served with Case as AOL’s vice chairman, will become a special adviser to AmEx, Chenault said. Revolution employs about 70 people who will remain with American Express, spokeswoman Joanna Lambert said.

Hogg’s father, Russell Hogg, worked for nine years at American Express, serving as general manager of the U.S. card division, and later was CEO of MasterCard International from 1980-88.

Mainframe Warehouses

Leonsis, 52, who owns the Washington Capitals hockey team, said Revolution Money has created a Web platform that can cheaply process millions of transactions and harness the power of social-networking Web sites such as MySpace to handle person- to-person payments.

Revolution can support millions of customers “with low- cost PCs in a conference room,” while competitors need warehouses the size of football fields with “lots of minicomputers and mainframes,” Leonsis said in a Sept. 9 interview.

‘Great Opportunity’

The firm wasn’t able to build a big enough base with consumers, “and that’s why this is such a great opportunity for us,” Leonsis said today. “American Express has a large customer base that’s accustomed to innovation.”

Investors have poured at least $112 million into Revolution. RRE Ventures, co-founded by Robinson, 74, and U.S. Venture Partners agreed to invest $20 million. Goldman Sachs Group Inc. and Deutsche Bank AG participated in earlier financing.

The transaction, subject to regulatory review, is expected to be completed in the first quarter of 2010, the statement said. Revolution will be the first component of AmEx’s recently formed Enterprise Growth division.

American Express, the top performer this year in the Dow Jones Industrial Average, rose 21 cents to $41.57 at 4:15 p.m. in New York Stock Exchange composite trading. The shares have gained 124 percent this year, compared with 19 percent for the Dow index.

To contact the reporter on this story: Peter Eichenbaum in New York at peichenbaum@bloomberg.net

Last Updated: November 18, 2009 16:55 EST