The Age of Offers

 

Startups and established companies alike are betting that consumers obsessed with daily deals could jump-start mobile payments. But it may take a while for that bet to pay off.

 

By Jane Adler

 

 

 

Rewards redemption with a mobile device at the point of sale isn’t a reality quite yet. But companies have their sights set on that goal, hoping to snag mobile customers and ring up more sales.

 

The advent of the smart phone has created a huge opportunity to link specific offers to a consumer’s location and shopping preferences, especially when tied to payment methods. So it’s not surprising that discounts and rewards are being used to lure shoppers to merchant locations.

 

In April, for example, financial-service technology company Fiserv Inc. partnered with transaction-marketing company Cardlytics Corp. to deliver merchant-funded rewards tailored to the customer that can be accessed online or through a mobile device.

 

At the same time, new entrants are shaking up the market. Google Inc. in May launched its mobile wallet bundled with its coupon service Google Offers. Google pushed further into promotions-linked payments in August with the acquisition of Dealmap, a company that aggregates local deals. Google is expected to tie Dealmap into its Google Offers service.

 

In late July, a partnership was announced between four big credit card networks—Visa Inc., MasterCard Inc., American Express Co., and Discover Financial Services—and Isis, the mobile-commerce venture of AT&T Mobility, T-Mobile USA, and Verizon Wireless. The venture will support a mobile-payments system that includes offers and discounts tailored to the consumer’s location and preferences.

 

Daily-deal giant Groupon has Groupon Now, a service that sends coupons via the phone to consumers near the merchant. Living Social, another big daily-deal site, announced a partnership in June with rewards company Next Jump. Social-networking sites such as Facebook and Twitter want in on coupons and rewards too.

 

“A whole lot of players are stirring the pot,” says Peggy Olson, principal at payments consulting firm Strategic Marketing, in Phoenix. “They’re exploring technologies and ways to bring mobile payments and offers to the masses.”

 

Cloudy Revenue Model

 

As smart phones rapidly replace feature phones, the potential to reach consumers at just the right place and at just the right time, with just the right offer, has never been higher. The total value of global mobile transactions will increase from $162 billion in 2010 to $984 billion in 2014, according to a recent report by Yankee Group Research Inc., Boston. Meanwhile, the number of active mobile-coupon users is expected to grow from 2.7 million in 2010 to 25 million in 2014.

 

Still, much work remains to be done to realize that potential. The mobile-payments market is still in its infancy, industry observers say. Many payments providers are just now starting to introduce mobile solutions. It could be years before couponing and discounts via mobile are routine at the point of sale.

 

No standard mobile-payments technology has emerged yet, though near field communication (NFC) is gaining steam. An interactive, short-range technology, NFC allows mobile users to tap their phone on a point-of-sale reader to make a payment or receive an offer. ABI Research, Oyster Bay, N.Y., estimates that worldwide shipments of NFC-enabled smart phones will total 66 million units in 2012.

 

But merchants need a special reader for NFC payments. And research firm Aite Group LLC estimates there are currently fewer than 200,000 NFC readers in the U.S.

 

Also, consumers don’t necessarily see the advantage of giving up their cards in favor of tapping a phone. “I understand why some say NFC point-of-sale payments is a solution in search of a problem,” says Calvin Grimes, product manager, mobile solutions at Fiserv, based at the company’s office in Norcross, Ga.

 

Still, merchants and payments companies alike are aware that a growing number of consumers are comfortable with smart phones and will expect to pay by phone. “Young people will want this technology,” says consultant Olson.

 

At the same time, the revenue model for discount offers via mobile devices remains somewhat unclear. Companies are experimenting with different approaches. But, the Yankee Group report says, fewer than 10% of consumer respondents would be willing to pay extra for transaction-related services such as mobile banking, mobile coupons, and mobile payments.

 

In a statement released by Yankee Group, senior analyst Nick Holland says banks, mobile operators, card networks, and retailers will need to come up with more creative revenue schemes than per-transaction fees.

 

‘ISOs Are Excited’

 

Despite the technical challenges, loyalty programs, rewards, and couponing are expected to boost the mobile-commerce market. Discounts and offers available through a smart phone should encourage consumers to make the transition to mobile commerce, experts say. “The sizzle of mobile commerce is the couponing,” says Fiserv’s Grimes.

 

Mobile-payments consultant Todd Ablowitz agrees. Consumers need a reason to switch to mobile payments. And until every retailer has a way to accept mobile payments, consumers will be forced to carry cards any way.

 

“There has to be something else to spur consumers,” notes Ablowitz, president at Double Diamond Group, Centennial, Colo. That’s where the mobile offer or discount comes into play, providing a value that the traditional credit or debit card cannot. “The Holy Grail is redemption at the point of sale,” says Ablowitz.

 

Startups and established firms alike are in hot pursuit of that Holy Grail. Cleveland-based SparkBase Inc. recently launched Paycloud, a mobile-wallet application available for the iPhone and Android operating systems that allows smart-phone users to store and manage loyalty cards.

 

Paycloud uses a technology, developed by Sunnyvale, Calif.-based tech startup Naratte Inc., that completes transactions with ultrasonic sounds. Merchants must purchase a sensor for about $50 that plugs into the back of the point-of-sale system.

 

Customers sign up for the service by downloading the application and then clicking on a merchant icon to enroll. Users wave their phone over the sensor to redeem rewards. “It’s a neat way to conduct a transaction,” says Doug Hardman, chief executive at SparkBase, whose technology manages gift card and loyalty programs.

