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Merchant-funded card reward programs, increasingly popular among issuers that often lack the wherewithal to fund rewards, are gaining broader distribution through processors.
Affinity Solutions Inc., a New York company that designs merchant-funded rewards programs, is working with First Data Corp., Fiserv Inc., and Metavante Technologies Inc. to develop such programs for their financial institution clients.
Though all three arrangements are configured differently, Affinity is giving the processors access to its relationships with more than 200 national retail chains, which will fund reward points redeemable at their outlets.
The processors are offering these programs to their clients for an additional fee; the financial institutions can then offer consumers the rewards without having to pay for the full rewards package themselves.
"For loyalty programs, it's the direction that every financial institution has to take to survive," said Ed Mock, vice president of marketing solutions for First Data, a unit of Kohlberg Kravis Roberts & Co.
Lori Stafford-Thomas, a spokeswoman for Fiserv, said its program would be "merchant-funded as well as traditional issuer-funded," but "we would rather keep the details until we're ready to launch" in the fall. Metavante would not discuss its program.
Jonathan Gagliano, Affinity's executive vice president for business development, said its programs can be applied to "all credit, debit, and prepaid" products, but he said there is more opportunity - and interest - in debit rewards.
"On the credit card side, that whole industry is more mature in rewards," he said. "We're seeing more of a pickup on the debit side. With interchange rates compressing today, the institutions don't have the money to fund the debit rewards."
Gwenn Bezard, a research director at Aite Group LLC, said "merchant-funded rewards are really becoming a must-have in the payment industry."
Because most traditional rewards programs are funded by interchange, which does not vary from issuer to issuer, "the value that consumers get from the rewards program tends to be somewhat similar," he said, whereas "if you work with a merchant-funded network, you have the ability to differentiate."
Mr. Gagliano said that "Affinity has created a customized platform for each" of the three processors. "Most of the banks that work with the processors are smaller to medium-size banks," which will now have "a ready-made rewards platform."
Mr. Mock said First Data's deal with Affinity, which was announced in April, involves a sit-down customization process for larger clients and an adaptable template for smaller financial institutions.
"Historically merchant-funded programs have been" more accessible for large financial institutions and "difficult for the smaller ones to get into," he said. "We've been able to take it down to very smaller, local, regional institutions."
But Affinity's platform also can appeal to the processor's larger clients. "Five out of our 10 largest clients are very interested," Mr. Mock said. (He would not say how many institutions have signed up for the service.)
Though First Data already offers its own loyalty programs to "over 180 million accounts," he said, its relationship with Affinity allowed the processor "to provide the next generation of loyalty products": merchant-funded rewards, which "was a core competency that First Data itself did not have."
Affinity also works with financial institutions directly, including Washington Mutual Inc., Capital One Financial Corp., JPMorgan Chase & Co., Citigroup Inc., U.S. Bancorp, and the network unit of Discover Financial Services. It has more than 200 retail partners at the national level, including The Gap Inc., Bed Bath & Beyond Inc., The Home Depot Inc., Office Depot Inc., Chevron Corp., Exxon Mobil Corp., Blockbuster Inc., Rite Aid Corp., Pizza Hut Inc., and Applebee's International Inc.
Mr. Gagliano said his company's retailer-dependent business model prevents it from entering into exclusive contracts with banks or processors. "What attracts the retailers to Affinity is that we have scale," he said. (Affinity provides rewards for about 60 million cardholders and expects that number to increase to 100 million next year.)
