A Startup Builds on Cap One’s Decoupled Debit Program to Run Rewards

A company founded by the man behind Capital One Financial Corp.'s decoupled debit program is introducing what it terms a “next-generation debit rewards” system that allows banks to provide cost-free rewards to cardholders. Under the system developed by Atlanta-based Cardlytics, merchants fund rewards that will be offered to banks' online-banking customers when they log in to review their bank statements. The Cardlytics system uses the customer's debit card as a form of “virtual” coupon which can be used online or in a store. “We think of banks as our channel partners,” says Scott Grimes, founder of Cardlytics. “The advertisers, the merchants, are the ones who fund the system in essence. They pay the incentives, and they pay us a fee for placing the ad to consumers. ” The Cardlytics system uses proprietary technology that targets merchant offers based on the consumer's actual transactions. “It allows us to bring consumers offers from merchants based on how they shop every day,” Grimes says. The technology also tracks whether consumers respond to the offers, allowing merchants to create more relevant rewards or to target different groups. For example, McDonald's might target offers to bank customers who spend at least $20 per month at Burger King but have not eaten at a McDonald's for at least three months. The offer could be for a discounted meal at McDonald's. “We can say to McDonald's, we presented a million offers and 73,006 people responded,” Grimes says. McDonald's can see how the offers affected sales at its stores in comparison to sales at Burger King. The Cardlytics system is comprised of two pieces of software, an offer-management system and order-placement system. The offer-management system is a tool in which advertisers or merchants create the campaigns and includes segmentation, offers, and reporting tools. Once an offer is completed, it is pushed into Cardlytics' offer-placement system within the bank's data center. The OPS consists of software downloaded onto the bank's servers that matches consumer transactions to the offers. When consumers log on to their online bank accounts, the OPS serves up offers as part of their account- history pages, either under designated transactions or in white space. Once a customer clicks on an offer, “we turn their debit card into a virtual coupon,” Grimes says. “All they need to do is go to Macy's, use their debit card, make a purchase, and they automatically get the reward.” No information on individual account holders leaves the bank, Grimes says. “We don't have knowledge of individual consumers,” he says. “The only data that leaves the OPS is segment-level performance data. And the consumer data never leaves the security of the bank.” Consumers that complete qualified transactions will find a thank-you message from the merchant the next time they log into their online bank account. The Cardlytics system also can be used with credit and prepaid cards. Banks benefit from Cardlytics because they can offer “very valuable rewards to consumers that are completely independent of interchange,” Grimes says. The experiences of Grimes and Cardlytics president Lynn Laube with the launch of decoupled debit at Capital One led to the development of the Cardlytics product, Grimes says. “What we found is that given rich rewards to consumers … people would quickly and very easily set down one debit card and start using the other.” After Grimes left Cap One, the bank discontinued merchant pilots it had been conducting for decoupled debit and ultimately shelved the program. Cardlytics expects to go live with a Top 10 credit/debit card bank within a couple of weeks, Grimes says. The company also has signed two other banks for the program and expects to have 6 or more coming online during the fourth quarter.