B2C Customer Loyalty – Financial Services

Interview Transcript

Article | B2C Customer Loyalty – Financial Services
25th May 2021 Atheneum Team

Expert Profile


Head of Business Development and Strategy




Phillip has worked for the last 10 years with Fintechs and Financial Institutions in creating new products and partnerships. As a director of B2B Payment Solutions and Partnerships at Visa he was involved in establishing product to drive card volume within bill pay, marketplaces and expense management workflows. Currently he works at Divvy as the Head of Business Development and Strategy with responsibilities over launching new businesses initiatives.

Section 1: Current Loyalty Programs & Successful Case Studies

1.1. How do you define customer loyalty in your industry?

In the financial services world, it’s really split up into a couple of different modalities. There are reward schemes that are provided from a network perspective, so those are the Visas or the MasterCards that have their loyalty schemes built into the actual card themselves. So that’s really from an interchange perspective. When there’s credit cards or debit cards, there’s different interchange schemes in the background, and those then go and power those reward programs that you see from Bank of America or another US bank. So that’s how, from a network perspective, those reward schemes are going to push out loyalty schemes. Now from the network side, it pushes down into the banks’ side and the banks do a couple of different loyalty schemes. The main one is card linked offers.

Cardlytics is the major player in that space, and there’s a couple of different pieces that have just recently happened around Cardlytics which have bolstered this type of card linked offer schemes. A card linked offer, is where you have intent, a purchase prior. You log into your bank portal or your bank app, and you select the offers that you’re looking for, those are typically merchant offers or brand specific offers. For example, buy X at Walmart, get X% off or buy this item at Walmart, get X% off. And those intent pieces then lead to the actual card swipe where the bank, being the processor, gets that transaction information then uses a Cardlytics on the backend who basically brings all the merchant deals to then do that reconciliation.

They’ll point out that this person showed this intent through my bank portal, they actually went and shopped here, I can see that because the card showcases the merchant and the right MCC category code or the right brand if it’s brand.com. At that point, Cardlytics who is in the background facilitating that with their merchant vendor network, and then distributes out the actual savings.

The big changes in this space have really come around consolidation around the access to data. One of the big changes in marketing in general is the movement away from third-party cookies. So, with Google and Facebook right now, and Apple just pushed out their big piece around opting in as opposed to opting out as a default.
Cardlytics actually purchased two different players recently within the last 3-6 months. The first one is Dosh and the second one is Bridg. Now what’s really interesting about this is if you look at Cardlytics, they’re more of a bank player, so they’re more of a B2B2C. They go directly to the banks; the banks then distribute their product through their portals.

Dosh on the other hand has a similar model, but they go through FinTechs. Dosh specifically goes out there and basically sells to neobanks or FinTech apps that are launching cards or anyone that really wants a drop ship turnkey rewards program. Basically, Dosh has gone out there and recreated a similar type network like Cardlytics have, just with different merchants and a different infrastructure technology that allows it to be more of a white label; one to many approach. And then it also allows you to bring some of your own customized offers as well. So, if you didn’t want to use their network of offers, you can cobble together your own, do your own deals, but then use the Dosh platform to actually deliver those deals.

1.2. Can you describe the structure of your customer loyalty programs?

One of the launches that we did in Divvy, was a Bill Pay program. One of the major pieces that we had was, we were trying to get more loyalty use on the card, so we actually did something that was a little bit different. We launched Bill Pay to create a stickier environment around the card usage. These small, medium businesses were used to using our card and there was a lot of non-cardable items, for example invoices. And what we did was we created the Bill Pay platform and for specific customers, we would actually give them the cash back points on that ACH spend, like the card spend. So points are typically once again, coming from the interchange stack on the card, but what we’ve done is we’ve said, if you’re able to give us your invoice spend, then we are able to turn on points for it, as if we can convert it onto card.

So for example, maybe as a small-medium business, you have all of your indirect spends, so that’s travel expenses, that all goes on the card, and then you have some larger infrastructure payments, maybe it’s rent or if it’s some utilities that may or may not be always put on card, if you put that through our Bill Pay system, anything that we can turn onto card, submit the invoices, Divvy will search through them, call the merchants, figure out what can be carded or maybe different payment terms. And if we are able to create an interchange environment on the Bill Pay side, then we will then reward it in the same kind of point structure. So, they weren’t as valuable. The exchange system was a little bit different, but in essence, you would just get different points.

Maybe you get two points for every dollar, whereas you get one point for every dollar on the Bill Pay side. And once again, the idea is really tying the two worlds together. I think that’s what you’re also seeing broadly in the marketplace today, where a lot of card providers are trying to obfuscate that reward structure. That’s where you’re seeing a lot of the Bitcoin or other crypto reward structures as well, because when you’re buying and exchanging crypto in such small increments across so many people, you can have that arbitrage, if you will. They may buy a bunch of Bitcoin upfront and then piecemeal it out in sub-wallets afterwards. And that whole entire piece really allows the program provider to kind of double-dip. So, whenever you’re using your rewards, you’re obfuscating the exchange there from crypto to something else, especially if they’re bringing their own merchant network for those offers. And then the same thing when you’re actually spending on the card and then getting the crypto back as a reward.

