Competition is heating up among the several companies that provide merchant-funded card-rewards programs to financial institutions seeking loyalty mechanisms and revenue from alternative sources.

The programs, which typically provide credit, debit and prepaid cardholders with discounts or other rewards on purchases made through an issuer’s online-banking service, are gaining in popularity as banks push card use while facing potential reductions in debit card interchange revenue, analysts say.

Indeed, merchant-funded rewards programs from third-party companies are becoming a more-viable option for financial institutions that are “feeling pressure on revenues and profits because of legislation in the card business,” Red Gillen, a senior analyst with Celent LLC, tells PaymentsSource.

Observers expect the Federal Reserve Board to issue new debit card-interchange rules before the end of the year in accordance with the Durbin Amendment within last summer’s financial-reform act. Certain issuers, including JPMorgan Chase & Co., already have announced plans to curtail debit-rewards programs (see story). 

Cardlytics Inc. grabbed attention earlier this year with claims of rapid growth of its merchant-funded rewards program. The transaction-marketing company says more than 30 million consumers are using its programs, and in September it announced a partnership with Birmingham, Ala.-based Regions Financial Corp. (see story).

Cardlytics’ program enables banks’ cardholders to receive cash back on specific merchant-promoted purchases, both national and local, through its online and mobile-banking websites. The Atlanta-based company also recently inked a deal with First National Bank of Omaha (see story). 

Competitor Redwood City, Calif.-based BillShrink Inc. earlier this year launched a merchant-funded rewards program that provides merchandise rewards for consumer purchases through banks’ websites. Unlike Cardlytics, however, BillShrink enables consumers to engage in comparative pricing using information contained in their online banking statements (see story).

And Cartera Commerce Inc., formerly Mall Networks Inc., in November announced an overhaul of its merchant-funded online shopping platform. The new platform, slated to roll out next year, not only will include cash-back statement rewards but also a local couponing element, which may differentiate the company from its competitors.

The Lexington, Mass.-based firm says it is working with three large banks, one of which is Chase, for its RealCash debit-rewards program. Cartera declined to comment on which other financial institutions would participate.

Through an “open-offer architecture” system, Cartera plans to offer financial institutions the ability to offer consumers rewards based on transaction histories along with discount offers and coupons at the point of sale to help local merchants increase sales, Marc Caltabiano, Cartera Commerce vice president of marketing and products, tells PaymentsSource.

Banks may send consumers offers via their online credit or debit card statements, Caltabiano says. Depending on where consumers shop, some may see an offer for 15% cash back at a specific retailer or 3% off their next gas purchases at a gas station they frequent, he adds.

To redeem offers, consumers use their credit, debit or prepaid card either in the store or online. Cartera then applies the discount to their account through a cash credit that appears on their statement, Caltabiano explains.

Cartera provides banks with a system that automatically suggests offers available at local merchants, Caltabiano says. For example, if a customer travels frequently, a bank may offer the consumer a discount at a local luggage store, he notes.

Because Cartera’s program is merchant-funded, most financial institutions will offer statement rewards to their customers for free, Caltabiano says. Financial institutions pay a low-cost implementation fee and receive a share of the merchant’s commission.

To offer coupons at the point of-sale, Cartera is partnering with Valpak Direct Marketing Systems Inc., a Largo, Fla.-based direct-marketing company. Through the partnership, consumers may search for digital coupons within Valpak’s network based on the their location.

Additionally, financial institutions may cobrand merchants’ coupons and send offers to consumers through such social networking sites as Facebook Inc. and Twitter Inc., Caltabiano says.

Cartera has relationships with more than 200 brick-and-mortar merchants, 750 online retailers and more than 10,000 local merchants, including Macy’s Inc., Red Box Automated Retail LLC and Rite Aid Corp., Caltabiano says.

Analysts point to various advantages inherent in merchant-funded rewards programs, but also note a few uncertainties.

The programs often are feasible from a technology standpoint, but many larger banks are “concerned about merchant-funded programs from a branding and reputation standpoint,” Celent’s Gillen says. Some banks are “worried about offering nonbank products and turning into more of a marketing company,” he adds.

If merchant-funded rewards take hold, even with a small number of banks, Gillen warns of a potential tidal wave of interlopers. “I expect that many of the bank’s technology vendors will be looking for alliances with reward-system vendors as a sales channel to reach a wide pool of banks and credit unions,” Gillen adds.

Competition may lead to a marketplace shakeout because the “differentiators are going to depend on banking-vendor alliances and preferred redemption methods,” Gillen says.

  Also unclear is whether banks would be forced to sign exclusivity deals with specific merchant-funded rewards programs. Although it is “conceivably possible that banks may have more than one reward-system vendor in place, from an implementation perspective this would not be ideal,” Gillen notes.

Banks also will have to rely on the consumer to participate, Ron Shevlin, an analyst for Boston-based Aite Group LLC, tells PaymentsSource. So it would come down to how often consumers look at their statements in search of deals, he says.

Banks will need to ensure the program is efficient and “drive the opportunity,” Shevlin adds.

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