What Citi gets from its Kard acquisition

• Key insight: Citi has agreed to acquire rewards fintech Kard Financial for an undisclosed amount.  
• What's at stake: Citi's pending purchase of the rewards fintech marks a pivot in the way the $2.9 trillion-asset bank thinks about its points program and comes as interchange continues to come under fire. 
• Expert quote: "Citi's acquisition of Kard will strengthen its cards business by enabling dynamic, highly targeted merchant-funded ads, rewards, and promotions," Eric Grover, principal, Intrepid Ventures. 

At Citi's Investor Day in May, U.S. Head of Consumer Cards Pam Habner took the stage and said the $2.9 trillion-asset bank and the third largest credit card issuer in the country was going to reduce its dependency on "expensive, points-based rewards." On Thursday, it took a step toward that goal.

Citi agreed to acquire New York-based commerce media and rewards fintech Kard Financial for an undisclosed amount. Kard uses predictive artificial intelligence and first-party transaction data to offer customers personalized, merchant-funded rewards.

Kard will enable Citi to use verified transaction data, machine learning-powered matching and an expanded network of merchant relationships to improve incentive marketing, according to Abhinav Anand, Citi's head of value cards, lending and commerce.

"Kard adds advanced personalization capabilities that can identify spending patterns and match customers with relevant offers in real time," Citi's Anand told American Banker. "This will help Citi present more tailored rewards based on actual purchase behavior, while also giving brands and merchants a direct way to reach high-intent consumers."

The acquisition is a signal that Citi is serious about pivoting on its points program, according to Phil Philliou, a payments industry consultant.

"Rewards points programs are a direct cost center that Citi funds as opposed to merchant-funded, offer-based rewards that shift that cost to brands who want targeted access to Citi's 70 million cardmembers," Phillou told American Banker. "It's exciting to see non-points based programs such as merchant-funded offers, gamification, and sweepstakes serving as ways to reward customers and influence spending behavior."

Merchant-funded rewards have been gaining traction with lenders and retailers over the last couple of years because they are mutually beneficial. Lenders like merchant-funded promotions because they reduce their top-line costs, and merchants like funding those promotions because they have more transparent and measurable outcomes than traditional marketing avenues.

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If successfully executed, the acquisition will generate incremental sales and customers for merchants, alongside incremental customers, payment volume, and receivables for Citi, which will boost interchange and finance revenue, said Eric Grover, principal at Intrepid Ventures.

"That's a win-win," Grover told American Banker. "Crucially, it should give Citi closed-loop-style control and promotions, but over the open payment system, while delivering value across the merchant spectrum, from SMBs to large enterprise co-brand partners."

But merchant-funded rewards do come with their difficulties, according to Aaron McPherson, principal at AFM Consulting.

"With card interchange under threat, finding alternative ways to fund card rewards is important. Card-linked offers have long been an appealing alternative," McPherson told American Banker. "The main problem [with merchant-funded rewards] has always been proving lift by distinguishing between transactions that would have happened anyway versus net new transactions."