New card regulations are giving merchant-funded rewards programs a boost.
Such programs are becoming more popular because banks and credit unions are "feeling pressure on revenues and profits" as a result "of legislation in the card business," Red Gillen, a senior analyst with the Boston research firm Celent, said in an interview.
The Federal Reserve Board is expected to issue rules reducing debit card interchange rates by the end of the year under a provision in the Dodd-Frank Act.
JPMorgan Chase & Co. announced plans in November to curtail its debit rewards program next year, and analysts expect other firms to follow suit.
Third-party companies that operate merchant-funded programs such as Cardlytics Inc., BillShrink Inc. and Cartera Commerce Inc. say they are seeing more demand from financial institutions for their services.
More than 30 million consumers are using the Cardlytics transaction marketing program, according to the Atlanta company.
In recent months, Cardlytics has announced partnerships with Regions Financial Corp., First National Bank of Omaha and the prepaid card companies AccountNow Inc. and FSV Payment Systems Inc.
Cardlytics' program lets banks' cardholders get cash back on specific merchant-promoted purchases, both national and local, through their online and mobile banking websites.
Recipients click to activate the rewards and then use their card to make qualifying purchases at specified retailers.
Competitor BillShrink introduced a merchant-funded rewards program this year that also provides product rewards for consumer purchases through banks' websites. Unlike Cardlytics, however, the Redwood City, Calif., company lets consumers do comparative pricing using information contained in their online banking statements.
And Cartera Commerce, formerly Mall Networks Inc., in November announced an overhaul of its merchant-funded online shopping system. The new program, slated to be rolled out next year, not only will include cash-back statement rewards but also a local couponing element, which may differentiate the company from its competitors.
The Lexington, Mass., company said it is working with three large banks, including JPMorgan Chase. Cartera would not say which other financial institutions would participate.
Through an "open-offer architecture" system, Cartera plans to give banks the ability to offer consumers rewards based on their transaction histories along with discount offers and coupons at the point of sale to help local merchants increase sales, said Marc Caltabiano, Cartera Commerce's vice president of marketing and products.
Banks may send consumers offers via their online credit or debit card statements, Caltabiano says. Depending on where people shop, some may see an offer for 15% cash back at a specific retailer or 3% off their next gas purchase at a gas station they frequent, he said.
To redeem offers, consumers use their credit, debit or prepaid cards either in the store or online. Cartera then applies the discount to their account through a cash credit that appears on their statement, Caltabiano said.
Cartera gives banks a system that automatically suggests offers available at local merchants, he said.
For example, if a customer travels frequently, a bank may offer that person a discount at a local luggage store.
Because Cartera's program is merchant-funded, most financial institutions will offer statement rewards to their customers for free, Caltabiano said. Financial institutions pay a low-cost implementation fee and receive a share of the merchant's commission.
To offer coupons at the point of sale, Cartera is in a partnership with Valpak Direct Marketing Systems Inc., a Largo, Fla., direct marketing company. Through the partnership, consumers may search for digital coupons within Valpak's network based on their location.
Financial institutions can also co-brand merchants' coupons and send offers to consumers through social networking sites as Facebook Inc. and Twitter Inc., Caltabiano said.
Cartera has relationships with more than 200 brick-and-mortar merchants, 750 online retailers and more than 10,000 local merchants, including Macy's Inc., Redbox Automated Retail LLC and Rite Aid Corp., he said.
Though merchant-funded rewards programs offer advantages, many larger banks are "concerned about merchant-funded programs from a branding and reputation standpoint," Celent's Gillen said. Some banks are "worried about offering nonbank products and turning into more of a marketing company," he added.
If merchant-funded rewards take hold, even with a small number of banks, Gillen said, there could be a tidal wave of interlopers.
"I expect that many of the banks' technology vendors will be looking for alliances with reward-system vendors as a sales channel to reach a wide pool of banks and credit unions," Gillen said.
Competition may lead to a marketplace shakeout because the "differentiators are going to depend on banking-vendor alliances and preferred redemption methods," he said.
Also unclear is whether banks would have to sign exclusivity deals with specific merchant-funded rewards programs.
Though it is "conceivably possible that banks may have more than one reward-system vendor in place, from an implementation perspective this would not be ideal," Gillen said.
Banks also need consumers to participate, said Ron Shevlin, an analyst at the Aite Group LLC research firm in Boston. Getting consumers to look at their statements frequently to search for deals is crucial, he said.
Banks must ensure that the program is efficient and "drive the opportunity," he said.