The rise of online and mobile banking plus new regulatory pressure on debit card interchange are converging to spark explosive growth in credit and debit card merchant-funded loyalty programs, a new report suggests.
If present trends continue, card issuers’ annual revenue from merchant-funded incentive programs will more than quadruple over the next four years, amounting to $1.7 billion by 2015 from about $300 million presently, according to Madeline Aufseeser, an Aite Group senior analyst and author of a report released June 21.
The driving force in merchant-funded incentives are issuers sitting on a vast store of customer transaction and demographic data easily harnessed to create targeted merchant offers through payment cards, and merchants are willing to foot the bill when consumers make purchases based on such offers, Aufseeser contends.
Partly because of pending new Federal Reserve Board rules going into effect in July that likely will drastically reduce debit card issuers’ interchange revenue, growth in merchant-funded debit card loyalty programs soon will accelerate, and that momentum is bound to spread to credit cards, Aufseeser told PaymentsSource in an interview.
“The merchant-funded incentive model provides issuers with revenue and enables them to support a loyalty program at little or no cost,” Aufseeser said. “Once issuers stop paying for debit rewards, they are going to see the benefits of letting merchants also pay for credit card rewards programs, and they will gradually pull back from the traditional interchange-funded model there as well,” she said.
Card issuers on average by 2015 will derive an additional $12 in revenue annually from each account in which a cardholder redeems about a dozen offers per year, apart from existing fees including interchange and interest, Aufseeser projects. Credit card issuers will reap $18 in additional revenue annually from accounts that routinely redeem offers, while debit card issuers will see $8 more annually from such accounts.
Total transactions with merchant-funded incentives will rise to 1.68 billion by 2015, up 82.6% from 92 million in 2010, Aite projects. Despite that surge, transactions associated with merchant-funded incentives will represent less than 2% of the total gross dollar volume of all credit, debit and prepaid card transactions, because only a fraction of consumers will take advantage of them, according to Aite’s forecasts.
The total number of credit and debit card customers who will sign up for merchant-funded incentive programs will reach 467 million by 2015, up 816% from 51 million last year. Of those, only 30% will actually redeem offers. (In 2010 approximately 15% of all cardholders enrolled in merchant-funded loyalty programs routinely redeemed offers, Aite said.)
For the study, Aite assumed consumers would receive a discount of 5% on the total transaction and that merchants would pay vendors 4% of the transaction amount for marketing and processing the offers consumers redeem. Aite projects issuers would receive a share of 35% of the fee vendors collect from merchants.
Cardholders typically automatically are enrolled in the merchant-funded programs through issuers’ demand-deposit and credit card accounts. Offers are displayed on banks’ online account sites and are marketed through email, mobile applications and text messages. Credits, ranging from flat amounts to percentage-off discounts or cash gifts, are applied directly to consumers’ bank accounts or, in some cases, at the point of sale.
Merchant-funded rewards programs, typically operated by third-party vendors that provide the technology and line up participating merchants, are about 80% less costly for issuers than traditional loyalty programs, which require issuers to assume the risk and expense, Aufseeser said.
Despite the steep projected growth of merchant-funded incentive programs, they will exist alongside other loyalty and marketing strategies, she added
Many issuers have used credit and debit card interchange to help fund rewards programs, but downward pressure on interchange in recent years in part led to the rise of vendors of merchant-funded programs, Aufseeser said. Significant players in the U.S. number “about 10,” she said, including Cardlytics Inc., BillShrink Inc. and Affinity Solutions Inc.
But a shakeout also is ahead for merchant-funded incentive program providers, Aufseeser contends.
“The number of merchant-funded program providers we have now is not sustainable, and after a collapse we’ll see a handful of survivors,” she said. “And it is likely that the major payment processors will support multiple providers so that issuers can pick and choose among vendors.”
The emergence of mobile payments, including those powered by Near Field Communication, also likely will accelerate consumer involvement with merchant-funded card-payment incentives, Aufseeser said.
“Vendors already have the ability to send merchant offers through various communication channels, but as consumers increasingly move to mobile devices, I believe NFC-based mobile payments will converge with existing offerings,” she said. “Mobile payments ultimately will boost overall merchant-funded incentive activity.”
What do you think about this? Send us your feedback.
