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By themselves, merchant loyalty programs will not create thousands of dollars of revenue for ISOs. The payoff instead resides in the added value merchants perceive they get and the resulting unwillingness to disrupt that value, observers say.
"I'll make no representation that loyalty programs are a big revenue generator," Bryant Y. Dowden III, managing director at Trilogy Payment Solutions LP, tells ISO&Agent. "They simply aren't. Loyalty programs are a defensive program that puts 'hooks' in a merchant."
Indeed, loyalty programs can make it more complicated for merchants to change processors, often-but not always-making them good retention tools, Dowden says. Loyalty programs also can be based on geography, where merchants in the same region share a common system or work only with one merchant.
Fort Worth, Texas-based Trilogy offers two loyalty initiatives. One is a traditional card-based product that enables merchants to choose the types of rewards their customer can receive. The other relies on a prepaid card, and Trilogy's merchants use the product in a variety of ways, Dowden says.
Dowden likens the traditional card-based product to a punch card scheme that rewards the consumer after purchasing five haircuts with a free haircut, for example. With the company's other options, transactions are tracked electronically instead of punching a hole in the card, which customers can misplace or crooks can counterfeit, Dowden says. This scheme also provides merchants with some marketing and transaction data.
One way Trilogy's merchants use the ISO's loyalty products is a gift card, in which consumer loads a dollar value into the card account and gives the card to another person as a gift. Yet another way is for merchants to use the cards to promote products, such as offering a $10 gift card for tea purchases when a consumer buys a tea kettle, Dowden says.
Merchants also may use prepaid gift cards to promote other merchants that offer related products, such as a clothing store offering a $10 gift card for use at a dry cleaner with the purchase of $100 worth of shirts.
Trilogy's loyalty schemes provide one example of the diversity of programs ISOs can offer. Shopping around for a loyalty company requires understanding how merchants could use these schemes without creating extra work for the ISO or the sales agent, observers agree.
KEEP IT SIMPLE
As Group ISO looked for a loyalty company a few years ago, important factors included ease of use for the merchant and the sales agent, says Michael W. Fox, sales manager for the Newport Beach, Calif.-based merchant-services provider.
Having used Secure Payment Systems Inc., a San Diego-based loyalty and gift card company, since 2006, Fox says he can attest to the virtue of having a simple program to understand and sell. "I don't have to make sure the sales agent knows every single thing about gift cards," he says, noting the agent or merchant can call the provider if there is a problem.
Dowden agrees that simplicity and ease of use are required attributes for loyalty providers. "Within that requirement, there should be a high level of existing equipment compatibility, easy-to-use menus on the terminals, and online [applications] and intuitive online reporting," he says.
Merchants want loyalty products that meet the same criteria: easy installation, ease of use and intuitive reporting, Dowden says.
Likewise, an important element in Group ISO's loyalty program provider was that Secure Payment's platform was compatible with the ISO's processing platform, Fox says. ISOs should look for loyalty providers that are integrated into multiple processing platforms to ease their program's setup and data- reporting capabilities, he advises.
LOYALTY PAYOFFS
Approximately half of U.S. merchants still do not have a prepaid gift or loyalty card program, says Craig Peterson, vice president of business development at TenderCard LLC, an East Falmouth, Mass.-based gift card processor.
Finding these merchants may not seem difficult, but trying to sell a gift card program to a funeral home, as one TenderCard-affiliated ISO did, might not be an obvious candidate for a sales pitch, Peterson says.
It was during a TenderCard training session that the ISO disclosed the successful sale, Peterson recalls. The funeral home made the cards available at hospitals and florist shops as a marketing tool to reach families. The funeral home puts value in the card account, such as $250 toward services, which families could then use.
Other merchants also require specially tailored loyalty products, Peterson says. "Because credit card processing is so competitive, if you approach the merchant with a little different twist, you may fare better," he says. One merchant recently told a TenderCard ISO reseller that the salesperson was the eighth one to call on the merchant in a week.
Merchants sit through a lot of sales pitches so Peterson suggests beginning a pitch by asking a merchant how it handles merchandise returns could result in a gift card sale. The ISO could recommend that the merchant put refunded amounts into a card account for use solely at the store.
And, as the economy has motivated many consumers to be thriftier, cardholders tend to use up all of the money on such cards, Peterson says. "That's a good thing because people are coming in to see the merchant more often and are not leaving that value on the card," he says.
Relaying that anecdote may help persuade merchants to adopt a loyalty program. It also may help that many merchants themselves participate in loyalty programs, says Steven Eazell, Secure Payment director of national third-party sales and marketing.
Loyalty programs have been around for decades, with some of the most-recognized being in the travel industry. American Airlines, a unit of Fort Worth, Texas-based AMR Corp., generally is credited with starting the first reward program for air travel in 1982.
"Loyalty is just one of those things that for the longest time people didn't take beyond certain level," Eazell says. Now smaller retailers are beginning to see the value of a loyalty program, he says.
The development of customer databases affordable enough for small merchants to use is one factor that has helped them manage the customer information, says Eazell, whose company's system can use transaction data to trigger e-mails and text messages to consumers offering them a coupon or similar enticement.
CONSUMER ACCEPTANCE
The Business Builder Alliance Inc. is adapting its loyalty approach based on consumer and merchant feedback, says Walter Dubowec, chief marketing officer at the Rancho Santa Margarita, Calif.-based loyalty company.
The original concept was for consumers to register their payment cards at a Web site for the merchant, a concept Dubowec labels "extreme pushback" from consumers. Consumers proved reluctant to place their payment card information on a Web site, he says.
An additional difficulty Business Builder faced was that its transaction aggregator, Golden Retriever Systems, a unit of TSYS Acquiring Solutions LLC, which gathers transaction data from merchants for the loyalty company, did not work with transactions processed by First Data Corp., an Atlanta-based processor, Dubowec says. "If [the merchant] used First Data, we couldn't get the data," he says.
Business Builder is working on fixing both problems. Dubowec would not reveal details of the fixes but says the revamped system will not rely on a consumer registering a payment card.
The company also will not use a transaction aggregator, which will help the company track debit and cash transactions. Golden Retriever was not capable of providing that service, Dubowec says.
A Golden Retriever spokesperson says the company can collect data from member banks that are part of First Data, but it does not collect data from First Data's Direct portfolio.
Even with these changes, Dubowec sees no change in the importance of ISOs to the company's plans. "ISOs have the touchpoints with the merchants across the country," he says.
MONEY AND RETENTION
A merchant-level salesperson relying solely on offering gift and loyalty programs "is not going to make a living, but he'll be able to buy a nice steak dinner every once in a while," TenderCard's Peterson says
Indeed, at Trilogy ongoing compensation is a per-transaction fee and a monthly fee, "which are substantially lower than other card products we sell," Dowden says.
It often depends on the merchant as to whether a loyalty program can prevent the retailer from jumping to another merchant-service provider, Dowden says. "Loyalty programs can enhance merchant-attrition rates, but since it is generally the least costly program, it isn't the most effective in these economic times," he says.
"For example, we looked at a merchant that we were going to save just over $30,000 [a year] in card processing, and they had a custom stored- valued card program," Dowden says. "They were willing to go through the pain of a gift card conversion to save $30,000 annually."
So why should ISOs choose to offer a loyalty program? "Solving multiple merchant noncash-payment needs, all through one company, on the same equipment, is a great selling tool," Dowden says. And bringing that value to a merchant in a single point of contact may be enough to generate the type of loyalty an ISO needs to survive.