 

SparkBase tested Paycloud in the Cleveland area. The service is now being launched at 35 Chicago merchants that are all located within a six-mile radius. The company works with about 130 independent sales organizations (ISOs) and resellers that are making the Paycloud service available to their merchants.

 

Hardman expects to roll out the service city by city and to be operating in 20 to 30 cities by the end of the year. “The ISOs are excited,” he says.

 

Retailers want loyalty programs, he adds, but they don’t like the current system where they must purchase cards, key in customer information, and then also pay a transaction fee. Hardman also expects to have a deal soon with one or several of the big daily-deal platforms, such as Groupon and Living Social. “We see that as a natural extension of our business,” he says.

 

Paycloud’s revenue model relies on the resellers and ISOs that sell the service. Paycloud, which in May won the Technology Innovation Award at the 2011 Electronic Transactions Association meeting, has flat-rate pricing of $6 a month per merchant on top of the average monthly fee of about $10 for non-Paycloud services. Paycloud does not take a fee on transactions. Hardman imagines that some ISOs will give the program away to merchants as a retention strategy.

 

Extending the Ad Business

 

Google’s approach could cut the ISO out of the equation, industry observers say. Google’s electronic wallet relies on NFC technology and is available as an application for the Sprint Nexus Android smart phone. To facilitate payments, Google has teamed with Citigroup Inc.’s Citibank unit, MasterCard, and First Data.

 

The Google wallet is being tested now with a formal launch expected by the end of the summer. “We are bringing together payments, offers, and loyalty on an open platform,” says Marc Freed-Finnegan, product lead for Google Wallet, San Francisco.

 

Google has taken on the heavy lifting of lining up the merchants. Reports say Google is subsidizing the cost of NFC-enabled terminals for big retail chains. But it has also been reported that Google expects banks and the card networks to chip in too.

 

Google won’t take a fee on transactions. Instead, the wallet comes with Google Offers, a deal-of-the-day service. Users can clip offers and save them on the wallet for later use. Merchants pay Google to distribute offers through its network. “We are extending our advertising business,” says Freed-Finnegan. “We are helping to drive traffic to merchants.”

 

Some ISOs aren’t risking getting cut out. They’re getting in on the act themselves. Merchant-services company ProPay Inc. is still evaluating pricing models for its ProPay Link product, originally named Zumogo, an application merchants and consumers can access through a smart phone or tablet device.

 

The system runs through a Web-based browser so merchants don’t need new equipment—a plus that may help speed adoption.

 

Consumers download a free application, but the merchant will pay some kind of fee for the service which includes security features. ProPay is also considering some source of third-party revenue, such as advertising or sponsorships, to subsidize merchant fees. “We are looking at a variety of things,” says Heather Mark, senior vice president of market strategy at ProPay, Lehi, Utah.

 

Merchants can use ProPay Link to send out real-time discounts. A restaurant, for example, with open tables can relay a special offer only to consumers who may be strolling nearby. Consumers see the offer on their phone.

 

ProPay conducted a test of ProPay Link in January. It is currently testing the system with a direct-sales organization with 30,000 agents. “We are looking at a full launch by the end of this quarter,” says Mark.

 

‘The $64,000 Question’

 

Rewards company Street Savings Inc. offers text-messaging marketing services for merchants. The services are sold through ISOs, which determine the pricing.

 

The service has a so-called set-and-forget feature. Customers who have not been to a merchant in a designated period of time receive a text message with a special offer. The offer is linked to the customer’s phone number. It is redeemed at the point of sale by the clerk who keys in the phone number.

 

For now, Street Savings is focused on text messaging, instead of developing an application. “Every phone can receive a text message,” says Pal Flagg, chief operating officer at Street Savings, Orange, Calif. “You do not want to filter out two-thirds of your customers because they don’t own a smart phone.”

 

Companies with mobile applications admit it’s a challenge to get consumers to download their app. Thousands of apps are available, creating a lot of competition for the consumer’s attention. “Whether or not the consumer uses the app is the $64,000 question,” notes Mark at ProPay.

 

SparkBase has a public-relations campaign under way to explain its Paycloud application. A Paycloud street team introduces consumers to the application in cities where it is being rolled out. Merchants can add a link to the app on their Facebook page. “We think the app will be viral in areas where merchants are concentrated,” says Hardman.

 

Further Experimentation

 

Close, specialized relationships can also help move consumers to download and use apps. Access Development, a rewards network with about 250,000 merchant locations and about 75,000 merchants offering mobile coupons, introduced a mobile application a few months ago. Access provides rewards to organizations such as teacher’s associations, so the app, My Deals Mobile, is currently only available to certain groups. But it has already been downloaded between 5,000 and 7,000 times.

 

The application displays offers in the surrounding area, filters offers by category, and tracks savings. Results are displayed in a map format and the app calculates the user’s distance from a merchant. The app also provides directions to the store, offers a link to call the merchant, and displays the coupon on the phone for redemption at the store.

 

My Deals Mobile is being marketed by clients through mailings, e-mails, and fliers. “We have relationships with the groups we serve,” says Andrew Graft, vice president of corporate marketing at Access Development in Salt Lake City.

 

When will mobile coupons redeemable at the point of sale be routine? Experts agree the market will undergo further experimentation and development. It’s hard to predict what alliances will be struck among the big players, especially now that companies like Groupon and Google are quickly changing the mobile landscape.

 

Alliances—or “co-opetition” as one payments executive puts it—will be key as smaller players without financial resources face the prospect of being left behind. “It will take time to sort out the preferred methods and technologies for merchants and consumers to determine the winners and losers,” says consultant Olson. “It won’t happen overnight.”