As the effects of recent financial legislation may cause some card issuers to scale back on the rewards and loyalty programs they offer to encourage card use and, inherently, shopping, the doors may be opening for third-party loyalty-program providers to align with merchants.

Indeed, many merchants already are beginning to do more of their own loyalty-building, especially through mobile-phone applications, potentially making third-party providers of mobile-based loyalty initiatives the newest allies. Moreover, targeting consumers using mobile applications also may appeal to individuals lacking rewards-based cards or who are interested in saving without committing to a particular card-loyalty program.

And merchants appear to be open to the emerging trend. Orange, Calif.-based mobile gift and loyalty company StreetSavings predicts merchants will spend $6.53 billion on mobile-coupon programs by 2014, up from $90 million in 2009.

Moreover, in a recent survey regarding loyalty programs, Chicago-based Mintel Comperemedia found that 47% of U.S. adults surveyed most likely would participate in loyalty programs offering instant redemption (see story). 

“There is a huge gap in the industry on the merchant side in terms of loyalty and rewards programs,” Red Gillen, a senior analyst with Boston-based Celent LLC, tells PaymentsSource. And because of the recent financial legislation tied to the Credit CARD Act, and the Durbin Amendment tied to the Dodd-Frank Act, “it is clear that many card issuers are going to be under complete financial pressure, and not in a good way,” Gillen adds.

The Dodd-Frank Act, which President Obama signed into law on July 21, requires the Federal Reserve Board to set policy for establishing “reasonable and proportional” debit card interchange rates, effective in July 2011, and it allows retailers to refuse to accept credit cards for transactions of $10 or less.

In fact, many debit card issuers now are considering adding account fees, raising minimum-balance requirements, reducing rewards and taking other measures to recoup revenue losses (see story). 

Moreover, JPMorgan Chase & Co. earlier this month announced it will phase out its debit-rewards programs because of the pending Fed interchange rules (see story).

Should more merchants scale back their debit-rewards programs, more merchants will look elsewhere to attract shoppers, Gillen says. And turning to the mobile channel is one way to accomplish that task, Gillen contends.

Merchants generally remain interested in loyalty and rewards programs because the recent legislation does not directly affect merchant programs, Ron Shevlin, an analyst for Boston-based Aite Group LLC, tells PaymentsSource. And many retailers are considering loyalty programs not tied to payment cards, Shevlin adds.

As such, within the past year many companies specializing in mobile-based loyalty initiatives have rolled out low-cost programs that enable merchants, including small and local retailers, to entice customers through coupons and rewards available at the touch of a button.

Among them include Mocapay Inc., a Denver-based mobile loyalty and gift card technology company that in March officially rolled out its mobile-based payment and couponing platform. Mocapay offers merchants the option to increase customer loyalty through a mobile-coupon program or through a rewards service based on points or dollars, Kevin Grieve, Mocapay CEO, tells PaymentsSource.

For example, a small delicatessen may enable consumers to receive a free sandwich or meal on their 11th purchase, while larger merchants may offer a specific amount of points per $10 spent, he explains.

Through Mocopay, merchants give customers a one-time authorization code to conduct purchases from prepaid accounts using mobile handsets at the point of sale (see story).

Since its alpha launch in the second half of 2007, Mocapay now works with more than 200 merchants, about 10% of which operate in single locations, Grieve says.

Mocapay sets up software in participating merchants’ point-of-sale systems so they can accept the mobile coupons and send out the authorization codes, he says, noting merchants pay Mocapay small set-up and monthly fees. The company declined to disclose the cost of the service and equipment.

Most merchants usually offer the mobile-coupons service to consumers for free, but some may charge a small fee, Grieve says. The fee-based option may include a $25 annual membership fee to receive 10% off on each purchase, he says.

To redeem coupons, Mocapay offers merchants the option to send participants text messages before, during or after a visit, Grieve says. For instance, merchants may want to note on the bottom of receipt for morning shoppers that they will get a discount if they come back after 2 p.m. to make another purchase, he says.

Each text message or printed receipt offers consumers a unique code, which they may use only once, Grieve says. In doing so, “we are preventing repeat usage and fraud at the point of sale, which is important to many merchants,” he says.

