How Acquirers Can Leverage New High-Tech Marketing Tools

Banks that have both issuing and merchant-acquiring operations might generate more charge volume and make more money if they started taking advantage of new opportunities presented by online group-couponing companies, merchant-funded rewards programs, and mobile-phone-based marketers to help their merchant clients increase sales, Aite Group LLC says in a new report.

Group-coupon companies, exemplified by Groupon Inc., are new on the scene but rapidly finding favor among consumers, and mobile-marketing programs are just revving up too. Merchant-funded rewards programs are a bit older, but merchant acquirers haven’t quite figured out how to capitalize on the changing market, according to Adil Moussa, an Aite analyst and author of “Merchant-Acquiring Opportunities: Focusing on the Merchant’s Clients.”

Today, if a bank owns both a credit card and merchant-acquiring operation, volume-generating ventures typically are linked with the issuing side and new possibilities using the bank’s own merchant clients on the acquiring side are overlooked, according to Moussa. “Both sides should talk to each other and they should collaborate; I don’t know anybody who does it at all,” he tells Digital Transactions News.

For example, issuers usually arrange merchant-funded rewards programs with firms such as Vesdia, Affinity Solutions, Cardlytics, LoyaltyIQ, and Cartera, Moussa says. If acquirers in their efforts to retain merchants began offering points or rewards, margins would suffer, he says. The result is that acquirers narrowly focus mostly on processing and efficiency.

Moussa adds that he’s aware of no acquirer that is working with the likes of Internet-based couponing firms like Groupon, LivingSocial, Dealster, DealOn, SocialBuy, and BuyWithMe. Groupon currently is the hottest of this young bunch, with some observers speculating that Google Inc. might make a multibillion-dollar buyout offer for the Chicago-based firm, which operates in 91 cities. Groupon, which typically offers half off on a daily deal with a local merchant, takes a 25% cut.

But opportunities exist for acquirers with these group-couponing companies, according to Aite. For example, an acquirer could bring a portfolio of merchants to such a firm, thereby reducing the online company’s expenses while at the same time generating fee revenue for its effort. A similar situation exists with marketers such as Trumpia, which sends text-message offers to consumers from merchants. In a typical Trumpia deal, the merchant offers $10 worth of goods for $5. Of that revenue, the merchant gets $4.50 and Trumpia 50 cents. “Right now what happens is that people like Trumpia and others have to pay a commission to their sales force,” says Moussa. But if the acquirer recruited the merchants, “the acquirer could make that [commission].”

Acquirers also could help banks squeeze more juice out of merchant-funded rewards programs. Only 22% of U.S. consumers that receive offers through such rewards programs actually take advantage of them, says Moussa, who bases that estimate on information he received from a number of program managers. Banks, as issuers, receive interchange through charge volume generated by the programs while the acquiring side typically generates much less revenue. But the acquiring side could get in on the action by developing internal rewards programs from its own merchant portfolio, according to Moussa.

If the programs are designed correctly, merchants could make discounted offers to consumers and still be willing to pay a monthly or annual fee to the acquirer. Moussa estimates that the top 10 banks potentially could make nearly $130 million in new annual revenues based on the size of their cardholder and merchant portfolios, 10% cardholder participation, and $100 in spending per cardholder, and 10% of their active merchants paying a $29 monthly fee to participate.

But acquirers, if they do want to get into the merchant-funded rewards game at all, are more likely to bring in a vendor that will take care of the details rather than design their own programs, according to Moussa. An example comes from JPMorgan Chase & Co.’s Chase Paymentech acquiring subsidiary, which recently paired up with LoyaltyIQ to create a program. While the deal could boost the acquiring unit, it does not engage Chase’s big cardholder portfolio, Aite says.

“If somebody doesn’t do it for them, they [acquirers] just choose to concentrate on becoming more efficient,” Moussa says. There’s nothing wrong with efficiency, of course, but an exclusive focus on it might mean missing profitable new business.