This story appears in the January 2009 issue of Cards&Payments.

With retailers getting hit hard by the slumping economy and consumer confidence falling ever lower, it may not be a good time to introduce new technology at the point of sale. But backers of mobile couponing hope the tough times will encourage more merchants to accept the digital discounts and other offers as a way to attract consumers who are increasingly stingy with their money.

"Basically, consumers are looking for more and more ways to save and maximize their dollars," says Dan Kihanya, vice president of consumer marketing for Cellfire Inc., the largest vendor of mobile coupons in the United States. "The phone is unique, whether at home or in the office or car."

Mobile couponing was a promising technology even before the economic crisis hit last fall. Just about every consumer carries a mobile phone with which they could download or receive coupons anywhere, even those forwarded by friends. Of the roughly 300 billion paper coupons distributed every year, including those printed on home computers, consumers redeem fewer than 1%, according to estimates. But users of mobile coupons usually enroll or "opt in" to receive the offers. Redemption rates, therefore, are naturally much higher, 10% to 15% or more.

It makes a lot more sense to market to a group of people already interested in a coupon offering, as opposed to a scattergun or vanilla approach, Howard Wilcox, senior analyst for United Kingdom-based Juniper Research, tells Cards&Payments. Most paper coupons consumers receive are for products they do not use.

And merchants or product brands can target consumers more readily based on demographic or buying patterns compared with paper coupons and deliver the discounts when consumers are at the point of sale, their phones at the ready. 

Wilcox predicts 200 million subscribers will be using mobile coupons on their handsets by 2013. Today, however, the mobile-couponing market remains small. Many more merchants must sign on for it to grow. They are hesitant, however, Wilcox says.

Part of their concern is the range of technology options available to redeem the digital coupons. That includes conventional and two-dimensional bar codes that often require merchants to install new infrared scanners or to train cashiers to type in to the register up to 18 digits read off subscribers' phone screens.

On the receiving end, consumers often have to punch in short SMS text codes on their phone keypads to request coupons by text or to download applications to their handsets. They then may have to scroll through menus in these applications or through mobile browser pages to retrieve the coupons.

"The difficulty we're having is matching the technology with the consumer take-up," says Stefan Magnusson, managing director of The Light Agency Ltd., a UK-based mobile-coupon service provider. "While there is lots of excellent technology to deliver mobile coupons, some of them are difficult to understand for laymen, and some of them require some level of integration with the retailer's payment system, which imposes a barrier to entry."

The company completed what it considered a successful trial at the 35-outlet Jacksons convenience store chain in 2007 in the UK. It was one of the first mobile-couponing projects in Europe of its size. The vendor's "Shop Scan Save" system increased revenue by 4.7% and doubled average spend to £10.42 (US$15.02) at the small chain.

The Light Agency's system is a good example of the type of customized offers merchants could use to try to attract customers with mobile coupons.

After signing up for the Shop Scan Save couponing club, Jackson's customers shopping for, say, washing powder (laundry detergent) could punch in a short numerical SMS code and then type in "washing powder" or the name of a particular detergent brand to receive an offer by text message within seconds, if one is available.

At checkout, cashiers would scan a bar code on the users' phone screens. The point-of-sale register would connect to the vendor's servers. It would match the coupons members loaded into their accounts with the items in their shopping baskets and send messages back to registers to deduct discounts.

The system later could provide consumers regular offers based on past purchases.

But J Sainbury PLC, which acquired Jacksons  in 2004 and is one of the UK's largest supermarket chains, shelved the program. Among other things, the chain was put off by the fact that to expand the scheme, it likely would have had to replace infrared scanners at the point of sale of many of its other stores. Units that read UPC product bar codes often cannot read bar codes on phone screens. And Sainsbury's would have to integrate the system into its back-end payment servers.

The chain already had a loyalty card program in place, Nectar, and Shop Scan Save would not have been a priority going forward, The Light Agency's Magnusson says. "They had a lot of other issues to resolve at that time," he says.