It’s almost like how Forex is. Sometimes you get a really good rate because you swiped at the right time, other times, you get a less favorable rate because it’s at the end of the day. So those are just some use cases where you see different programs, whether it’s from a network level. So, we were getting interchange from the card side and using that to supplement the reward structure and then we built our own kind of reward structure that tagged along with a non-interchange driven payment form being ACH or bank transfers.

1.3. What is the leading customer loyalty program in your industry?

It really depends on what your end goal is. There’s a lot driven around engagement. Broadly speaking, when you look at the marketplace around customer engagement and loyalty, a lot of the schemes or use cases they do, it’s not meant to drive true revenue. It’s more of an engagement model. If I can raise more money because now my average user time on device has increased by 30% because they’re actually clicking on the offers, checking back when I’m actually paying out on the offers, that may not actually drive revenue. They may actually just give all the actual kind of arbitrages that are directly to the customer, but because of the time on-device has gone up, it allows them to raise more funds or at a higher multiple. I think depending on who you are in the marketplace, whether you’re a main line bank or regional bank or a new FinTech, a neobank or just a new FinTech in general, there’s a lot of different use cases around it.

I would say from the bank perspective, the card linked offers, offering from Cardlytics is probably the strongest. From a FinTech perspective, Dosh was a pretty strong player. And then there’s a lot of other smaller ones. I’m consulting for a newer startup called Banyan. And what they’re doing is really driving the same mentality, but down to a deeper level. So instead of just doing card linked offers based on the merchant or the brand, they’re really building level 3 data, so all the receipt line items. They’re actually getting down to the point where they can see you go to Walmart, I’m not going to just give you 20% off of all of Walmart, I’m going to give you 20% off of a Black & Decker drill specifically at Walmart. And because of the level 3 line item data, they’re able to get much more granular.

You become a much more customizable program, or you could say to a customer, if you buy, this ladder with this Black & Decker combo across any of these three merchants, we’ll give you X, Y, Z back. It’s just getting to a more finite, granular detail. Once again, because of the fact of, a lot of these cookies are going away, traversing across apps, it’s really important to get really rich first party data, so that’s working with those merchants to get the line item data, and then obviously working with FinTech demand side that’s looking to be able to drive more engagement off of offers like that. Broadly there’s just different players and it really depends on what kind of end goal you’re driving for, whether it’s monetization, whether it’s engagement or it’s just a feature parody that you need to offer, just so that you can have a check box when you’re lining up your features kind of across the board.

Section 2: Challenges & Future Loyalty Programs

2.1. What are the key challenges in designing a successful customer loyalty program?

Getting access to first party data is always going to be paramount, especially in today’s privacy world, let alone in the GDPR world or the PSD2 world over in Europe. So with certain states starting to make legislation like the California Consumer Protection Act, the CCPA, granting you the right to be forgotten, these pieces are going to challenge who can touch first party, second party, third party, fourth party data, and what are the data derivatives that you can drive off of that. For instance, if a user, a consumer is using X, Y, Z, we’ll say like maybe they use Mint, which is a personal finance management app, a PFM app.

The question now is, who truly owns that data? Is it the bank that the user’s card is being used on? Or is it Mint because now they’ve linked the bank account as they have the user’s permission. I think that, broadly speaking, everyone has a certain claim to it, but as you start generating different data derivatives off of it, whether it’s insights, whether it’s offers, whether it’s just trends and analytics. Now the question becomes who has the right to that revenue or to that aggregated data. That’s going to be the biggest challenge. And once again, being able to create your own networks where you are working first party with those merchants or first party with those issuers, banks, FinTechs, is going to be the way that you solve that, if legislation doesn’t have a different idea around it.

2.2. What are the risks of using technology as part of your customer loyalty programs?

There is a very classic case that most people remember from Target. Target sent a bunch of prenatal advertisements to this girl and her parents were really curious why that was? Well, it was because in the backend, Target had a loyalty card link with her and they understood based on the timing of when she bought certain things, that it was pretty good indication that she was pregnant or could be pregnant. So technically there was nothing wrong in what they did based on what their T&C’s and user data rights were for that card program, but it was a very fine line of invasion of privacy. These corporations may know more about me than I know about me beforehand. Then what happens when it deals with perhaps the child, which mom and dad opened the card for her, but it was one of those things where you couldn’t really tell in advance.

It was one of those things where I think there may be an oversharing of data that everyone’s worried about, but the question there is, do the benefits outweigh the risks? I think in a perfect world of marketing and offers, discovery and intent can be taken out. So if there was perfect information, ideally marketers or anyone that’s doing a reward scheme or a loyalty scheme should be able to recommend things that you will love before you even know about it and before you even need to know about it, if that makes sense.

If they know that you typically do road trips, come the fall time, well, they may give you something during the spring that you didn’t even know you needed, but they knew that it was coming up. The question is, does that value overtake the sharing of data? And I think that’s where, especially with this newer generation, they’re open to that in a different way versus older generations. It will be interesting to see how that plays out over time. I think technology allows for that fast transaction, but then the actual outcome of that sometimes isn’t exactly what’s wanted, especially in this aggregated scale.

