E-Payments Luminary: Merchant Rewards Will Light Bankers' Way

Bankers should listen to Peter Kight. If anyone knows which way the winds of bank technology are blowing, it might be him.

Banks are in danger of having their lunch eaten by non-bank purveyors of new technology like the digital wallet, but there are significant opportunities as well, says Kight, the founder and former chief executive of CheckFree.

One of the best opportunities is merchant-funded rewards, says Kight, who is now co-chairman and managing partner of the private-equity firm Comvest Group.

Through Comvest, of West Palm Beach, Kight recently led a group of investors who put $12.2 million in Cartera, the merchant-funded rewards company in Lexington, Mass.

Kight previously invested in the partnership marketing company Vesdia, which Cartera acquired in 2011.

Cartera, as well as the merchant-funded rewards companies it competes with (such as Cardlytics and Truaxis), offers banks an opportunity to create revenue paid for by merchant offers and discounts. This service is particularly important in a post-Durbin regulatory environment that is squeezing bank fees, experts say.

But what intrigues Kight most about merchant-funded rewards is that it has the same three constituent parts as CheckFree. Those three parts are the bank, the merchant and the consumer.

"The really big hurdle we had [with CheckFree] among all the constituents was trying to convince the consumer to try online banking and payments, because the fact is that paper checks worked," Kight says.

With merchant-funded rewards, the hurdle is convincing consumers to use the coupons and discounts linked to their card accounts. In Cartera's case, merchants racked up about $1 billion in sales through offers in 2011, Cartera says.

"We are trying to give rewards away to consumers, and too many of them don't know that those rewards are sitting on their cards," Kight says.

CheckFree, which Kight founded in the 1980s, evolved into a disruptive technology provider in the 1990s that threatened the banks and their own goals for digital banking and electronic bill payment. CheckFree ultimately handled half of all electronic check payments by about 2005. Fiserv (FISV) acquired CheckFree in 2007.

Merchant rewards are currently offered through bank debit or credit card accounts, but banks can still be disintermediated by non-banks with plans for digital wallets, experts say.

"What the final form of the digital wallet will be, we don't know, but there is no reason Cartera or Cardlytics or Truaxis could not go directly to them," says Nicole Sturgill, a research director in the retail banking and cards practice at CEB TowerGroup.

PayPal, a unit of eBay (EBAY), is developing local, geo-targeted offers for customers that use its wallet. Similarly, Google (GOOG) plans to bring to bear its dominant role in online search and advertising for targeted offers in its own wallet. And American Express (AXP), also a non-bank card company, could easily link its Serve wallet to merchant funded rewards programs as well, Sturgill says.

Kight agrees.

"I prefer to spend my time working with financial institutions, but you can't not pay attention to the fact that there are huge players who have tremendous consumer brands that want the data off the payment transactions; it is tremendously valuable to the non-bank digital services providers," he says.

Other investors say Cartera's scale interested them. It reaches 150 million consumers and 65 million card accounts, works with three of the top four banks, and all five of the top airline rewards programs linked to credit cards.

(Cardlytics, of Atlanta, says it works with 300 financial institutions and 200 million consumers.)