Big Day for Payments: Plastic vs. Digital

Only in the ever changing world of payments.

It is more than a bit ironic that on a day that Isis Mobile Wallet announced that they were going live with their carrier-backed digital payments initiative, a unique card-based solution named Coin announced their alternative solution to the overstuffed wallet.

The question is . . . which solution has the greatest chance for near-term and long-term success?

Maybe both will garner the support of the key involved parties. Maybe neither. Maybe another company will take the Coin concept mainstream sooner than the planned introduction. The one thing I am pretty sure of is that it is further evidence that financial institutions need to place multiple bets on alternative solutions to avoid being left behind.

Despite all of the talk in the industry around mobile payments, acceptance of new digital innovations and platforms has been anything but a smooth ride. In addition to the seemingly insurmountable challenge around consumer's concern with security/privacy, getting merchants, consumers, financial institutions and even carriers on the same page has been close to impossible.

At the end of the day, the biggest challenge may be the perception by many that there is no reason to fix something that isn't broken. The current card-based process for making payments, while not perfect, is relatively easy and definitely firmly entrenched in the consumer's daily life.

What is Coin?

Coin is a .84 mm thin plastic card-like device that can store any of your current cards (actually, 8 of them) and behave like the cards it replaces. Instead of carrying an assortment of debit, credit, gift, membership and loyalty cards from various institutions, you simply use the dongle provided (like the one used by merchants accepting Square) to capture your card information on your phone, take a picture of the cards and use the Coin app to load your Coin card.

While only 8 cards can be loaded into the Coin card, an unlimited number of cards can be stored in the mobile app and switched in and out of the card as desired. "You don't need eight cards every day, so your phone is kind of like your drawer, and your Coin is kind of like your wallet," explains Parashar, founder and CEO of Coin. 

When you are ready to pay or use a loaded card, simply press a button on your Coin card to select the card you want to use (electronics imbedded within the Coin card itself), present your card to the merchant like you have done in the past, and the rest of the process is the same as it is today (see compelling video below).

Coin is Secure

For those concerned about the security of the card should you leave the card behind (only happens to me about 4x a year), the Coin card uses Bluetooth low energy technology to inform you on your phone that you left your card behind. Better yet, the card completely disables itself if your phone and card are away from each other for more than 10 minutes. 

For those concerned about someone scanning another person's plastic into the app, Coin says that the app only accepts a card that includes the user's personal information. Further, the Coin app is protected with 128-bit or 256-bit encryption and the company is pursuing PCI compliance. The app is also password protected.

Coin is Cool

Coin Retargeting Ad

From the video alone, it is clear that Coin is cool. I personally love it because it is another example of incremental innovation, based on simplifying a person's life seamlessly. It combines something that I am very familiar with (traditional magnetic swipe mechanics) and leverages very high tech digital technology to lighten my wallet. The public seems interested as well since, in the first 48 hours, almost 2 million people viewed the demonstration video on YouTube, making this financial product the number one trending video.

No new hardware is needed since the device uses a traditional (or new form) credit card swiping device.

In other words, Coin has done what mobile payments is hoping to do (eliminate wallet bulk) without changing my payments behavior. And until NFC, Isis, PayPass or any other mobile payment alternative gains the needed momentum to become omnipresent in my life, an incremental improvement works for me (even though I still love the integration of my Moven debit card and PayPass with mobile receipt and payment analysis).

Initially, the Coin card is expecting to be released in either black ('Midnight') or white ('Snow'), with additional colors being introduced later (sound familiar?). The app will initially be able to run on both iOS and Android. Obviously, the Coin card would not be used for online purchases.

While not the best way to judge a new payments alternative, even the Card website is cool. Here is a link to the product's FAQ page (be sure to read all of the questions . . . some are helpful in daily life).

Coin Crowdfunding

While already having raised funds from venture capital firms (and interestingly the backing of former Google Wallet head Osama), Coin hoped to raise the $50,000 it says it needs to start producing the card by pre-selling the cards to the public beginning immediately for $50 on their website. This method of pre-sale was to gauge the acceptance of the concept up front and underwrite the initial  offering. It is expected that the card will be priced at about $100 at introduction which is scheduled for next summer.

