Executives from merchant-funded rewards companies dislike the title attached to the service they provide.
Cardlytics Inc. prefers to call it “transactional marketing.” Cartera Commerce Inc. favors “card-linked offers.”
Regardless of what companies call them, payment card-based merchant-funded incentives are saturating the market at a time when consumers are assaulted daily with deals from different sources.
Merchant-funded rewards providers say they offer better value than the daily-deal model, namely Groupon Inc. and LivingSocial, because they provide targeted offers based on a consumer’s credit, debit or prepaid card transaction history.
Eventually, such companies might find themselves working together, or even merging.
But for now, most are working to survive the increasingly competitive merchant-rewards market.
A recent Aite Group report suggests multiple companies could find long-term success offering merchant-funded rewards (
Revenue from offering merchant-funded rewards services by 2015 could exceed $3.5 billion, split almost evenly between card issuers and third-party vendors, Aite said.
Companies such as Cartera and Cardlytics will help drive the market as they play several important roles, Madeline Aufseeser, Aite senior analyst, wrote in the report.
Vendors own the contractual relationships with the merchants, support the underpinning technology, and drive new marketing tools and analytics for the programs, she noted.
Caltabiano believes having multiple companies offering the services benefits everyone involved because it increases merchant awareness about the programs. “The whole [merchant-funded rewards] model is relatively new to merchants compared with television, radio, Internet and other forms of marketing,” he says.
However, merchants will choose only one or two companies for long-term partnerships, Caltabiano says.
Other companies could view providers that do not develop the scale merchants seek as acquisition targets, he adds.
Which companies become targets remains to be seen. But some providers have started to offer a different spin on merchant-funded rewards.
Linkable Networks Inc.’s system enables consumers to link retail offers they see in various advertisements online, in print and on television directly to a credit or debit card account (
“Unlike the traditional merchant-funded model, where retailers subsidized the program but it was still in the bank environment, we bring Linkable offers in the advertising world,” Burgess said.
For example, consumers who click a banner ad on a website can link the offer to a credit or debit card instantly. The offers also could come from QR codes found in print ads, elevator screens or even billboards in Times Square, Burgess said.
“These are places the bank has never been,” he added.
Affinity Solutions Inc. is giving the daily-deals model a new look with merchant-funded rewards that enable businesses to track a deal’s effectiveness and deploy follow-up offers to drive repeat business with discounts consumers should find relevant based on their past purchases.
New York-based Affinity partnered with Sovereign Bank in September to deliver Spot On Deals to participating issuers’ credit and debit cardholders through email, online banking and mobile alerts, among other methods (
“You have a basic problem with the Groupon and Living Social model, which is offered to everyone and attracts people who are not going to come back” to some merchants a second time, he says.
Affinity will target those same consumers plus those who seek deals on something they would have purchased anyway, Silver adds. His plan is to target consumers seeking additional deals begs the question of whether there are too many deals available from different sources.
Mercator’s Hewitt believes consumers will demand more-relevant deals to fit their needs.
“Merchants want that, too,” she adds. “Their click-through rate will increase if consumers are being presented with targeted offers.”
But targeting offers based on individuals’ own shopping habits brings up consumer-privacy concerns regarding providers sharing sensitive information with merchants. “The other piece of this that’s lurking in the background is how far providers will be able to push the privacy envelope and how much will regulators push back,” Hewitt says.
Issuers recognize the privacy concerns and are cautious about consumer information, Hewitt says. “They don’t want to be tagged as being flippant or irresponsible with consumer transactions,” she says.
Grimes agrees. Issuers must do their due diligence to protect cardholder information as more players get involved with merchant-funded rewards, he says.
“The more we let transaction data get out into the Wild Wild West, there will be a day some of that data falls into the wrong hands,” he says. “We believe banks really have to worry about security to protect this industry.”
Indeed, based on Aite’s report, the industry is growing by leaps and bounds. How many providers are still standing in four years to reap the benefits remains to be seen.
As more companies get involved with merchant-funded rewards, consolidation among providers becomes more likely, observers believe.
Aite’s Aufseeser believes a combination of different acquisition possibilities could occur. A company such as Carlson Marketing Worldwide Inc., which specializes in loyalty programs, could purchase a merchant-funded rewards provider to enter the market, she suggests to PaymentsSource.
Similar strategic alliances already exist in the industry.
In September, Cardlytics announced a partnership with Groupe Aeroplan Inc. in Canada (
In another scenario, transaction processors such as First Data Corp. and Fidelity National Information Services, or FIS, that already have strategic relationships with merchant-funded rewards providers could seek to purchase one of those companies, Aufseeser suggests.
“Instead of having just a strategic alliance, those processors could just purchase one and add that capability to their existing platforms,” she tells PaymentsSource.
First Data is a choice candidate to purchase a merchant-funded rewards provider because it already has a large number of partnerships with retailers and issuers, Aufseeser believes.
Another acquisition scenario could see larger merchant-funded providers purchase smaller players, Aufseeser adds.
Patricia Hewitt, director of the debit advisory service at Mercator Advisory Group in Maynard, Mass., does not rule out the possibility of a daily-deal company acquiring a merchant-funded rewards provider.
Card issuers would welcome such an alliance because they want opportunities to offer experiences specific to cardholders, and the daily-deal models fit that prospect, Hewitt contends.
Groupon and Cartera already have a strategic partnership. Groupon deals are integrated throughout Cartera’s performance advertising network. Consumers can earn points, miles or cash back if they purchase a Groupon deal with their eligible card.
Cardlytics views possible acquisition targets differently.
“When I think about acquisitions, it’s to bring new capabilities to our team that we don’t have today,” company CEO Scott Grimes told PaymentsSource in November at SourceMedia’s annual ATM, Debit and Prepaid Forum. SourceMedia publishes PaymentsSource.
Cardlytics would pursue companies that help it bring new products to the market quicker than it otherwise might not be able to do, Grimes said.
Cartera achieved something similar when it merged with Vesdia Corp. in January. Vesdia was a loyalty-rewards provider.
In February, Cartera integrated Groupon’s daily deals into its merchant network to enable consumers to earn rewards by purchasing a Groupon deal (
Until more consolidation opportunities arise, Marc Caltabiano, Cartera vice president of marketing and products, believes the market is large enough to support two or three key players. But those companies would need to build sufficient scale through merchant and card-issuer relationships to succeed, he notes.
“There is still a lot of room for growth, and [smaller] companies need to make a land grab to get scale,” he tells PaymentsSource.
The current market indicates existing merchant-funded rewards players should have no problem building scale. But being among those still standing when the momentum fades should be their long-term goal.
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