Targeted Consumer Rewards Fail to Yield Profits for Banks

At a time when banks own vast troves of data about their customers' shopping habits, digital-era discounts were supposed to become a lucrative new revenue stream.

The premise was straightforward: if banks could help specific retailers to identify the shoppers most likely to be enticed by price reductions, the merchants would share some of their profits with the banks.

So far, it has not really worked out that way.

Banks' expectations for the business — which some call "card-linked offers," and others dub "merchant-funded rewards" — have diminished over the last year or so.

The offers, often sent by email, are tailored based on an individual consumer's spending patterns. So if a family's credit-card bill shows that they dine regularly at a particular Italian restaurant, they might receive an offer for a discounted meal at a competitor.

If the family redeems the offer, their bank would get a cut of the money generated. The family would not have to present a coupon. But in order to qualify for the discount, they would have to pay with a debit or credit card from the bank that presented the offer.

Large banks were initially hoping that card-linked offers would replace a significant portion of the revenue they lost as a result of the congressionally imposed cap on debit card swipe fees.

But today, even the offer programs' biggest boosters acknowledge that banks should not expect to earn much of a financial return from the business. Instead, the companies that serve as the link between banks and merchants are making the case that participating banks will reap less tangible benefits, such as increased customer loyalty.

"It's not so much about revenue as it is about the value for the end user," said John Brown, president of U.S. operations at Cardlytics, which partners with Bank of America, BBVA Compass, PNC Bank and Regions Bank, among other financial institutions.

Brian Riley, research director at CEB TowerGroup, said: "Banks are lucky to have a program that's revenue-neutral."

This is not to imply that card-linked offers are falling out of favor at banks. While the industry has seen some attrition — Ally Bank discontinued its merchant-funded rewards program last year, and FreeMonee, a firm that partnered with banks, shut down in April — it is also showing signs of resilience.

Atlanta-based Cardlytics, which is privately held, said that its revenue has grown threefold over the last year. Edo Interactive, a Chicago-based competitor, also said that it is enjoying strong growth.

Still, observers identified several hurdles that may be diminishing the profitability of card-linked offers.

• Local retailers have lost some of their allure. One early hope in the card-linked rewards business was that the participation of small local retailers would spur redemptions by consumers.

Today there are mixed opinions about whether most consumers really want offers from local merchants. But there's broad agreement that enrolling smaller retailers in these programs, which involves paying a sales team to knock on lots of doors, is an expensive endeavor.

"It turns out, that wasn't really what consumers wanted, and wasn't the financially prudent thing to do," said Michael Misasi, a senior analyst at Mercator Advisory Group.

• Problems with redemption. Merchants want evidence that a particular sale is attributable to an offer that the customer received, so card-linked programs generally require the consumer to take some affirmative step to redeem the offer. This might entail an online activation by the consumer, or it might just be based on evidence that the customer opened a particular email or text message.

The big problem is that more than a week often passes between when the consumer activates the deal and when the offer actually becomes valid at the retailer, according to Misasi. That lag time weakens the value proposition for the consumer.

• Inundating consumers with offers. Because each offer is inexpensive to distribute, banks may be tempted to send out more of them than consumers want to see.

The offers are targeted to each particular shopper's tastes, and Silvio Tavares, president of the CardLinx Association, an industry group, calls them "the opposite of spam."

Still, banks need to find ways to engage consumers with their card-linked programs, or they risk adding to the unwanted clutter in their customers' lives. "Do these rewards start becoming irrelevant?" Riley asked.

Today, banks also face the threat of competition from outside of the financial industry.

Retailers have viewed banks as valuable partners in this realm because they know so much about their customers' spending habits. But tech companies like Facebook and Twitter are gathering a lot of similar information about consumers.

In July, Twitter acquired CardSpring, a payments company that will allow the social media giant to make card-linked offers to its users. Moreover, companies like Coupons.com are encouraging consumers to enroll their Visa, MasterCard and American Express cards in order to receive personalized offers, eliminating banks' share of the revenue.

Large merchants including Wal-Mart and Target are planning their own mobile payment system, known as CurrentC, which is also expected to compete against card-linked offers from banks.

Despite the challenges, many banks still see value in card-linked offers.

Mercator's Misasi says that in order to be successful, banks need to make significant investments in their programs. He points to BankAmeriDeals as a successful example, and notes that Bank of America has spent heavily on marketing the deals it offers.

"Vendors' early sales pitches overpromised in terms of performance and underemphasized banks' responsibility for the success of their programs," Misasi wrote in a recent report.

In a recent interview, Discover Financial Services Chief Executive Officer David Nelms indicated that his firm is happy with Discover Deals, a card-linked program that works with about 300 merchant partners. But he also acknowledged that other banks have hit pitfalls when they have sought to earn a profit from their own programs.

"We're not trying to earn a spread or commission or what have you," Nelms said.