PayPoint PLC, however, has the proper scanners already installed at the more than 20,000 small chains and independent retail outlets throughout the UK where it has terminals. The UK-based payment-service provider was keen to offer the mobile loyalty scheme with the bill-payment, mobile phone top-ups and transit tickets it already sells at the outlets. PayPoint gets a commission for each coupon it redeems on products its member merchants ring up.

Peter Brooker, a PayPoint spokesperson, says the small merchants it serves do not need to integrate the mobile-couponing program into its network because PayPoint has done it for them. The retailers expect to ring up higher sales by accepting the coupons, although Brooker declined to say whether they have seen increased volume since PayPoint started supporting the service in 2007.

But even with the proper scanners, reading bar codes on mobile screens is less reliable than scanning printed bar codes. The bar codes on the phone screens may display differently depending on the handset model. And cashiers have to hold the scanners at the proper angle. Otherwise, they have to punch in the numbers on the bar code manually.

"I don't think it's been a problem," Brooker says. "I just think it takes a knack."

Avoiding Clumsy Cashiers
Competing UK couponing vendor Eagle Eye Solutions believes bar codes will not fly because most retailers would need to upgrade to higher-end scanners for mobile couponing.

That is one reason his company developed a way for customers to enter a coupon code they have received in their text-message inbox into the PIN pad of EMV payment terminals, called chip-and-PIN in the UK. This also avoids the possibility a customer will hand his phone to a cashier to scan or enter a voucher code, only to see the cashier drop and break it.

Eagle Eye also is the first to offer mobile couponing via interactive television. A campaign that UK furniture chain Harveys launched last year giving viewers 15% off store merchandise yielded 30% redemption rates, says Steven Rothwell, Eagle Eye director. He declined to release other results.

Viewers used their TV remote controls to switch to a special screen on their satellite set-top boxes during Harveys-sponsored shows. There they found a five-digit short code they typed into their phones followed by the word "voucher." They received a text coupon in return, which they brought to the store.

With the expected eventual arrival of Near Field Communication technology, which embeds contactless chips in mobile phones, customers will be able to touch their phones to posters or other promotional displays on the street or upon entering a store to automatically download coupons, say backers. The consumers then could tap the phones on the point-of-sale terminal to redeem the vouchers and use the same contactless technology to pay for the purchase, perhaps as part of an integrated payment and loyalty application.

Still, technology is not the main problem holding mobile couponing back, says Rothwell.

"The biggest challenge is to get retailer acceptance," he says. "The technology is just a point of resistance."

Sparse Coverage
Trying to buck that trend is Cellfire Inc., which bills itself as the only mobile-couponing company in the United States with a nationwide reach.

The company has raised an impressive $26 million in venture capital, including $12 million it announced early last year in a third round.

The 4-year-old Silicon Valley-based company says it has enrolled more than 1.4 million consumers and delivered more than 8 million mobile coupons to them since 2005. Cellfire receives a fee every time it delivers a coupon at the request of a customer, not when the customer redeems it.

So far, the company has signed up 15 supermarket chains to accept its mobile coupons. Most are small or medium-sized chains, with the exception of the Kroger Co., one of the nation's largest, which agreed to a rollout late last year to its more than 2,000 stores. The rest of the retailers supporting Cellfire mainly are second-tier fast-food chains. 1-800-Flowers also accepts the Cellfire vouchers but does not have any actual outlets.

In all, Cellfire's retail partners have about 10,000 locations. That is progress, but critics point out that an American consumer searching for Cellfire deals by ZIP code often comes up with meager results.

"We're growing every day; we have very good performance," responds Kihanya. "There's nobody even close in the mobile world of coverage in the United States."

The company tries to keep redemption of the mobile coupons simple. It has eschewed bar codes because of the low-end scanners installed in most American supermarkets.

Instead, in outlets other than supermarkets, clerks type a redemption code into the register. Because customers often have multiple items for which they can claim discounts at supermarkets, Cellfire usually links the coupons the customers have loaded into their accounts to loyalty cards the stores issue, such as the Kroger Plus Card.

Merchants do not have to add hardware, and they process the digital vouchers just as they would paper coupons, Kihanya says. But unlike paper coupons, they do not have to haul bags of coupons to redemption centers.