Mocapay also sets up the service to enable merchants to distribute coupons to consumers located in a specific area through “geo-fencing,” Grieve says. The proximity-based technology notifies participating consumers when they are within one to two miles of participating merchant locations if the consumer already participates in a loyalty program with that merchant.

Consumers may receive a text message or an e-mail notifying them of the merchant’s special offers or available coupons.

However, there are risks. “If there are too many offers, consumers may delete them or discontinue the service, which may be damaging to the merchants brand,” Grieve explains. “Merchants just need to make sure they scale their programs and be smart as to how to use a consumer’s mobile phone their advantage.”

At StreetSavings, the loyalty company primarily caters to local and one-shop merchants such as Jake’s Burgers in Dallas, Extreme Pita in Modesto, Calif., and Kidd Coffee in Mason, Ohio, notes Pal Flagg, the company’s chief operating officer.

The company offers its merchants two mobile-based loyalty packages: coupons and rewards. The rewards option also includes the mobile-coupon features.

Through the mobile-coupons package, merchants may sign up consumers via text message, at the point of sale, by phone or online. Merchants also may set a specific amount of text-message offers that get sent each month, Flagg explains. Each texted coupon includes a text code the sales clerk keys in at the point of sale so the consumer may receive the discount, he adds.

The starter kit for both options costs $35.95 per month, and it includes 200 messages for 50 users. For more messages and users, the monthly charge can range from $69.95 to $109.95, depending on he amount of text messages and consumers targeted. The mobile-rewards option will cost merchants between $74.99 and $134.95 per month and includes additional features such as the ability to track the amount of revenue earned through the mobile coupon and rewards programs.

Consumers pay nothing to participate, and they tend to sign up by giving the merchant their mobile-phone number or by sending a text message to a number given to them by the merchant.

Merchants may use their existing payment terminals to track points or credits, which are accumulated through a closed-loop or stored-value network, Flagg says. Consumers may receive rewards or credits via a mobile phone or a traditional plastic card.

StreetSavings designed the program to enable smaller merchants to increase customer loyalty by focusing on consumers who have not visited the store in some time, Flagg says.

To reach such consumers, merchants may send out a “miss you message” and offer them either a coupon or dollar value credited to their account,” Flagg explains. If the consumer returns to make a purchase and gives his mobile-phone number, he will see that the value was added, he says.

StreetSavings targets small and midsize merchants “to deliver a product as close and feature rich as larger companies that have their own loyalty programs,” Flagg says.

Other mobile-based loyalty companies such as Omnego Inc. and Shopkick Inc. have taken mobile coupons and rewards one step further and have developed free downloadable smart-phone applications that function as digital wallets for reward points and coupon storage.

Omnego, a Toronto-based mobile loyalty company, soon will offer merchants and consumers the option to digitize their loyalty cards, which also may be stored in the digital wallet (see story).

Palo Alto, Calif.-based Shopkick’s smart-phone application also functions as a mobile wallet. Moreover, merchants may offer consumers “kickbucks” for just stepping inside the store or for clicking on the store’s entry in the mobile application to see coupons. Consumers may redeem their points for gift cards at participating Shopkick stores such as Target Corp. and Macy’s Inc. (see story).

Merchants may have a plethora of mobile-based reward programs available, but the challenge is to ensure “we are communicating the benefits to the merchants,” who then communicate the benefits to consumers, Streetsavings’ Flagg says.

Moreover, merchants should work to ensure consumers are responsive to the mobile programs, Beth Robertson, director of payments research at Javelin Strategy & Research, tells PaymentsSource.

“A mobile reward may be meaningful or useful to many consumers, but not all consumers like to receive text messages,” she says. “To a certain extent, merchants really have to enable consumers to opt in or opt out for the services. Merchants don’t want the consumer to feel like the program is a hassle.”

Overall, mobile phones make merchant-funded rewards programs appealing to merchants because the options for mobile couponing continue to grow, Celent’s Gillen says. In the coming year, many merchants will be able to offer location-based services as well as contactless technology to support quick redemptions, he says.

Additionally, merchants see the mobile phone as an efficient way to help create more intelligent loyalty and rewards schemes, Gillen contends.

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