Credit card issuers may be able to turn loyalty program costs into revenues, according to a new report from Celent, a division of Oliver Wyman.
The analyst firm refers to these loyalty programs as merchant-funded programs, yet different from the merchant-funded programs offered by firms such as Groupon in that the these programs are targeted to specific customers, presented through financial institution and linked to payment cards. Groupon and similar programs, by contrast, are available to everyone and require the consumer to print out the reward or present a digital version to the merchant.
“Merchant-funded rewards programs promise a truly “win-win-win” solution with clear benefits to merchants, financial institutions and consumers,” said Celent senior analyst Zilvinas Bareisis in the report. “However, as with all propositions relying on network effects, they face a familiar ‘chicken-and-egg’ problem – merchants are not going to re-direct large portions of their promotional budgets to these programs until they are able to reach a large base of consumers, and financial institutions won’t see much value in the programs unless merchants participate with relevant and meaningful offers.”
Though these programs are “brimming with promise” and “truly on an upward trajectory in terms of financial institution and merchant adoption,” they have yet to move the needle in terms of overall results, according to Bareisis.
Credit card issuers are seeking more of the merchant-funded programs instead of older programs that were only indirectly funded by merchants – through interchange fees – because those fees are now limited by the Durbin Amendment, limiting revenues and the rewards the issuers can afford now. Merchants have no up-front costs in these programs and don’t need any technological upgrades to systems to participate in these programs, the research says.
Merchants’ potential benefits include the ability to attract and retain customers from within the financial institution cardholder base; the ability to provide rewards to targeted customer segments; program monitoring capabilities; and management reports from providers.
Celent expects merchants to consider joining multiple merchant-funded rewards programs in order to maximize their benefits. Merchant migration to these programs is already underway. According to figures reported to Celent, more than 70,000 merchants -- one third of them restaurants -- are already participating in merchant funded programs.
However, merchant-funded programs still face a number of challenges, according to the report:
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New competitors continue to come into the market, including those, like Google, that offer electronic wallets that offer some conveniences for consumers and different, and perhaps more beneficial for merchants, relationship with businesses.
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Consumers may tune out offers as they continue to be bombarded with them.
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The increasing competition could lower the margins for all competitors as they seek to grab market share.
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The more valuable data becomes in the loyalty business, the more that fraudsters will attempt to hack the information, heightening the risk of data breaches.
Even with these risks, “the promise of merchant-funded reforms remains quite attractive at this stage,” according to Bareisis.