Increase sales by leveraging people's herd mentality?

In an article titled “Swarming the shelves”, The Economist describes a growing trend in promotional marketing. The idea is that, if a certain product is seen to be popular, shoppers are likely to choose it too. The challenge is to keep customers informed about what others are buying. "People that shop like you also chose this product." Amazon.com has been very successful with this in the online world, but doing it in the physical world is more difficult.

Welcome is designing new payment technology based on this principle, for cross promotions triggered automatically when the customer pays at a real world point of sale.

Imagine a new restaurant opening in a shopping mall. Today, the restaurant would typically distribute coupons through the local paper, by direct mail, or through cross promotions with other merchants in the same mall. None of these offers are targeted. They could be wasted on customers that would never go to the restaurant anyway, or customers that are already loyal to the restaurant and don’t need the offer.

Welcome’s technology gets around these problems by using credit and debit card data to automatically deliver a cross promotion only to those customers that are highly likely to appreciate and use the offer.

Say that you have never been to the restaurant in question. Say that you are shopping right now at a store which happens to have many customers that go to the restaurant. Say that your shopping patterns indicate that you are pretty similar to those other customers. It is highly likely that a valuable offer to try out the restaurant will catch your attention. Welcome's technology determines all of this at the moment of payment, using a combination of information stored in several places, on servers, in the merchant's POS terminal and in the chip of the customer's credit or debit card (in the case of a smart card transaction). If everything fits, you get a special offer printed at the bottom of your card receipt, encouraging you to go to the restaurant.

The technology is based on an algorithm that creates matrices of relevant merchants and relevant customers, and analyses the overlap between the too. If the overlap is high (meaning the customer is highly likely to appreciate the offer) and the promotion is outside the overlapping area (meaning the customer hasn't visited the merchant before) the promotion gets triggered.

The restaurant simply asks its acquirer bank to set up the cross promotion, then sits back and lets all the individual POS terminals and cards everywhere do their work and automatically churn out offers to relevant customers that have not yet been to the restaurant. There is no CRM to manage, no expensive databases, no sending out mailings, no door-to-door negotiations with merchants, no guessing at which merchants tend to see customers that might be interested in the restaurant, and on and on and on.

Of course, our real goal is to develop innovative ways for banks to prove to merchants that payment cards are a valuable service and that interchange fees are justified.

10% interchange surcharge, mobile payments, and other rants

Sitting in a cab from Singapore's Changi airport into town, I decided to pay by plastic for once. I had just gotten off the phone, and found myself thinking that actually it might be pretty cool to pay the cab fare just by tapping my phone against a contactless reader, if such things were deployed here in Singapore. One drawback with mobile payments is that people sometimes forget their phones behind while they are far less likely to forget their wallets, but I was feeling so bullish that I started thinking that maybe people would pay more attention to their phones if they were a payment method.

Anyway, that stuff isn't available here so instead I used my HSBC debit card (MasterCard Electronic, if you want to know), issued here in Singapore. I was promptly and unexpectedly charged 10% extra for the intense enjoyment of using plastic rather than cash.

Here's what the receipt says:

TOTAL FARE 17.90
ADMIN 10% 1.79
GST 5% on ADMIN 0.09
TOTAL PAYABLE 19.78

No, you're not mistaken: to add insult to injury they add GST on the 10% administrative fee!

I'm not using my card in a cab again, no matter how convenient it is. I even chose to use a debit card on purpose, and was immediately debited the full amount (I checked my account on-line a few hours later). Where's the logic in that?

How about using my mobile phone to pay in a cab? No thanks, not if I have to pay a surcharge for the great fun and convenience of tapping my phone against a contactless reader. It's back to cash for me from now on.

Our industry is putting so much energy into contactless and mobile payments. Everyone is so bullish and excited. If only we would put as much energy into finding ways to avoid seeing cab drivers hike up the cost of paying by plastic. What’s really bothersome is that the only solution seriously being considered by the mainstream industry is to simply eliminate interchange fees.

Tipping Points for the Payments Industry

Digital Transactions has published an article titled The Corrosive Siege Over Signature-Card Interchange, as part 3 of its series on 10 Tipping Points for the Payments Industry. The conclusion on interchange?

"Prognosis: Ironically, the banking industry’s own inability to calculate its costs and communicate its value propositions—justifying its pricing—seems bound to push the payments business to an unfortunate conclusion—including, perhaps, imposition of precipitous drops in rates.

"One solution: Push Visa and MasterCard to allow surcharges on expensive signature-card transactions in the U.S. (as they do in every other one of their five global regions). If merchants don’t see the value or can’t bear the costs of particular cards in particular markets, they can ask their customers to pay the freight; if the value is there, one or both of them should be willing to pay the costs. A wild card: MasterCard’s new owners will undoubtedly push this new public company to settle early and often on these interchange lawsuits in order to get the negative overhang put to bed; why not opt for a constructive settlement and lead the industry to a more balanced and rational set of interchange rates that fit the specific market, product, and transactional cost circumstances?"

It's inevitable that merchants will end up paying different fees to accept different cards. Right now it's purely cost based (for example, debit card transactions often have less interchange than credit cards). In the future, the payment brand people are certainly going to focus on creating new value for merchants so that new generation cards can be charged at higher rates.

Branding and advertising "A New Way to Pay"

An interview with Greg Legg-Bagg, Managing Director of Momentum Worldwide, in Sydney.

Charging merchants for the ability to target their promotions

If a bank’s payment system gives merchants valuable, new ways to target their promotions, should the merchant be charged extra for this feature? Many of Welcome’s bank customers have asked this question. Some see XLS as a way to improve on the merchant partnerships which they already have, and choose not to charge. Others are clearly looking for ways to charge.

