Zala, a startup person-to-person payments network, is teaming with Monster Offers, a Groupon-like "daily deals" service, to tie the use of coupons to a customer's prepaid card.
Such partnerships could become more prevalent as banks look for ways to maintain rewards programs in the face of lower fee revenue.
"I kind of frame this up [as] the next evolution of rewards," said Patricia Hewitt, the director of the debit advisory service at Mercator Advisory Group in Maynard, Mass. "There's a direct connection between the payment form and the merchant offer."
Zala, which was developed by the New York technology company SSL5, and Monster Offers, which is based in Bonsall, Calif., are still in the early stages of fleshing out their technology. The goal is for users of the deal service to be able to redeem offers simply by paying from their designated prepaid account.
Under one model, a consumer would automatically apply a discount or other reward by simply paying with the card at the participating merchant. Information about the deal would be attached to the card and Zala's processing system would be able to apply the discount directly to the purchase, eliminating the need for consumers to carry paper coupons or discount codes and making it easier for merchants to track usage of offers. Under a separate approach, consumers could "buy a deal," such as paying $10 for $20 worth of food at a particular restaurant, through Zala's mobile application, automatically debiting their prepaid account, said Miles Paschini, a director of SSL5.
"I think a lot of players within the deal-of-the-day space are looking to try to find their niche," said Brian Lisi, a managing director with SSL5, adding that having the ability to group their deals with a "financial instrument" such as a specific payment card or mobile wallet application is an attractive way to get buy-in from consumers and merchants. "Whoever solves that quickest is really going to gain major market share," Lisi said.
The concept of marrying a daily deals service with a bank's credit and debit cards is not entirely new. Issuers historically have included merchant-funded offers in their rewards programs, allowing cardholders to earn extra bonus points, a certain percentage off a purchase or both when buying from a specific retailer.
A pending drop in the interchange fees that banks earn on debit card purchases is also prompting more interest in merchant-funded offers. Putting into practice the Dodd-Frank Act, the Federal Reserve Board has proposed capping debit interchange at 12 cents a transaction, compared with a current average of 44 cents. Banks use interchange revenue to fund rewards programs. Some banks, including JPMorgan Chase & Co. and Regions Financial Corp., have announced plans to end their in-house debit rewards programs partially or entirely.
"The economic models on a lot of these rewards programs are really changing," Hewitt said.
As sites like Groupon have become more popular, issuers have become more interested in experimenting with such services. Cartera Commerce Inc., a Lexington, Mass., vendor that provides merchant-funded rewards programs to banks, announced in February that it added Groupon Inc. to its roster of rewards options.
Customers with debit cards and credit cards from banks that use Cartera Commerce's rewards program can earn points, cash back and airline miles when they purchase deals from Groupon with the designated card.
American Express Co. recently tested a service at the South by Southwest Interactive Festival in Austin, Texas, with Foursquare Labs Inc. that allowed Amex cardholders to earn discounts at participating merchants through the mobile check-in service. Customers were able to link their card accounts to their Foursquare profiles, allowing them to receive the discounts as a statement credit. Amex said it plans to roll the service out more widely in the months ahead.
The approach of Monster Offers and Zala differs slightly because of the way Monster Offers operates. Rather than working with merchants directly to devise offers, like Groupon or LivingSocial, another well-known deals site, Monster Offers aggregates deals from those individual sites "so people don't have to go to 10 different sites … and enter their credit cards when they want to buy a deal 10 different times," said Paul Gain, Monster Offers' chief executive.
By incorporating Zala's prepaid accounts and P-to-P payments network, Monster Offers hopes to provide its customers with "one-click payment" capability to make using the deals easier, Gain said.
Zala has started issuing prepaid cards to its users, but Paschini declined to say how many have been issued. Its Visa-branded cards are issued by MetaBank, a unit of Meta Financial Group of Storm Lake, Iowa.
Paschini said one of the benefits of the Zala P-to-P payments network is its low cost, though using the accompanying prepaid card comes with many fees for consumers. The card has a monthly service fee of $1.99, which is considerably lower than what other popular prepaid card companies, such as Green Dot Corp. and NetSpend Holdings Inc., charge. However, it does not offer ways to avoid other fees, such as access to a surcharge-free automated teller machine network to get around withdrawal and balance-inquiry fees, which has become more common in the prepaid industry.
Additionally, Zala charges a "negative balance fee" if a cardholder makes a purchase that exceeds the balance on the card. Paschini said SSL5 plans to experiment with different pricing.
Monster Offers' strategy of incorporating a prepaid card could appeal to consumers who don't have multiple payment cards, Hewitt said. However, it may struggle to gain wider adoption. "I don't know … if people will be willing to set up and manage a separate account just to do this," Hewitt said. Paschini said SSL5 may look to allow customers to incorporate existing bank cards with the service.
