High-Tech Rules For the Loyalty Game

  Loyalty-program marketers typically position their offerings to consumers as no-brainer schemes for attaining status, savings or some aspirational reward. Behind these schemes are increasingly sophisticated databases, many of which include so-called rules written to thank customers for displaying desired behaviors and to motivate them to keep shopping at the sponsoring merchant's locations.
  Where the rules reside and when they are matched with customer activity, however, varies greatly. One thing most programs have in common is predictability: reach a certain spending threshold and you earn a predetermined number of miles, points, or other rewards currency.
  But surprise "thank yous" and spontaneous suggestions encouraging larger sales in exchange for program perks rarely factor into the consumer experience. The coming of Internet connections to point-of-sale terminals, however, is providing merchants with new tools for faster payment processing and inventory management, as well as the ability to give consumers mini-commercials while they're at the checkout counter ("The POS Potential of Web Technologies," June).
  That raises questions about the prospects for full-fledged loyalty applications that could access external databases through Web connections, and reach out to members during purchases with real-time rules that allow the dispensing of immediate, individually tailored benefits.
  Increasing market penetration and price reductions for digital subscriber lines (DSL) and cable connections and wireless infrastructure will make communication with centralized customer data and reward rules more prevalent in the near future, according to payment technology experts. Many POS technology vendors, merchant acquirers and processors already include a low-cost broadband application in the products and services they market.
  And merchants, just as consumers in their homes, revel in broadband's constant service devoid of dial-out delays. Required upgrades or changes in terminals to accommodate high-speed connections don't necessarily provide obstacles to improvements in loyalty-based services, either. In devices with modular communications ports, merchants may need only slide out the modems and install Ethernet cards.
  The bigger issues for high-tech loyalty programs include protection of customer data as well as access and operational issues that must be resolved in order to make a good program work.
  "Most multilane retail environments are online at POS, but not for loyalty," says Jonathan Adams, vice president of product development and implementation for Detroit-based loyalty technology vendor Catuity Inc. "There are firewall security issues there. They can access store or local-regional databases, but not data at large."
  Not only does security on the Internet concern program managers, but the lack of a standard platform for data streams coming into and going out of merchant-acquiring networks and payment processors introduces a challenge for even the best-intentioned marketer.
  Enhancement Services Corp., Roswell, Ga., has had interest from its credit and debit card-issuing clients for multiple server communications in real-time at the point of sale, but hasn't implemented such a set-up yet.
  "We'd like to have a couple of those in the market," says Lars Holmquist, ESC's executive vice president of business development and consulting. But first, he says, the company needs to integrate technologies with other players serving card issuers.
  Holmquist predicts the new cobranded Starbucks Duetto Visa credit and stored-value card from Chicago-based Bank One Corp., which was launched in October, could conquer the challenge first. The card puts 1% of the holder's Visa volume into "Duetto Dollars" good at Starbucks. Automatic reloads from the credit account to the stored-value account, so that the caffeine swiller never finds himself unable to pay at Starbucks, earn a 3% reward. Rewards are deposited every billing cycle.
  Holmquist says the credit and debit networks are working with vendors to enable multiple communications with external servers, but "the linking of various acquiring networks is complicated. The myriad of acquirers is so expansive, and there is no industry standard. And there won't be one for a long time."
  Precursor
  Early examples of marketers' use of a live connection to loyalty rules at the point of sale likely will involve closed loops such as Starbucks.
  "This is a precursor to much more extensive coalitions," Holmquist says. "If we can get this right, we can start building loyalty coalitions."
  Meanwhile, retailers are constantly searching for new technology that will make rewards programs more flexible and less costly. But a recent survey by Cleveland-based LakeWest Group shows delivery of spontaneous rewards has a way to go.
  LakeWest conducts an annual POS benchmarking survey of the top 100 specialty retailers in the U.S. This year's research revealed that 61% of the group used a frame-relay network from the point of sale that costs significantly less than DSL and marks a definite improvement over downloaded rules to POS hardware. Frame-relay connects remote sites in a wide-area network-larger than a local-area network but less comprehensive than a DSL line-into the 'Net.
  Additionally, the study showed that 64% of U.S. specialty retailers employ customer identifiers and track purchase patterns, but only 39% provide any of this information at the point of sale. Of those that do, only simple customer-contact details and a limited sales history appear, keeping many retailers from capitalizing on the full potential of their customer databases.
  Sunita Gupta, LakeWest vice president, doesn't see retailers refusing to evolve, only taking their time to understand the possibilities of POS loyalty technology.
  "Everyone is looking at loyalty and figuring out how to use connectivity," says Gupta. "Retailers are looking at connectivity as the infrastructure of their store of the future. The technology has been there, but finally the costs are coming down."
  'Special Message'
  About a year ago, Catuity's Adams predicted that by 2005, merchant acquirers would bring about Internet connections at the point of sale starting with multilane retailers, touting solutions not as focused on payment as they are now but on loyalty. First Data Corp.'s First Data Merchant Services unit reportedly is testing such a program, sources say. The pilot program, called Earn, reportedly involves a closed loop of several furniture retailer locations and manages real-time loyalty transactions at the same time as payment authorization. A spokesperson says First Data has Internet connectivity solutions in the works, but would not comment further.
  In another example, clients of Ernex Marketing Technologies Inc. today use magnetic-stripe or bar-coded cards to identify loyalty program members and ensure they are recognized on Ernex's central host. Burnaby, British Columbia-based Ernex then makes reward decisions based on predetermined rules such as frequency of visits, customer status, lifetime value, incremental spending targets or unique customer preferences.
  "The key is whatever special message that is determined is sent to the actual point of sale at the time of the interaction with the customer," says James Christensen, former president and chief executive of Ernex. (Christensen retired after this story was reported. And in October, Toronto-based RBC Financial Group said it would sell Ernex to merchant acquirer Moneris Solutions Corp.)
  In order for this to occur, clients need Internet protocol-capable POS systems.
  "Much the same as every credit card transaction goes to a central server whether you're in a California or New York merchant location, our marketing transaction goes to our central server," Christensen says. "Credit servers respond to the point of sale with an authorization code for that individual, Ernex responds with marketing for the cardholder. During a transaction both the payment and the value-added marketing get processed by their respective servers and then joined back at the point of sale.
  "We operate clients that can multiply the benefit based on what the customer has spent currently, last time, etc., or even what they have purchased," he continues. "This processing is difficult to do at the terminal level" because the terminal at the point of sale can't store all the rules Ernex programs use.
  Consumers Like Surprises
  One industry watcher agrees with the prediction from Catuity's Adams that more processors and loyalty vendors will have their acts together in the next few years. As the Internet pervades all communications, merchants, at processors' prodding, will engage real-time updates to loyalty-program member databases and provide live rules-engine flexibility, says Claude Johnson, a consultant in retail customer relationship management based in Weehawken, N.J.
  "Consumers love to be surprised with new things, and rules engines (in real time) will allow you to put new things in hour by hour if you wanted to," Johnson says. "If Monday business was slow, you could put in a rule that says anyone that buys on Monday gets $5 off on Tuesday and generate an immediate response. Applications for Internet connectivity at the point of sale are tremendous."