My feeling is that banks should definitely charge for the added value, but maybe in an indirect fashion. Why not build the value into your interchange revenue? How? Put XLS only on your high end products, like Platinum cards, which are already designed to bring in high interchange. Get customers excited about your high end cards, so more customers apply for them and more customers use them. Get merchants excited about running promotions linked to your high-end cards, so they encourage their customers to pay with those cards. With less people using debit cards and no frills zero-interest credit cards which don’t have the additional feature, your interchange revenues will automatically increase.

Example of a simple, effective pitch focusing on pain elimination

Here's a product that "can radically reduce the size of your Powerpoint presentations in seconds, by as much as 95% with no discernable loss of quality." It produces a new version of your presentation as a .ppt that anyone can read and modify using standard Powerpoint.

The company's fact sheet is a good case study on how to present a product in terms of the pain that it eliminates, in this case targeting people that insist on creating huge media rich presentations (like me). The fact sheet focuses clearly on the pains and makes the product irresistible for the target buyer. The tool essentially downgrades the quality of all the pictures in the presentation, something anybody could do by hand, but the fact sheet doesn't waste hardly any effort on describing HOW the pain is removed, so as not to cause the reader to lose focus on the simple pain of avoiding large Powerpoint presentations.

What does this have to do with payment cards? Imagine being able to market payment cards as being able to have a clear and substantial impact on something which all merchants can relate to. Rather than the current approach of small, incremental benefits like a tiny cut in payment transaction times, or big cuts in interchange fees.

Thank you Ram for bringing this to my attention.

TV ad shows how credit card rewards have become commoditized

This ad is for the Chase Freedom credit card. The entire consumer value proposition is this: “Feel free to choose cash back. And then change to points. And then change again, all with the same card and without losing a thing.”

I know that credit card rewards have become totally commoditized and look absolutely the same across all banks. I know that banks need even the smallest benefit to attempt to stand out just a little bit from the rest of the crowd. Still, even knowing all that, I can’t help but be amazed at how much money banks pour into advertising tiny incremental benefits.

Who is financing this? Merchants, of course, through interchange!

The following links give you more information on the Chase Freedom card:
Chase website
CreditCards.com
The Wise Marketer

Promotional marketing in China

I paid in a restaurant the other day and got these two coupons along with my receipt. One is for a 10 Yuan discount if I come back to the same restaurant for afternoon tea. The offer expires in a month. The other coupon is for the karaoke lounge upstairs.

These promotional marketing tactics would be much more effective if they were linked to a credit or debit card, so the offers can be targeted based on the customer's prior behaviour, rather than giving them out to everyone.

The restaurant discount is obviously intended to encourage customers to try the afternoon tea menu. What if I go to this restaurant all the time anyway? Isn't that offer wasted on someone like me? If it is not wasted and can be targeted only to first time or infrequent customers, would the restaurant have preferred to offer a much higher discount?

The KTV offer is an enticement for restaurant customers that have likely not discovered the karaoke lounge upstairs. Since management can't be sure that the coupon is not being given to an already frequent Frank Sinatra wannabe, they are afraid of wasting the discount on someone who would come anyway. So they keep the offer down to something manageable. Like 10 Yuan. What if they could give it only to people who had never been to the lounge? What if they could give it just once, rather than each time I eat at this restaurant? If they were confident on not wasting the offer, would they want to give something much more enticing?

Merchants can't do this today. They can't even do it with their own loyalty cards (because infrequent customers obviously don't have the merchant's loyalty card). The payment networks are ideally positioned to provide this added value to merchants, and general purpose credit or debit cards are the ideal tool for real-time promotional marketing at the POS. This would make credit and debit cards more valuable and attractive to merchants, so they accept cards more willingly without complaining about Visa and MasterCard's interchange fees, or American Express's merchant discount. The only other way to get merchants to willingly accept cards without complaining anymore is to bring the fees down.

Mobile payments on the evening news in France

This news report discusses the mobile payment trial in Strasbourg, where some customers can pay with their mobile phones and enter their PIN codes into the phone keyboard rather than the POS terminal keyboard.

Dave Birch refers to this trial in his vision of the future of retail payments: "the retail POS shrinks to a button on the shop counter, whereas all the "smarts" migrate into the mobile." Take a look at his post. It gives a compelling vision of where things could go without major changes in how the payments industry is structured. However, if the role of merchants continues to grow stronger, there could be a growing push to put more and more smarts into the POS, where it is much easier to create merchant-centric features. These two forces compete for two very different outcomes, one issuer-centric and the other merchant-centric. The true outcome will surely be something in between, but that could happen in a pendulum fashion.

To me, the Strasbourg trial feels like a huge amount of effort on another technological gadget that doesn't really produce substantial new benefits for cardholders or merchants. Very much like the Moneo e-purse trials that French banks spent a fortune on and that was never really adopted by anyone. Where is the sound marketing and branding rationale behind all these efforts? Please don't say that people want to run around with their mobile phones and leave their wallets behind. You won't get any serious marketing expert to believe that one.

Merchants everywhere do coupons, even in China

While in China the other day, this flyer was handed to me in the street in front of a restaurant. Discount coupons work all over the world. But I still get blank stares by bankers in some countries who insist on telling me that this is a marketing tactic that is only used in rich developed nations, and that in their country, coupons are never used.

Here's another similar post on coupons in Pakistan.

60% of promotional budgets are wasted on ineffective campaigns (survey)

Businesses spent $342 billion last year on promotional marketing in the US, but according to this survey, 60% of that money is wasted on promotions that result in “insufficient awareness or comprehension and fail to change attitudes or behaviour”.