Loyalty 2.0, promotional marketing and interchange

I have just read “Loyalty 2.0”, a white paper by Karen L. Webster, president of consulting firm Market Platform Dynamics. Loyalty programs are so mature today that it seems that every company has one. Yet the white paper points out that eight of the top ten brands in North America don’t offer a rewards program and probably never will.


The list includes two notable retailers, Wal-Mart and McDonald’s. Wal-Mart is notorious for sticking with every-day low pricing instead of a formal loyalty program offering points or cash back rewards. As for McDonald's, you do sometimes see individual franchisees with loyalty programs, but these are mainly outside the US, and they are an exception not the rule. But I'm not sure why she included Bank of America in the list, a company that I thought had a rewards program. And of course, the GE Money division of General Electric manages lots of private label cards on behalf of other companies, most of which have some kind of loyalty program attached to the cards.

But the theme is interesting anyway, and other publications do paint a similar story. For example, according to the Food Marketing Institute, 60% of US food retailers don’t offer loyalty programs. Again, Wal-Mart is the most prominent example.

On the other hand, all retailers offer promotions, including those not involved in loyalty programs. Just walk past a McDonald's restaurant near you and you'll see lots of promotions without even going inside. According to Promo Magazine’s annual trends report, in-store advertising is a $42 billion industry in the US, while spending on loyalty programs has been stable at $2 billion.

There’s also an interchange angle to all this. Karen Webster writes, “Unfortunately for the merchant, 44 percent of the issuer’s interchange fee revenue generated at the store is plowed back into rewards programs for the card. In essence merchants are financing reward programs for which they may see little, if any, direct benefit. Of course, the big question is what happens to loyalty programs when interchange fees are reduced. That might not happen next year or even the year after, but it is a likely scenario.”

Boots till receipt promotions

Lots of merchants already print promotions and marketing messages at the bottom of till receipts, but they are based only on the amount the customer spends in one transaction. The next step is to print these offers and messages at the bottom of credit and debit card receipts, using a richer set of trigger criteria, like the date of the customer's last visit, or the number of visits or amount spent over a given period.


I picked up a couple things at Boots in London and received this promotional offer at the bottom of my till receipt. All shoppers get the offer. I didn’t use my Boots loyalty card (I don’t have one) and the checkout clerk didn’t ask if I wanted to apply for one.

But I did pay with a credit card.

Imagine if the same type of offer appeared at the bottom of the customer’s credit or debit card receipt, triggered based on whatever criteria Boots chooses, using payment data managed by Boots’ acquirer. The customer has been to Boots before, but not recently? Include a special offer at the bottom of the receipt, for occasional customers that could be shopping elsewhere. The customer is a heavy duty frequent shopper? Print a message encouraging the customer to apply for a Boots co-branded payment card.

"What a bunch of bloggers"

Chris Skinner of Balatro gives more detail on the blogger panel at the Digital Money Forum in London. Apparently, while we were sitting on the panel, another member was using Twitter to chat with several audience members!

"One of our panel was using Twitter during this discussion. His twitter stated that the moderator talked too much and various folks in the audience agreed on Twitter. This was a silent conversation during the real world conversation. Real-time streams from individuals is the world of 2008. So the next time you’re in a meeting, see if anyone is Twittering. You never know, your every word may be reported on the internet in real-time."

How do you get merchants to accept mobile payments?

Whenever payment people talk about using a mobile phone to pay at a physical retailer, like Starbucks or Carrefour, the discussion will almost always gravitate towards the difficulty of convincing merchants to accept mobile payments. Many mobile payment schemes and pilots are still funded by the scheme operator, who effectively subsidizes merchant acceptance. This has come up both yesterday and today in one on one discussions at the Digital Money Forum. Dirk-Jan de Haan of Payter just gave a presentation on an NFC pilot in Rotterdam with 500 to 1000 customers using their phones at 40 retailers equipped with a total of 80 POS terminals. It doesn't cost much to finance all of that.

How do you get merchants excited enough about mobile payments so that they actually want to upgrade their terminals and - OK, let's be bold and optimistic - maybe even pay a fee? The issue will come up again and again until someone solves the problem or people become interested in other things.

Here's the problem.

