Card Linked Offers

Retailers will respond to banks loyalty spend initiatives, but “redemption” will largely be online (restricted merchandise lists) because retailers do share data at the point of sale. Banks and the Networks are attempting to expand Card Linked offers into the advertising space, but this means someone will have to sell retailers and construct campaigns. Neither Banks nor the Networks are adept at selling retailers anything, there will be need for 3rd party ad exchange (ex freemonee) where advertisers can bid to place across multiple issuers (ie each issuer control cards). These Ad Exchanges will be slow to mature because there is no proven CPA for card linked offers and merchant profitability

28 November 2011

pdf version here (sorry for previous Typos.. I need an editor.. so pardon the mess)

I’m fat and happy from all the Turkey.. and was thinking of what to blog about.  I’ve decided to link a funny story… with a complex market. Earlier this month I was called by a recruiter to lead a new company. Here is the abbreviated dialog

  • What is it? “a bank Groupon”..
  • How is it structured? A separate company? A Bank Division? “Both, it is a separate company 100% owned by bank”
  • Are they looking to spin it out? Will there be other investors? “no”
  • So CEO (with no equity upside) building a business from Scratch within a complex bank? “yes”
  • Where will it be based? “right here in NYC next to the Bank”
  • Did you know the COO of Groupon was given about $xxM in options… how are you going to compete with that? “we are not looking to compete on compensation.. but we do want to compete with Groupon”
  • Good luck with that!  (See my previous blog for lessons learned on bank spin offs)

Message here is that top banks and payment networks are getting into the “offers” space. I haven’t seen an industry analysis of CARD LINKED OFFERS…. So I thought I would create one. Today I was reading 2 month old post in All Things Digital: Will the next Groupon Killer be your Bank.. ? One of my first Blog posts (2.5 yrs ago) covered this subject as I saw in back in 2008/09 “Googlization of Financial Services”.  Here are a list of current leaders in Card Linked offers

Not all of the companies above are the same. Here are a few basic strategies behind these start ups

Strategy #1 – Improve Existing Loyalty Effectiveness. Colloquy.com is the industry leader in research on loyalty programs. Two recently published white papers by Colloquy.com display a macroeconomic view of the size and value of loyalty programs for U.S. consumers. Colloquy estimates the total value of loyalty currency issued to U.S. consumers in 2010 is a $48 billion dollar industry across financial, travel and hospitality, and retail sectors of U.S.

economy in 2 billion U.S. household loyalty program memberships. Edgar Dunn provide a great graphical view on the purpose of loyalty programs

Why do banks want to improve Loyalty?

A) Credit cards carry a much improved interchange (250-350bps vs $0.21 flat of Debit)

B) Loyalty Programs are highly effective card use AND retention tool. From Edgar Dunn

Strategy #2 – Redemption Network. Improve the way redemption works. Enable redemption of specific items. Catera and Cardlytics are leaders here. Great Article on Clovr (now Linkable Networks).

Banks used to see card offers as part of a large revenue stream.  Now banks need to find unique technologies in order to capture the customers’ attention again.  Some of that technology comes from mergers such as Cartera and Vesidia to form a new more innovative merchant network platform.  Other pieces of the card-linked offer space is coming from companies that are focused on card-linked offers, such as Boston-based Clovr Media.

… The card-linked offer company wants to make sure that promotions they are powering are meaningful.  They do that by getting down to the SKU level (the long number on products that identifies a unique product within a store. Tom said, “we can go right down into a particular product within a store, get right down into the SKU level.  Instead of 10 dollars off at Staples, it’s 10 dollars off a cannon printer at Staples.  We see that as a very powerful concept.

CONCEPT is the key word here as “networks” are minimal beyond eCommerce store fronts capable of redeeming offers for specific products. In the physical world, none of the participants above have cracked the code on the scenario above. POS integration is too hard AND retailers will not give up their data.  Entities like Catera are using other parties (ex SavingStar in Grocery) to give item level credit hours, days or weeks  after the sale.

