Five rising payments reward concepts funded by merchants

March 21, 2023 12:37 PM

U.S. merchants perennially push back on card network interchange that partially fund many traditional card rewards with 2% to 3% of each credit card sale. But the same retailers are often willing to pay for their own reward programs — even in partnership with banks — if it gives the merchant more control of the customer relationship.

The latest concepts for merchant-funded rewards leverage new technology and digital payments via pay-by-bank channels, affiliate marketing and gift cards. At the same time, older bank-based models for card-linked offers are undergoing major change.

"The holy grail in consumer rewards is retaining attribution for the sale with the payment, and that's what merchants are relentlessly pushing toward," said Richard Crone, a principal with Crone Consulting LLC.

Here are five examples of merchant-funded rewards spotlighting new concepts plus the evolution of older card-linked offer engines popular among banks.

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Sionic harnesses pay-by-bank tech for consumer rewards

The gradual expansion of open banking technology and the acceleration of real-time payments sets the stage for merchants to expand pay-by-bank options, and Atlanta-based Sionic has built a platform for early adopters of that approach, for which Europe has a head start.

Merchants participating in Sionic's Verified Rapid Payments, announced last month, offer cash rewards and discounts on purchases to consumers who share their bank login credentials after using their phone to scan a QR code at the merchant checkout. Sionic's open-finance technology partner MX instantly verifies bank account details.

Merchants and consumers go through Sionic's platform to verify any disputes, with Sionic publishing a "trust score" ranking merchants' responsiveness to resolving issues around fraud, returns and refunds, which drive the majority of traditional credit card costs surrounding fraud and chargebacks, according to Sionic CEO Ron Herman.

Sionic said undisclosed merchants testing the concept can save up to 60% over credit card interchange fees.

The pay-by-bank concept's biggest hurdles will be changing consumers' entrenched habits around the effortless accumulation of cash-back credit cards and the monumental challenge around building scale with merchants. But the success of buy now/pay later loans demonstrated merchants' willingness to pay fees of up to 6% for alternative approaches to closing sales, said Sara Elinson, a principal at EY-Parthenon.

FutureCard doles out cash for ‘green’ debit card spending

New York-based Future figured one way to get consumers to change the way they pay is to make it about fighting climate change.

Its FutureCard, which rolled out last fall, gives consumers up to 5% back on Visa debit card purchases at 50,000 merchants whose products are better for the environment — like public transportation and thrift stores. The card also gives users 6% cash back on bigger-ticket environmentally friendly merchants, like electric bike sellers.

FutureCard requires users to link a bank account to the card, issued by minority-owned Piermont Bank, which splits debit card interchange with Future. But the majority of the rewards are paid through an affiliate marketing model that has several dozen participants committed to environmental causes, including Rad Power Bikes, Back Market and Our Place.

FutureCard, which just rolled out a recycled-plastic version of the card after launching with a digital-first approach, has signed up more than 11,000 users mostly by word of mouth.

The concept's advantage is the flywheel of public interest in fighting the universal threat of climate change. But paying up to 6% in cash rewards — more than triple the average of any bank card debit rewards program — could be a loss leader for FutureCard, said Brian Riley, director of credit advisory services and co-head of payments with Javelin Strategy & Research.

Credit unions power local-merchant rewards via gift cards

Nine U.S. credit unions recently formed a credit union service organization to give members extra cash bonuses for shopping at local businesses through a partnership with digital gift card platform Prizeout.

The Prizeout Partners CUSO enables local merchants to plug into participating credit unions' online or mobile banking apps to sell members digital gift cards with bonuses built in above the cash value of the gift card. Bonuses average 12% and range significantly higher.

Prizeout's platform supports participation from merchants of any size and consumers redeem gift cards using their bank's mobile app. Credit unions connect to Prizeout's platform via an API. Prizeout transfers the core value of the gift card to the merchant when the credit union sells a gift card.

Goshen, Indiana-based Interra Credit Union, a founding member of the CUSO, saw merchants offering bonuses of up to 25% in a recent test.

Local merchants and community banks and credit unions are natural partners for such a rewards program, and to catch on it will require ongoing promotion, said Heidi Leibenguth, managing partner at Crone Consulting.

Kard uses data to sell card-linked offers

Card-linked offers have been around for decades, but Kard — launched in 2016 — is a relative newcomer that launched with an API-based approach giving merchants and cards a lightweight approach to integrating its services.

Card issuers can use Kard's platform to customize the merchant selection and the appearance of the offers within a bank's website or mobile app, with consumers able to track offers when they shop and merchants and issuers able to easily track results through Kard's platform.

Working with 40 issuers, Kard can reach more than 15 million consumers, and the platform splits the revenue from merchant offers consumers redeem with banks. The firm raised $23 million in venture capital last year in a round led by Tiger Global.

Kard got traction with financial institutions through a partnership with Marqeta, extending the rewards platform to Marqeta's card-issuing parters. Kard has since launched deals with hundreds of merchants including McDonald's, which offered deals of 2% and 3% cash back on purchases, which banks and merchants can track.

Last year, Kard hired Mary Zoumas — previously global business development lead at Klarna who early spent a decade in loyalty marketing at American Express— as chief revenue officer.

Cardlytics retools for a local-national rewards approach

As the original large card-linked offer engine, Cardlytics has partnerships with major issuers including JPMorgan Chase, Bank of America, Wells Fargo, SunTrust, PNC, BB&T and many smaller banks. And as competition in card-linked offers increased, the company recently embarked on several major initiatives.

Atlanta-based Cardlytics bought Bridg, a software firm that provides a view into the specific items consumers are purchasing, along with Dosh, which provides a different form of digital card-linked offers accessible to neobanks and others.

Six months ago, Cardlytics also named a new CEO to pull the company's vision together for integrating local and national offers, bringing in Karim Temsamani, who was previously head of global partnerships at Stripe and prior to that spent 12 years at Google in sales and advertising roles. Temsamani replaced Lynne Laube, Cardlytics' co-founder who was at the helm since the company's launch in 2008; Laube resigned in November 2022 along with Cardlytics co-founder Scott Grimes, when more than 50 employees were laid off.

By the end of this year Cardlytics plans to have all banks on its platform migrated to a new, cloud-based ad server delivering more granular, customized deals including thousands of local offers.

"It's still early [in the transformation] but we're starting to see the results of these improvements," Tamsamani told analysts earlier this month during a conference to discuss the company's latest quarterly results.

"The challenge for Cardlytics and many card-linked offer providers will be making these deals unique and relevant, versus the old 'spray and pray' approach where offers were very generic and didn't offer much differentiation," Crone said.