Merchant-Funded Rewards Give Zions Cardholders A Lift

  With card issuers discovering that customer-rewards programs can be expensive to operate and maintain, a major Utah bank is trying a different, though not entirely novel, approach: Have participating merchants pay for the rewards going to the bank’s cardholders.
  The implementation of a merchant-funded rewards program also may present some banks with a means to confront a new threat to their marketing and loyalty efforts: decoupled debit cards, which Capital One Financial Corp. and Tempo Payments Inc. introduced separately to the U.S. market last summer. Decoupled debit cards enable issuers to tap into any financial institution’s demand deposit accounts, thereby eroding the interchange revenue from the institution’s own card base (“Cap One MasterCard Taps into Other Issuers’ Accounts,” July 2007).
  Zions Bank, a Salt Lake City-based card issuer with 136 full-service branches in Utah and Idaho, launched a rewards program two years ago tied to its Visa-branded credit and debit cards. The program, which offers cardholders cash back on purchases at participating merchants, began with 500 merchants in the network; today there are about 1,600.
  Those merchants offer Zions’ 600,000 cardholders various pay-back schemes for purchases made online or at the point of sale. Each retailer sets and pays out its own rewards, transferring funds electronically back into cardholders’ accounts at Zions.
  Cardholders automatically are enrolled in the program. They have the right to opt out, but few have.
  Many retailers offer a first-time enticement of 50% cash back on purchases up to a certain level, with future rewards usually being somewhat smaller. Cynthia Smith, Zions senior vice president of bankcard operations, says the average reward per purchase is $4.20, or 21% of the typical purchase price.
  According to Zions, customers have spent more than $20 million with their Zions credit and debit cards at participating merchants since introducing the program in 2005. At the same time, according to Smith, Zions has experienced a 42% lift in total debit card sales and 20% hike in card transaction volume. She also says cardholder attrition is down 15%. Debit is used by cardholders in 88% of the transactions. The bank lacks statistics for credit card usage in the program.
  Both local and national retailers, including the Gap and Jiffy Lube, participate in the program. Yet it is local-merchant involvement that empowers such a rewards program because it gives consumers a genuine reason to use their Zions card over that of another brand, experts say.
  â€œI like the fact that the marketing is largely local,” says Scott Strumello, an associate with Auriemma Consulting Group of Westbury, N.Y. “That’s an important element, one that a more national program might not be able to speak to.”
  Rick Ferguson, editorial director of Colloquy, a Cincinnati-based research firm specializing in loyalty and rewards-marketing programs, notes that similar rewards programs in other countries, including Canada, the United Kingdom, Germany, France, South Africa, New Zealand, Singapore and Malaysia, work because they are based on coalitions between merchants and issuers that share the costs. But these loyalty programs are run on a national scale, he says, something that might be difficult to replicate in the United States, where the card market largely is more regional.
  Rewards Network Inc., of Chicago, however, runs a national cash-back rewards program for individuals using credit and debit cards at participating restaurants and hotels. The rewards in this program revert to the credit or debit card accounts of participating individuals.
  Local Versus National
  Regional issuers such as Zions or AmSouth Bank, which operates a similar merchant-funded rewards program out of Orlando, Fla., can succeed with local merchants, however, while a national issuer might have difficulties.
  D.J. Griffin, director of marketing for 12 Jiffy Lube outlets in the Ogden, Utah, area, says Zions’ strong presence in the local region makes its rewards program more valuable to the oil-change business than one that might be offered by a national card issuer. “The good part about the Zions program,” he explains, “is that they already have a large market share in our area.”
  Many of the Jiffy Lube customers had Zions’ cards before the program began, and the rewards initiative has been good for those customers as well as for Jiffy Lube, Griffin says.
  Access Development Corp., also based in Salt Lake City, has provided the Zions program considerable support. Established in 1984, Access maintains a network of more than 200,000 merchants nationwide for affinity marketing programs it administers for associations and groups.
  Kelly Passey, Access vice president of incentive and loyalty services, calls the Zions program the electronification of its typical loyalty-program model because it electronically remits the rewards dollars from merchants directly back to the accounts of Zions’ cardholders.
  Access created the concept of using its merchant base to develop a merchant-funded cash-rewards program and approached Zions to determine whether it was interested in participating.
  Access plays the pivotal role of lining up merchant partners for the rewards program, a job most banks would have difficulty doing on their own. It has turned to the Utah and Idaho merchants from a list of 200,000 merchants from its older loyalty and affinity programs. It also has approached Zions’ own commercial customers. In addition, Access has almost 40 full-time sales representatives whose job is to line up participating merchants for its programs.
  Access also effects the transfers of reward funds from merchants back to cardholders’ Zions accounts.