Overall, there’s low risk because you can build all the kind of checks and balances into it. New FinTechs are looking at any way to monetize. Whenever you have a free application, just take Chime, it is brand new, and is very popular. They’ve got about 15 million users, but it’s a free product and they’re not charging any overage fees or they’re charging less. At some point they’re going to have to monetize their data. Now, the question is, are they going to monetize it in a way that their users are familiar or are they actually just going to sell aggregated trends statistics data in an obfuscated way?

So perhaps they look across all of their users and suppose they all really like to buy this hard drive brand. And because of that, maybe I’ll become a group purchasing organization and then I will actually buy those hard drives and then resell with a different margin split, specifically back to all of my customers. Now that might be totally fine, but what if they actually bought a different brand to try to shift those people away from the original brand. Now, depending on who they’re getting that hard drive from, it may or may not be a big issue. So if Walmart doesn’t care whether it’s an Intel hard drive or a Samsung hard drive, not a big deal, but if they have a back-end deal with Intel, where Intel is selling them really cheap ones, because they were the first deal, however they then did a second deal with Samsung.

Now how does time balance affect that obligation? Is that only for net new users? Or is it at some point that they can start shift-sharing between and then go back to those same two vendors and actually ask for deeper discounts. They can actually pit them against each other. I think that’s where technology has the ability to do that at scale, which is awesome. But of course, the outcome may or may not be exactly what the user wanted or what the vendor originally intended for the program to do.

2.3. What is the future of customer loyalty programs in your industry?

I think the big one is there shouldn’t be this active customer intent, I think this whole exercise, where a customer needs to log in first, click these offers and then go about it. It makes sense why you want it to be done that way, because you don’t want to overpay for things, but eventually everything’s going to be baked in real-time contextually. For example, as you’re walking down the road and your GPS tracking crosses geofences, certain apps will just notify you, that you are passing a Dunkin’ Donuts, why don’t you go in and try something? At that point, do you really need to opt in? So, now you went to a Dunkin’ Donuts within that geofence or within a subsequent geofence and that is a much better experience. I think in the future, the customer needing to show intent first, is going to go away.

The second piece, as with Banyan, is that as you get more of these line item, richer things to be able to do offers off of, you can start getting really customized. You can start driving association across different items and test those in a really sophisticated way. For example, if I’m going to sell this ladder, hammer, nail combo or is it going to be a drill, nail, hammer combo. Being able to offer those up in real time dynamically, and then being able to actually rectify that in real time dynamically, because you’re getting access to the actual transaction data with the line item, data, I think is going to really drive basically a 2.0 version of card linked offers. Now legislation obviously may change that, and user behavior might as well, but right now everyone likes saving money and everyone also likes not doing anything to save money.

2.3.1. Do you foresee cross industry partnerships having any role in the future of loyalty programs?

There definitely is. If you take some of the traditional media players, like Nielsens, they’re always looking for ways to expand. I think that there’s lots between retail, marketing, and then also financial services. As you see with more and more financial services being embedded in different places, I think that you’ll start seeing the rise of these custom schemes. So, for example, a DICK’S Sporting Good store will have their own scheme within their app, but then also try to drive cross population to another merchant within their family of brands.

Take a PE group that owns both grocery and retail. If it has marketing that says to shop at XYZ grocery store and then get X, Y, Z off of it, maybe it’s a Whole Foods type grocery store; and they also own some vegan clothing brand. That association doesn’t seem like it’s tied together but if that PE brand is buying those types of entities together, they can stitch those as well in a cross kind of industry loyalty program. So, I think there is a lot of appetite, whether it’s individually company to company or in a private-equity group or with an actual broader industries, travel, marketing, media, it about tying all those together.

2.4. How will sustainability shape the future of your customer loyalty program?

I think if you’ve ever been to a CVS or a Walgreens in the USA, after you buy your items, you typically get a longer receipt than what was actually bought, and it is usually all those coupons in the back. From a sustainability aspect, paper waste is huge, especially around receipts. No one really keeps them. They’re hard to keep track of and there already a lot of receipt tracking apps, like Receipt Hog. And I think as you’re starting to see, the digitalization of that line item data being driven into the card aspect or built into a program, that’s going to drive a lot of sustainability efforts around just the less usage of paper, waste, and then it also allows you to have basically an unlimited shelf life of receipts.

If you think about Amazon’s whole position, they had unlimited shelf space for all these books, as opposed to a physical bookstore. The same thing will also benefit the CVSs and the Walgreens in the world by saying, you don’t have to spend this money on paper anymore, we can just create a digital version of this in your app, linked to that person, and its limitless shelf life. Right now, the question is, will Walgreens and CVS be able to make up as much money that they’re being paid to put those paper receipts out there because oftentimes they don’t actually pay for them. It’s the back-end providers of the Catalina Marketing people that actually pay for the reams of paper and then they bring their coupon network to have a distribution point for those physical paper receipts. I think that model may be tested a bit, but holistically, I think there is a strong sustainability effort around digitizing anything that has to deal with those flimsy pieces of paper that you get, that you immediately throw away.