If you're a merchant, why mess with accepting mobile payments when lots of other methods are just as good? Sure, if mobile payments are cheaper than credit or debit cards, then merchants get excited. Right now there is no indication that anyone is looking seriously at reducing interchange on mobile payments.

If mobile payments are not cheaper than other methods, is there added value that makes mobile payments more attractive to merchants? The typical answer is that mobile payments will be faster, but there is little to justify that.

Another response is that customers will want to waive their mobile phone in front of a reader. But then you run into the chicken and egg problem. If you're a customer, why mess with setting up your phone as a payment device if you can't use it anywhere?

Merchants would surely upgrade their terminals if customers begin avoiding merchants that don't accept mobile payments. This argument appears with embarrassing frequency. Customers have lots of ways to pay already, cash, credit cards, debit cards, so the inability to pay by mobile phone would at most be a small inconvenience. However, if merchants paid less on mobile transactions, then they would more than likely steer customers towards that payment method, either through discounts for mobile payments and/or surcharges on other methods. But that brings us back to the lower interchange argument.

When pushed with all of these issues, someone will invariably gush about how fantastic it would be to download a coupon at a smart poster, then redeem the coupon at a merchant outlet by tapping the phone against a contactless reader (Payter brought this up today in their presentation - their video even showed a customer using their mobile phone at a bar to redeem a coupon for a free drink). But the problems related to coupon redemption make this virtually a non-starter. How do you redeem the coupon and remove it from the phone? You can't leave it there to be used over and over again. How do you process the most popular types of coupons that merchants use the most often, coupons for free or discounted items, as opposed to a discount on the whole purchase, which most merchants abhor? How do you retrain clerks (or the bartender in Payter's video), all of whom already know how to balance their tills today with paper coupons? Several technology providers have approached me over the years looking for a solution, counting on Welcome's background in payment systems and couponing. They feel like they've gone down a complicated maize and found themselves at a dead-end. Removing the coupon is extremely cumbersome and technologically complicated, where handing over a paper coupon is simple and straightforward.

The key question to me is, where's the pain? Whose pain does mobile payments address? Banks don't seem to feel it is their pain, since they are not prepared to pay for the mobile payments infrastructure. They want to make money off of it. Same thing for mobile operators, merchants and even customers. Nobody wants to pay.

But there is pain related to mobile payments, but not the sort of pain that is focused enough to produce real solutions. Banks are worried that mobile operators will figure out the value proposition and make lots of money (and vice versa) while merchants are worried that banks and mobile operators will find a way to squeeze more money out of them than current fees. These fears are driving substantial interest in mobile payments.

A Vodafone executive in the audience mentioned that the industry has been talking about mobile payments for years yet we are still in the early exploratory stage. Any ideas how to get mobile payments moving forward after so many years?

(Here are more blog posts on mobile payments, as well as Welcome's video showing a mobile transaction that lets merchants trigger targeted marketing messages and promotions.)

Eight predictions on the impact of SEPA

First Data's John Chaplin, speaking at the Digital Money Forum in London, makes eight predictions on the impact of SEPA. Before I go through the predictions, I want to first say that the arguments were quite intelligent and persuasive. I found myself analyzing each prediction as John made his argument, then switched and began analyzing why John, as a First Data executive, would be making the prediction. You really can look at each of these predictions on both levels, as a general idea, and then why the prediction is important to First Data.

1 - Every part of the cards business will change. Some banks feel that they won't be impacted by SEPA, or that they are already "SEPA compliant". John's advice: "Think again."

2 - Interchange will survive but at a much reduced level in many markets. Most markets will likely evolve towards the French market, where merchants pay low interchange fees on debit, and consumers pay an annual fee of around 30 Euros.

3 - Many national payment schemes will disappear and MasterCard and Visa will become even more powerful brands.

4 - At least one European debit card brand will emerge and will take at least 15% of the market within 5 years.

5 - Many national processing companies will become uneconomic and cease to exist in their current form. "30 companies doing inter-bank processing in Europe cannot last. Lots of these national processing infrastructures are going to disappear."

6 - Card schemes providing processing will be forced to change and will have to chose what they want to be.

7 - Increased regulatory intervention will happen, as self regulation will not deliver results fast enough. Does anyone really believe that if you are a monopoly in Greece or wherever, that you will happily open up to other networks, processors and brands if you are not forced to?

8 - Large banks and some non-banks will aggressively exploit SEPA freedoms and opportunities.

