Who better to give you relevant coupons than the one that knows your payment habits best?
With card issuers having the keys to rich volumes of transaction data, they have the power to leave the Groupons of the world in the dust by rolling out extremely targeted coupons, discounts or rebates to individual customers based on their transactions.
At least that’s how Madeline Aufseeser, a senior analyst with Aite Group LLC who just published a report on incentives tied to cards, sees it.
Groupon and Living Social “don’t even come close” to how issuers could disrupt the loyalty market, she says. “Quite frankly, I don’t see those models working long term,” Aufseeser says. Why? The offers may or may not be relevant to consumers that have opted in to receiving the deals.
That beat-down-a-booming-daily-deals-business opportunity for issuers is significant. Despite recent negative headlines, Groupon has done much for leading innovation in the coupon space. By having consumers buy deals online, print out the associated coupons and bring them into stores, the daily deal site has essentially created another way to pay. And banks can do better than that business model because they can better tailor offers to cardholders, because they know their purchase behavior. Though programs vary, the gist of how the new loyalty program works is that bank statements include deals and discounts based on a cardholder’s transaction histories. Perhaps a consumer spends $200 at The Coffee Bean in a month, and receives a $10 coupon on his online card statement for his next beverage. And that’s just the beginning.
Known as merchant-funded incentives, Aufseeser explains the emerging loyalty program influences consumer’s current behavior rather than rewards past behavior. And for issuers, there’s a new revenue source from deploying the emerging loyalty program. Plus, the retailers pay the loyalty program’s tab.
Aite expects that the revenue from this market will exceed $3.5 billion by 2015, with the card issuer revenue exceeding $1.7 billion that same year.
From the report:
Aite Group believes this new category has two components that may potentially disrupt the reward business as it’s known today; revenue share, and lack of fulfillment costs for incentives. These components will create a longer-term ability to gain traction, shift resources, and complement traditional reward programs.”
“In this new world, expenses go away and new revenue [is created],” Aufseeser tells Bank Innovation.
Creating new debit card revenue is particularly important, given the current regulation floating around. With Durbin set to limit debit interchange fees, Aite believes merchant-funded incentives will gain wider — and quicker — adoption among issuers.
“We can safely say traditional debit programs will expire,” Aufseeser says. “This is definitely a replacement plan for that.”
Though Durbin should drive debit issuers to deploy merchant-funded incentives, she also believes credit cards will equally benefit from rolling out the programs. Why? The loyalty trend was percolating well before the upcoming regulation’s birth. Plus, she expects the new rewards program to sit alongside existing issuer programs, such as cash back.
Aufseeser identifies a solid 10 vendors in the market that already exist for issuers to buddy up with today, and alerted Bank Innovation that she will be rolling out a report later this summer dissecting the players. [BillShrink and Cardlytics are but two examples.]
In general, she believes the vendors “have made it easy to integrate,” and, therefore, issuers would have little trouble debuting the programs. Why many issuers have yet to start merchant-funded incentives, though, is because the market is “pretty new” and “banks are slow to adapt new technology that isn’t part of their core businesses and this is certainly one of them,” she says.
As to budding digital wallets, they pose less of a threat to merchant-funded incentives than previously thought.
“I think it’s all going down [the path of] convergence,” she says. But even so, Aufseeser advises vendors in the merchant-funded space to look to become part of the digital wallet world by teaming up with players like Shopkick and Isis.
Here is an opportunity to fatten the customer’s wallet. My spin would be to place their “coupon savings” into their IRA or other investment account. Otherwise, the average consumer will spend the savings because it would take extra work to adjust their budget (if they have one).