Merchants and Issuers: Heightening Competition on Rewards

by Robert Misasi 0


Many years ago, companies like Cardlytics began promoting a new kind of rewards program as an alternative or enhancement to traditional points-based payment card loyalty systems. The idea arose from the realization that a certain portion of payment card interchange was going to fund these points programs, usually based on total purchases, with a conversion rate of 100 points to $1 or 1%. Merchants objected to this practice because they saw themselves as funding loyalty programs that didn’t benefit them.

The new value proposition was this: The issuing bank would still reward its customers for spending on its cards, but this spending could be tied to specific merchant offers that either multiplied the number of points earned or rewarded the customer with a statement credit equal to a percentage of the amount spent (generally 20%). Since merchants routinely offer higher discounts in their own promotional activities (often BOGOs, or Buy One Get One free/50% off), this was a win-win. Consumers would get a higher conversion rate for their spending, and merchants would get more business.

Now we see this basic idea appearing in co-branded credit cards, coin counting, and prepaid cards. The key point is linkage — tying the reward to a specific customer behavior but now in the context of traditional financial services.

Let’s talk Amazon for a second

Did you get an Amazon Credit Card with 5% cash back — actually 5% back in Amazon points to use for Amazon purchases online? Did anything strike you as unusual about this offer when it hit the market? For me it was the seamless integration into my online holiday purchase behavior. It was adoption through the click of a button with immediate access to the approved line and the setting up of a “store card” as my default preferred card.

Since I work in the payments space, the offer caused me pause, as I wondered: “How can they offer that?” and then, “but wait, that acquisition fee paid to me is high too.” Amazon offered $70 immediate credit if I enrolled in Amazon Prime and then if $110 if I also picked up an Amazon Prime credit card.

And there you have part of an answer. This offer is open only to Amazon Prime Members. And according to Amazon CEO Jeff Bezos, that is over 100 million people worldwide who spend money at Amazon.

So, okay, “This is not that unusual,” you say, “…and it must make financial sense.” Of course it does . . . .

In addition to Prime membership (whose price increased recently), it probably helps that Amazon uses dynamic pricing on many of the goods and services it sells which is based on sophisticated algorithms that apparently take into account reviews in major publications and websites. Amazon is also known as a leader in targeted offers, using your purchase history to suggest other items you might like. And with an ever-increasing assortment of products, chances are the site has something relevant to offer. Maybe there is an offset or maybe Amazon is just so good analyzing behavior that it can get better lift and handle it.

Of course, this is Synchrony Bank for the Private Label/Store Card business and JP Morgan Chase on the Amazon Prime Credit card side.

Prepaid incentives / gift cards and Coinstar

Having surveyed the landscape as CEO of Mercator Advisory Group for some time, I have seen a trend toward merchant funding when balances can be tied or locked into a particular merchant brand or store.

Quick examples:

  • Coinstar charges 11.9% for coin counting but waives it when you get a prepaid card (which can be Amazon).
  • Merchant-funded discount networks, which are prepaid cards subsidized by a consumer packaged goods company.
  • Businesses buying prepaid for bulk incentives (e.g., $5,000,000 in LLBean cards, will find merchants willing to extend discounts to lock in the volume).
The entry of marketing dollars into the prepaid value chain

Locking in purchase volume is always a winning strategy and is the subject of marketing or incentive payments made by merchants every year. From a payments industry perspective, this represents a new possible source of merchant funding from which the payments value chain (the issuers, processors, networks, and consumers) can benefit.

However, this is not “freely given” but requires guaranteed sales, a “pool” of inflows to the organization in exchange for the discount.

What does the future hold?

Well, here is the thought for the day:

The disruption caused by market players that can control either pricing or distribution (through platform-based plays) enables the possibility of negotiations directly with the merchant communities that these platforms serve. Competing with the economics involved (as we get to 5% or even greater rewards) will become difficult if there is not a direct offset on the revenue side (usage goes only so far). Instead, the attack on the economics in this area and heightened rewards will continue as selected markets recognize the importance of locking in critical channels.

We see the accretion of rewards in another sense as well. That is the growing accretion in credit rewards programs. This may signal increased competition for the attention of the cardholder and the issuers’ or networks’ desire to push “credit” programs. It is this incentive that prompts the consumer to “choose credit” — this incentive along with consumers’ awareness of zero liability and appropriate dispute-resolution processes not always available with other solutions. The accretion of rewards sets a higher and more defensible hurdle rate for anyone looking to offer a discount for cash at the POS. Are you willing to give 5% off to accept cash? (Likely not, as your discount fee is less than 5%.) But merchants will on credit. So consumers will continue to use credit.

Market dynamics aside, there is a final point to be made. As technology-based e-commerce venues continue to develop and the larger players (in all merchant categories) remain in a pitched battle for transaction volume (with e-commerce being paramount), it is the player who can deal most directly with the merchants sales arms to bring the volumes directly that will win and get the highest marketing offsets to bring value back to its customers. In an increasingly competitive rewards market, this may be a marketing edge you cannot live without. This takes creative product construction and the willingness and ability to engage directly with the merchant community.