John throws in two jokers that could disrupt all of these predictions:

1st joker - The European Commission abolishes interchange. The EC is already very angry with MasterCard and could just go ballistic with all interchange models and simply abolish the practice.

2nd joker - Rapid convergence of debit card and ACH processing. These are managed separately today, but they could conceivable converge, and bring about disruptive change.

Where is SEPA taking us? Will there be a third debit card scheme in Europe?

Charles Bryant, of the EBA got this question from the floor at today's Digital Money Forum: "Will there be a third debit card scheme in Europe?"

Answer: "My gut feel is that yes, there will be. It will be a simple debit card, with an acceptance brand, and will combine all of the national brands that exist today. But everything is frozen right now, due to things like interchange uncertainties, the current economic climate, and so forth. The jury's still out, but my gut feel is that yes, there will be a European debit scheme."

The idea of a European debit scheme competing with Visa and MasterCard is a very emotional subject, and the comments here kind of highlight that. At a gut level, yes, many Europeans would like to see such a scheme. But on a cold, pragmatic, business level, it is harder to see how to justify such a brand. What pain would a third brand address? Whose pain would that be? This is not clear to me at all.

When to be a first mover? When to be a fast follower?

Day 2 at the Digital Money Forum in London.

In his intro today, Dave Birch made a comment that I found interesting. Many of us know that Western Union passed up on the telephone patent in 1871, saying that there was no money to be made in the technology. Of course, it eventually became huge, but only much later, in 1929. So all those guys in charge of Western Union in 1871 were absolutely right not to put any money into telephones in 1871. The technology finally took off long after those men were long gone and retired.

This is in line with a popular quote a few years ago that's been overused (why am I using it again?), "You can recognize a pioneer easily; he's the one with all the arrows in his back."

Innovation, first mover advantage, fast follower, etc. -Sigh- When do you decide to move aggressively, and when do you decide to wait? From what I have experienced, you don't usually have a choice. You are forced to move forward aggressively, even foolishly (as viewed by others) into new technology and business models when you are backed into a corner and can't get into the market through mainstream channels. Once you're in though, you are almost forced to switch tactics and adopt Western Union's mindset.

A solution to the interchange dilemma

Speaking in London at the Digital Money Forum, Leo van Hove suggests that the only solution to the interchange problem is to raise the price of cash to match its cost, for example through an ATM charge. The dilemma is that no single bank will move first, and banks are not allowed to organize an industry-wide move. The solution proposed by van Hove is for competition authorities to allow banks to move together.

The idea makes tremendous logical sense, but I seriously doubt that any European government would make a move like this that would clearly be designed to make business easier for Visa and MasterCard.

Leo van Hove wrote a very good paper on the European Commission's decision against interchange, published in the Wall Street Journal.

How innovation is impacting board membership

Charles Cohen, CEO of Probability and one of the speakers on the Digital Money Forum's panel on innovation, just made this interesting comment:

"UK boards of large companies tend to be dominated by accountants. US boards tend to be dominated by lawyers. Now, technologists are moving up the organization and we are possibly in a generational change where in a few years boards will be dominated by technologists."

I like that. So I could still have a job for a long time to come.

The Digital Money Forum, London, 23rd and 24th April

I am in London now for Consult Hyperion's Digital Money Forum. There are around a hundred attendees listening to presentations on the future of money. Tomorrow I will be speaking on a panel called "Meet the bloggers" along with fellow bloggers Scott Loftesness, Colin Henderson, Chris Skinner and Dave Birch.

Scott is posting in real-time here, and Colin is doing the same over here.

Forum Monétique 2008

Voici la présentation de mon intervention hier à Paris, au Forum Monétique 2008.

Le titre: Comment valoriser le paiement auprès des commerçants? Peut-on renverser les tendances actuelles?

SEPA, co-branding, lobbys de commerçants, consolidation des processeurs,… autant d’initiatives et de pressions qui mènent à la baisse des revenus des banques acquéreurs. Quelles sont donc les initiatives visant à développer une stratégie de valeur ajoutée pour les commerçants? Les pilotes sans contact ou NFC répondent-ils à l’attente des commerçants et permettent-ils de renverser les tendances actuelles? Comment tirer plus de valeur de la transaction de paiement et réduire la pression sur les prix?

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