Gaining access to prepaid customers
ccess Rewards, a division of Access Development, recently expanded its merchant funded rewards program to include prepaid card issuers. Now, merchants who participate in merchant networks - businesses that align themselves with other businesses to expand customer bases - can attract prepaid card users to their stores.
The hook to lure and retain customers is what Access Development calls an "unprecedented" 20 percent cash back program. Kelly Passey, Executive Vice President at Access Development, said when customers shop at merchants who are part of Access Rewards' networks, they can receive up to 20 percent to 25 percent cash back at the POS.
Customers can achieve these savings because the rewards are merchant-funded as opposed to issuer-funded. Passey explained that the traditional rewards model is funded by card issuing banks. Users of Discover Financial Services cards, for example, receive 1 percent cash back for making purchases with Discover cards.
But that 1 percent cash back is funded by Discover. When communities of merchants band together, however, they can offer much larger percentages back to consumers because increased foot traffic and ticket amounts more than offset those percentages. Obviously, from a consumer standpoint, 20 percent cash back is more attractive than 1 percent.
"What issuers - prepaid issuers or bankcard issuers - want is their card more at the top of the wallet," Passey said.
"In order to do that, there's got to be enough value there for you and me as consumers and say, 'Hey, wow, I can get up to 20 percent cash back when I use this card. I don't need the other cards. And though I have to shop in this merchant network, these are merchants that I'm going to go to anyway, so why not.'"
Cost effective advertising
Merchant funded cash back networks also function as efficient new avenues for marketing businesses to potential new customers. Traditionally, merchants would pay out advertising dollars upfront. Merchants would literally "write a check for $2,000 to get access to 10,000 households," Passey said. Then merchants would "sit back and pray and hope they see some foot traffic coming through the door."
But, using networks, merchants not only get access to other merchants' customers, but they also pay for advertising in the form of cash rebates to customers as they go. "In our model, [merchants] don't pay anything out unless the customer actually comes in from the affinity group we're marketing and partnering with," Passey said. "And then they know that traffic has come in from them, and then they give them their discount or reward."
Additionally, merchants only pay out when customers purchase a certain amount from their stores. Passey offered a local mom-and-pop deli as an example.
"Say their average ticket is $10 for lunch," he said. "They may set their offer at $5 off $15. So they raise their spend threshold $5, and they only pay out that $5 reward when somebody spends a third more than they normally would have. All the other people that come in and spend $11 or $12, $13 or $14 from that affinity group, they don't get the benefit of the rebate, but the merchant gets the benefit of the foot traffic and sales."
Two for one
By increasing access merchants have to new customers and new revenue, Passey called Access Rewards a "win-win" for merchants, cardholders and card issuers.
The goal of merchant funded networks is to "preserve and protect the merchant as much as possible," Passey said. "We have to manage their retail pricing structure and help protect their margins or we'll lose the merchant down the road.
"So, from our standpoint, it's got to be as much of a win for the merchant partner as it is for the bank partner, as it is for the cardholder. So that balance between all three points is critical for this really to work."
According to Passey, in traditional cash back models, card issuers have "accrual liability," as they have to manage on their books the amounts of points or miles that cardholders accrue over the course of a year - the level of redemption and nonredemption that occurs.
"So that is a pain point for issuers, not only in the cost of what they are funding but also the liability of reserving those dollars aside on the marketing budget that they really can't touch or do a lot with," Passey said.
In an August 2008 study, Mercator Advisory Group reported three key revenue generators of merchant funded discount networks:
- Increases "sticky factor," as consumers recognize the value proposition of substantial savings at the POS
- Increases dollar volumes which translates into higher interchange and transaction fee revenues to card issuers
- The margin between merchant discount payments to processors and discounts offered to cardholders
Affinity for merchants
According to Passey, 24-year-old Access Development has a portfolio of 250,000 merchants, including small mom-and-pop businesses in rural markets. Access Rewards is designed to give those clients access to affinity groups they would normally not have otherwise.
Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.