Cellfire, however, still does little customization of coupons based on customer demographics or profiles and does not target consumers when they are in the store.
This is what is missing from most mobile-couponing schemes in North America and Europe, say observers.

A Paper Mentality
"You've got to offer something more than you can offer with paper," says Einar Rosenberg, chief technology officer for U.S.-based Narian Technologies. "One, you hit them when they're in the store when they're most likely to buy. Two, you hit them when they ask you to hit them. And three, you give coupons that are specific to them with some motivation to buy."

When NFC technology arrives, a customer, for example, might tap his NFC phone on a chip embedded in a product display at the shelf that automatically would open a mobile Internet connection through which the consumer could play a video with more information on the product. The manufacturer or retailer could follow up with a text message, offering to knock 10% off the price if the customer buys within the next 30 minutes, says Rosenberg.

This would be more cumbersome with technologies already on the market, but NFC phones are not expected to hit stores in any significant way until at least next year.

Tapping For McBurgers
As usual, Japan is ahead in rolling out new mobile services. Mobile operators there for years have offered subscribers couponing using 2D bar codes that can store more data and be scanned more reliably than conventional bar codes.

Led by NTT DoCoMo, Japan's largest mobile-telecommunication company, the operators have put contactless wallet phones–similar to NFC–in the pockets of nearly half of Japan's mobile-network subscribers. DoCoMo has had limited success promoting its payment application on the wallet phones. But it hopes a mobile-couponing service it launched in December as part of a joint venture with fast-food chain McDonald's Holdings Co. (Japan) will encourage more subscribers to tap their phones to pay.

The fast-food chain sends customers discounts, usually by mobile e-mail, for their favorite menu items: for example, 20% off Big Macs or Teriyaki McBurgers for their next visit based on what they bought during previous visits.

If the customers have phones with satellite positioning, they might receive the vouchers when they are walking by an outlet. And customers can tap their phones against terminals in each of Japan's 4,000 McDonald's restaurants to download the customized coupons directly to their handsets.

They pay for their meals and redeem the coupons with tap of the phones at the point of sale with the same contactless terminals, which support DoCoMo's iD payment application. The purchase creates more profiles on customers that the telco and fast-food chain will use to entice the customers to come back.

Consumers agree to the monitoring of buying patterns when they sign up for the club on the Internet on their home computers, Hiroshi Tamano, head of  DoCoMo's European branch, tells Cards&Payments. Ten million consumers have joined McDonald's Japan's conventional mobile-couponing club, the chain said last year.

Tamano admits many often consider Japan the "Galapagos Islands" for mobile innovation in that what works there often does not translate overseas.

But backers of mobile couponing and payment already are increasing the sophistication of their offers, just as Japan has done.

Couponing With Android
In December, Visa Inc. launched its mobile platform application on the G1 phone from operator T-Mobile in the U.S., the first handset supporting Google Inc.'s Android mobile operating system.

Besides credit or debit account updates and payment alerts, consumers who download the Visa application can get targeted offers sent to their phones, including those based on past buying activity. And the Google Maps application on the phones can help consumers find stores to redeem the coupons, as well as ATMs. Later, satellite positioning or GPS could direct them to retail outlets.

But only 14 relatively little-known "national" merchants have signed on for the launch, half of them e-commerce or phone-order companies without physical stores.

Just as it plans to open the service to cardholders of other issuers after a roughly four-month period of exclusivity with JPMorgan Chase & Co. cardholders, Visa expects more mobile operators to stock Android phones that could host this version of the Visa mobile application.

And that could mean more merchants will follow with mobile-coupon offers, especially those that want to target younger consumers looking for deals.

The ever-deepening recession may cause consumers to put off their purchases of new Android or other smart phones that support more-sophisticated mobile-banking, payment and couponing applications.

But backers of the concept, such as Tim Attinger, Visa head of global product innovation, noted recently the card scheme grew through economic downturns in the past, albeit not as severe as the current one.

Visa is counting on a wider rollout of its mobile application. "You have to innovate because that lays the foundation for future growth," he says.

Merchants, many of which are fighting for survival, may not consider introducing mobile coupons a priority. Or they may decide the time is right to try to reduce the size of the bags of paper coupons they ship to redemption centers.  CP

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