Strategy #3 –  Advertising.  The first 2 strategies above are about leveraging the $48B in loyalty “value” to incent merchant participation. A third strategy is geared to attract retailer participation in an advertising network. The primary value proposition: target card customers with specific offers.  This strategy usually driven by card NETWORKS and Issuers looking to expand “value delivery” on existing networks (the  googlization article above provides an example). Although Banks certainly have the data to make this work, this is NOT a merchant friendly platform. Can you imagine using your Amex card at Macy’s then getting an incentive at Neimen Marcus? This is one reason why retailers are loathe to share any item detail information.. it would only help banks/networks more accurately target their customers.

Apparel, QSR, Furniture and a few other niches could be served in this model (few other retail categories have significant ad budget), but the price is credit card interchange.

Summary

Retailers will respond to Banks’ loyalty spend initiatives ($48B), but “redemption” will largely be online (restricted merchandise lists) because retailers do not share data at the point of sale.  Banks and the Networks are attempting to expand Card Linked Offers into the advertising space, but this means someone will have to sell retailers and construct campaigns.  Given that neither Banks nor Networks are adept at selling retailers anything, there will be a need for 3rd party ad exchange (ex freemonee) where advertisers can bid to place across multiple issuers (ie each issuer controls their respective cards).  These Ad Exchanges will be slow to mature because there is no proven CPA for card linked offers (and associated merchant sales lift/profitability). In other words the Merchant cost of accepting a credit card, paying for an offer, and tracking profitability is not a home run today. We need only to look at Visa Offers to see the confusing and bleak future. Consumers are overloaded with e-mail and messages.. behavior will not change until there is compelling value. Value cannot be delivered until there is a critical mass of ads which can be targeted. Targeting can not be done effectively because issuers only have merchant level preferences (not item level/brand). … Only certain categories of retailers have substantial marketing budgets… the majority of marketing is spent by manufactures.  Manufactures don’t know their customers.. (hence is why Shopper Marketing is red hot). … and so on

A logical extension of card linked offers is card linked pre-paid offers. This goes back to “Bank Groupon” listed above. Banks want to run a pre-paid program for retailers.. a “pay before” you eat… at a discount. Keeping it on the card so consumers don’t loose the offer and redemption is a seamless process within the existing card settlement flow. Hey this is a great idea for consumers and merchants. Problem is business model for banks. If this pre-paid was sold by a regulated bank entity I doubt if they would be able to take advantage of the breakage which drives Groupon’s profitability. Banks will also be responsible for things like escheatment..  this is where state regulators come looking for unclaimed funds.

Your thoughts and feedback are appreciated.

A related blog on Visa’s activities is listed below.

http://tomnoyes.wordpress.com/2011/05/20/visas-mobile-strategy-portfolio-manager/

Coupon Overload?

Well, FSIs and Card networks have finally gotten in the coupon/rebate game.. well sort of. Most have implemented along the lines of what I wrote about 2 years ago (See Googlizaiton of FS). Exception is Bank of America.. they have the best bank service by far. Merchant level incentives (ex 15% off your next purchase) seem to be the focus of Visa and Amex’s new service. Cardlytics provide a generic white label service along these lines to over 50 banks today (with much better usage than Visa/Amex).

Best Bank Coupon Service? Bank of America wins hands down

FSIs and Card networks have finally gotten in the coupon/rebate game..  sort of. Most have implemented along the lines of what I wrote about 2 years ago (See Googlizaiton of FS). Exception is Bank of America.. they have the best bank service by far.  Merchant level incentives (ex 15% off your next purchase) seem to be the focus of Visa and Amex’s LevelUp service. Cardlytics provide a generic white label service along these lines to over 50 banks today (with much better usage than Visa/Amex). From my previous blog above, the general flow:

1. Customer registers for service (credit card, mobile, ..) Accepts terms that allows for delivery of x advertisements  per month