  Zions markets the program using radio advertisements, e-mail messages, branch signage, direct mail and through promotions at Utah Jazz games. The issuer also sends to its cardholders lists of new participating merchants.
  Market Impression
  Karen Olson, owner and general manager of Metropolitan, a restaurant in Salt Lake City and a participant in Zions’ rewards program, says the bank has distributed “over 2 million impressions with our name on it” to cardholders. “If Zions weren’t such a driving force behind advertising, it wouldn’t be worth it for us,” she says. “It has been driving a significant amount of traffic to us.”
  Sales figures, says Olson, suggest that the Zions program leads to about 300 new Metropolitan customers every six months, representing $2,000 in additional monthly revenue.
  Indeed, if a merchant-funded rewards program is to succeed, it must increase business for participating retailers. If a merchant pays too much in rewards but does not receive sufficient added foot traffic, the program makes little sense. Passey says a few merchants have withdrawn from the Zions program, but overall “they have seen double-digit lift in spend and double-digit lift in transactions.”
  Shannon Winzeler, marketing director of Shade Clothing, a women’s wear retailer with one store and kiosks in several Utah malls, says the program seems to work well in bringing in consumer business. But, she says, the retailer has yet to make a detailed assessment.
  Access provides a portal to participating merchants to indicate how many cardholders earned rewards at their establishments.
  â€œWe’re not 100 percent sure if this is the best way to spend marketing money,” Winzeler explains. “We think it’s been effective, but we need to determine yet if it really is effective.”
  Cardholders do not need to mention the rewards program when they use their Zions card at participating merchants; funds earned automatically are deposited into their accounts and show up on monthly statements.
  Zions charges cardholders $2.50 per month when they earn rewards. The bank returns a share of that fee to Access as payment for administering the program for the bank. Access also receives a monthly operational fee from Zions.
  Tim Sloane, research director at Mercator Advisory Group, a Waltham, Mass.-based payments-industry consultancy, says Capital One’s announcement in June that it was issuing a decoupled debit card has put pressure on banks to bolster rewards programs and other services for its customers. Decoupled debit cards potentially could cost banks interchange revenue and threaten their relationships with their own debit cardholders.
  â€œA consumer can sign up for a decoupled debit card and use it instead of a card issued by [his own] bank,” says Sloane. “So banks better step up their rewards programs, improve the quality of their rewards and serve customers across all their portfolios. Otherwise, they might lose customers.”
  Sloane views such initiatives as merchant-funded rewards and decoupled debit cards as the “start of an arms race to get out there and get merchants included into these merchant-rewards programs.”
  Bruce Cundiff, a senior analyst with Javelin Strategy & Research of Pleasanton, Calif., says that at a time when many merchants are attempting to steer customers to PIN debit because it results in a lower interchange fee for them, a merchant-funded rewards program is a tool for card issuers to lure consumers back to using signature debit.
  Merchants eventually might have to decide which route is better for them to take: paying for a rewards program that helps spur loyalty, or paying higher interchange fees via signature debit, Cundiff says.
  While the Cap One decoupled card might be sending chills down the spines of some card issuers, the concept has yet to prove itself viable, although some experts view decoupled debit as the wave of the future.
  A merchant-funded program such as Zions’, however, could offer banks a tool to combat the threat of decoupled debit cards. “What Zions Bank is doing is raising the bar,” says Sloane. “If I am getting good merchant discounts on my existing debit card,” as Zions hopes its cardholders will conclude, “I am much less likely to add a decoupled debit card to my wallet.”
  It remains uncertain how many banks will initiate a merchant-funded rewards program. Passey says Zions was the first bank it approached, and another regional bank, located in the South, is under contract with Access to launch a similar program this year.
  Colloquy’s Ferguson views merchant-funded rewards programs as a good way for banks and merchants to work together in marketing their brands, to win new customers and retain old ones.
  Potential Snags
  Yet there are potential snags, Ferguson says. Some merchants, he says, participate in a number of different rewards programs, making it tougher for a card issuer to distinguish itself from the pack. And if a cardholder has a bad redemption experience or a poor service experience with a particular merchant, the card issuer may suffer the negative consequences.
  That is why it is important for banks first to evaluate the merchants with whom they partner, says Ferguson.
  Yet most consultants agree with Zions and Access that well-run merchant-funded programs make sense for all involved.
  â€œIt’s a good thing however it works,” says Paul Turgeon of Boston-based Dove Consulting Group. “The cardholder wins, the community wins, the bank wins, and the merchant wins. How can you beat that?”
  Merchants seem satisfied paying for the cash-back rewards earned by Zions’ cardholders. Such initiatives may help issuers prevent customers from pursuing alternative card programs that tout enhanced rewards.
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