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.
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.
Tom Burgess here from Linkable Networks. Thought I would drop in a note to correct some facts about the card linked offer market. At Linkable all our offers are redeemable offline at the physical store. That includes SKU and merchant level offers. Yes, we actually have cracked the SKU level code. As you may imagine this provides strong value to our banking partners. Additionally, we support online, mobile and traditional media channels so the banks are able to reach their customers outside their traditional touch points. That means a consumer can just as conveniently link an offer to their card through an online banner as they can from a traditional magazine ad or even a TV spot. Linkable turns any ad into a card linked offer allowing banks to secure a wide range of advertiser relationships and reach their card holders in all forms of media. In the traditional media we support QR codes, short codes and star star codes as the action the consumer can take to link an offer to their credit or debit card of choice. I agree with the author that linkable offers do not have much chance of success if they are only displayed on the banks web pages (although that is a critical part of the eco-system) and email is overused. If linkable offers are to grow it will require grand reach and frequency for advertisers. This means the advertisers need to reach a lot of consumers often to make it worth opening their ad budget for this new functionality. Linkable has opened the doors for advertisers (merchants or manufactures) to link-enable any of their ads in any media. Partners like WPP (http://tinyurl.com/7yr5gg8) guarantee that linkable can deliver on this front. WPP reaches every online consumer every three days via their 24/7 online ad network. This allows brands to target the consumers they want as often as they want, wherever they want. We have run campaigns for all categories of advertisers and have compiled first hand link and redemption data that will guide advertisers and banks toward successful campaigns.
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