Bankers should listen to Peter Kight. If anyone knows which way the winds of bank technology are blowing, it might be him.
Banks are in danger of having their lunch eaten by non-bank purveyors of new technology like the digital wallet, but there are significant opportunities as well, says Kight, the founder and former chief executive of CheckFree.
One of the best opportunities is merchant-funded rewards, says Kight, who is now co-chairman and managing partner of the private-equity firm Comvest Group.
Through Comvest, of West Palm Beach, Kight recently led a group of investors who put $12.2 million in Cartera, the merchant-funded rewards company in Lexington, Mass. (see story)
Kight previously invested in the partnership marketing company Vesdia, which Cartera acquired in 2011.
Cartera, as well as the merchant-funded rewards companies it competes with (such as Cardlytics and Truaxis), offers banks an opportunity to create revenue paid for by merchant offers and discounts. This service is particularly important in a post-Durbin regulatory environment that is squeezing bank fees, experts say.
But what intrigues Kight most about merchant-funded rewards is that it has the same three constituent parts as CheckFree. Those three parts are the bank, the merchant and the consumer.
"The really big hurdle we had [with CheckFree] among all the constituents was trying to convince the consumer to try online banking and payments, because the fact is that paper checks worked," Kight says.
With merchant-funded rewards, the hurdle is convincing consumers to use the coupons and discounts linked to their card accounts. In Cartera's case, merchants racked up about $1 billion in sales through offers in 2011, Cartera says.
"We are trying to give rewards away to consumers, and too many of them don't know that those rewards are sitting on their cards," Kight says.
CheckFree, which Kight founded in the 1980s, evolved into a disruptive technology provider in the 1990s that threatened the banks and their own goals for digital banking and electronic bill payment. CheckFree ultimately handled half of all electronic check payments by about 2005. Fiserv acquired CheckFree in 2007.
Merchant rewards are currently offered through bank debit or credit card accounts, but banks can still be disintermediated by non-banks with plans for digital wallets, experts say.
"What the final form of the digital wallet will be, we don't know, but there is no reason Cartera or Cardlytics or Truaxis could not go directly to them," says Nicole Sturgill, a research director in the retail banking and cards practice at CEB TowerGroup.
PayPal, a unit of eBay, is developing local, geo-targeted offers for customers that use its wallet. Similarly, Google plans to bring to bear its dominant role in online search and advertising for targeted offers in its own wallet. And American Express, also a non-bank card company, could easily link its Serve wallet to merchant funded rewards programs as well, Sturgill says.
"I prefer to spend my time working with financial institutions, but you can't not pay attention to the fact that there are huge players who have tremendous consumer brands that want the data off the payment transactions; it is tremendously valuable to the non-bank digital services providers," he says.
Other investors say Cartera's scale interested them. It reaches 150 million consumers and 65 million card accounts, works with three of the top four banks, and all five of the top airline rewards programs linked to credit cards.
(Cardlytics, of Atlanta, says it works with 300 financial institutions and 200 million consumers.)
"Banks are massive networks and that platform is their asset, and [a merchant-funded rewards program] allows them to leverage their networks to market to their consumers and then create value for everyone in the equation," Jeff Bussgang, a general partner at Flybridge Capital, says.
In addition to Flybridge, the other companies contributing to Cartera's funding round were Dace Ventures, LBO Enterprises, and Venture Capital Fund of New England.
Cartera's local merchant strategy is also critical, Kight says. In March, Cartera launched OfferLink Local, an attempt to get local businesses to participate in the rewards program. It currently has about 2,000 local merchants signed up.
Cartera also plans to tap thousands more of the 5.5 million small businesses that accept credit and debit cards, says Tom Beecher, president and chief executive of Cartera. It plans to do this through the development of geo-targeted offers sent to customer smartphones.
"There has been a rapid upswell in young-consumer interest in daily-deal discounting, and it is has driven attention to a lot of small merchants," Kight says.
And in an economic environment where politicians and business organizations have criticized banks for not lending adequately to small businesses, a local rewards strategy gives small businesses an opportunity to associate themselves with large card brands, Kight says.
That rings true for Chris Borducci, the chief operating officer for Capricorn Limo, a 150-employee luxury transportation service in Long Island City, New York.
Capricorn has been working with Cartera for about seven months, and since that time Capricorn has seen an increase in new customers of between 5% and 9% each month. Three quarters of them become repeat customers, Borducci says.
That contrasts with the primarily one-time customers who show up from daily-deal sites, where discounts tend to cost the company far more, Borducci says. Cartera's affiliation with national card brands gives it more important exposure, he says.
"We are a small business and it is hard [for customers] to know about us, and this will bring us the exposure to the type of clients we want," Borducci says.
Merchant-funded rewards programs give banks the opportunity to digitally market transaction information that they naturally produce, Kight says. That's particularly important as the stampede toward mobile banking and digital payments continues to gather force.
"We are at in inflection point, and the consumer marketplace is accelerating toward a digitally-managed information society and the last consumers willing to deal with paper and manual processing are going away," Kight says.