CO-OP Financial Services is offering a card-based local merchant rewards program that encourages credit union members to shop within a small area.

"Credit unions are focused on community, so this fits in with their mission," says Michelle Thornton, senior product manager for CO-OP Financial Services. "The credit union is a trusted entity, that's why we think this will resonate with members."

CO-OP manages the program, called "Shop Main Street," in partnership with RewardsNow Inc., a rewards program manager. The companies work together to enroll credit unions.

When credit union members use their debit or credit card at a participating merchant, they earn bonus points in the credit union's loyalty program. Members can then redeem the points for things such as gift cards for local merchants.

The technology and staff resources required to build and manage a footprint-wide merchant funded rewards program are prohibitive for most credit unions, Thornton says.

The card accounts, transactions and merchants need to be catalogued and tracked—and there's also work required to maintain a website and mobile app for credit union members to use to locate participating merchants.

"There's a lot of work to do to manage all of that…by going with us the credit union can still brand the program, so from the members' perspective, it's still being offered by their own credit union," Thornton says. "The big thing we have is the infrastructure is already built to help the credit unions help the merchants."

Shop Main Street is free for credit unions that are already members of CO-OP's existing rewards program. CO-OP provides signage for merchants to display at the point of sale, and there is also a website that CO-OP hosts that allows consumers to search for merchants within a specified radius.

Credit union members participating in Shop Main Street receive a welcome email, program activity confirmations and marketing messages highlighting special offers from the network of merchants. Members can also view their Shop Main Street activity at the credit union's loyalty program website. A Shop Main Street mobile app is in development, and should be released this year, Thornton says.

Similar community-focused merchant reward programs have existed for some time, though with mixed results. Bling Nation, which provided a mobile payment system to local banks and merchants, wound down its service 2011 because merchants resisted adding on its loyalty program.

More recent attempts at localized rewards include a program from rewards programs include fisoc's partnership with Facebook to deliver Buzz Points, a debit rewards program that combines offers with Facebook content.

Daily deal websites, such as Groupon or LivingSocial, initially focused on local, brick-and-mortar merchants before expanding offers to online and larger retailers, says Aleia Van Dyke, an analyst at Javelin Strategy & Research. "Bank-provided rewards programs have been transformed and many now partner with third-party rewards vendors that offer local rewards from small merchants."

In the face of regulatory and revenue pressure, the traditional rewards model has been restructured in favor of programs that are better suited to reducing costs and driving consumer spend, Van Dyke says.

"Using a financial institution's transactional data enables merchants, via their relationships with third-party rewards vendors, to precisely segment consumer populations based on demographics, location, spend preferences and retail history so that offers are presented to consumers via a targeted and highly refined marketing tool," Van Dyke says. 

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