2. Card Network acts as agency, coordinating merchants, promos and marketing spend

  • Merchants pre-pay for campaign settlement account
  • Cardlytics develop target promo and bid criteria: customer location, demographic, event transaction, …
  • A campaign function sits at “Network Switch”, listens to transaction traffic
  • Card transaction events are triggered based upon card registration status
  • Event gets sent to campaign engine.  AD triggered based upon criteria (Example. Shop at EXAMPLESTORE in next 5 hours and get 20% back)

3.  Redemption/ notification – Redemption server monitors transactions at Switch or at Bank Issuer Auth server

  • If Card transaction is for registered card it is sorted
  • Redemption engine finds that it Ad was sent to it, determines if transaction at EXAMPLESTORE meets threshold
  • If it is met, Campaign engine kicks transaction to MerchantAdvert service which bills merchant for AD and debits account for 10% credit plus fee.
  • Engine issues 10% credit to customer’s card account
  • Engine debits merchant account for fee + redemption amount
  • Notification message sent to customer that their card account has been credited for purchase and 10% discount.

Good news for merchants is that they pay only for purchases. Great CPA here. But a very poor customer experience.. getting credit either directly to your card.. or in Amex’s new program to a separate pre-paid card. Other limitation is that there can be no item level discounts.

Quite frankly I like Bank of America’s service much, much better. They are light years ahead of the other banks thanks to the efforts of people like Joe Giordano. Today, Bank of America customers can click on a coupon in coupons.bankofamerica.com and when you go to the grocery store, the discount item comes right off your bill. The company behind this is Zave Networks. Just fantastic stuff. Zave was the only company in IBM’s booth at the National Retail Federation (NRF) show. Given that IBM has 19 of the world’s top 20 retailers using its POS;. it is little wonder that IBM has embedded Zave in their OS.

Having run the online channel at 2 of the top 5 banks, I have a little idea of customer behavior and preferences. Banking customers visit frequently and may be able to have uptake of incentives, card customers have terrible online usage.. (1-2 times per month).. which is why the card companies are launching mobile services in cards so aggressively: they are trying to establish a new mobile behavior (ex mobile alerts on balances). The card coupon/incentive approach seems to have substantial risk, particularly when considering the poor customer interaction (on credit card), together with the very narrow market for incentives (apparel, restaurants), the competencies of the bank teams groups (campaign management) and customer preferences for debit.

Colloquy.com estimates that Banks and travel related industry spend about $48B per year on loyalty. Banks are running coupons programs primarily out of their existing “rewards” groups… with the hope of juicing rewards, as they reduce costs. With Debit interchange going down to $0.12 you can see the importance here.. either no rewards program at all, or one that is funded by another source. With Credit, loyalty programs are the primary customer driver both for card selection and use. Bank driven loyalty programs typically focus on redemption, not on the front side of selection. In other words, banks do not touch a customer prior to a purchase, but incent them afterwards.

From a retailer’s perspective what is the value of participating in a bank run a loyalty program?  Segments like apparel may gain traffic, but do you want your bank sending you an SMS ad for 10% off a nearby retailer/resturant everytime you pump gas? Possible, but more likely you will use the offerings from Google, Apple, Microsoft integrated with maps and comparison pricing. 10% off what? What do they have that I need? Most retailers are not big fans of banks, or their “incentive” plans. There are exceptions, particularly in apparel and restaurants (note restaurants are not considered retail). Overall this is less than $5B of $750B in US Marketing spend. I give the bank led initiatives about 6 months. When Google, Apple and MSFT come in with much richer services and focused teams. How many banks do you know with an campaign management group? … exactly. Visa had a tough time expanding into eCommerce (hence the CYBS acquisition), what makes them think they can run an advertising agency?

Sorry Amex, Visa, Cardlytics, FreeMonee, … Card driven models will have a very short life span. Exception is BofA both because of the bank (deposit) driven model and because of the item level integration with a partner (Zave/IBM) that knows retail. BAC will likely continue reign as  king of debit.. and even gain momentum.