According to representatives from Coin, the start-up surpassed their initial goal for funding . . . within 40 minutes. In addition, the buzz in the industry (while not always the perfect barometer) was unprecedented. Obviously, the consumer wants an alternative to the fat wallet, that is easy to use, acceptable everywhere and avoids a steep learning curve.

To kickstart the process (pun intended), Coin is offering a $5 referral incentive for those who pre-order Coin. Once a person orders Coin, they will be provided a unique URL via email which can be used to tell friends and family about this unique payments solution. For each referred party (up to 10) who also pre-orders within 90 days, a $5 credit will be applied (up to covering the $50 cost of the service.

No Platform is Perfect

Just like the card-based platform Coin is hoping to simplify, the solution is not without some potential drawbacks. For one, while the concept of connecting the smartphone and Coin card for security is a significant benefit, there may be some challenges during normal use when the bluetooth connection is lost (during airplane mode) or the card is out of contact with the phone for extended periods. Coin says that reactivating will be simple.

Additional issues include the normal concerns around any card-based system such as potential skimming even though there is encryption, durability of the card (said to be 2 years of 'normal' use) and the fact that the Coin card is not waterproof. It is still to be seen how durable a computer embedded, less flexible card will be (especially in my pocket).

From my perspective, there is one more drawback . . . Coin won't be available for at least another 6 months. Knowing the unpredictable payments world, the introduction will probably correlate with an announcement by Apple regarding their entry into the payments battlefield.

A Word About Isis

As mentioned in the beginning of this post, another significant announcement occurred today with the long awaited launch of the Isis Mobile Wallet. According to the press release, customers with one of the more than 40 'Isis ready' smartphones can receive an enhanced SIM card from their wireless carrier and download the Isis Mobile Wallet for free from Google Play. The Isis Mobile Wallet will allow customers to pay at contactless payment terminals.

Unfortunately, with only 200,000 local and national merchant locations (out of 8 million merchant locations in the U.S. market), this solution will continue to face an uphill climb. In other words, this might be a potential mobile solution if you live in the right place with the right phone.

Not surprisingly, the newswires were buzzing with discussion and stories about payments innovations today. It just wasn't about Isis.

Additional Resources

Coin Website (with video)

Inside Coin's Techie Vision for the All-in-One Credit Card: CNET (Nov. 2013)

Coin, The Electronic Credit Card, Reaches It's Pre-Order Goal in 40 Minutes: TechCrunch (Nov. 2013)

Coin Tries to Make Credit Cards History - Forbes (Nov. 2013)

Credit Card Satisfaction (and Confusion) Increases According to New Study

Despite being confused by the myriad of changes made by many institutions around rewards structures and terms, consumer satisfaction with their credit card issuer increased for the fourth straight year according to a just released 2013 U.S. Credit Card Satisfaction Study from J.D. Power.

According to the study, American Express continued their dominance of the credit card satisfaction ratings for the seventh straight year, with Discover Financial Services being ranked second followed by Chase at third.

The study, which surveyed 14,000 credit card holders in May and June of this year, found that overall satisfaction with credit cards rose 14 points in 2013 from 2012, to 767 on a 1,000 point scale. This was the highest level of satisfaction since the study was initiated in 2006. Satisfaction is measured by examining six key factors, including interaction, credit card terms, billing and payments, rewards, benefits and services and problem resolution.

"The fact that the economy is improving and consumers generally feel better about their personal financial situation is certainly helping to improve satisfaction with credit card issuers, especially considering there was such instability in the industry just a few years ago", said Jim Miller, senior director of banking services at J.D. Power. 

The study found that 27 percent of households reported being better off this year, up from 23 percent in 2012 and only 20 percent in 2011. Only 17 percent said they were worse off which was significantly better than 23 percent last year and 29 percent in 2011. In addition, fewer card holders saw rate increases in 2013 (5 percent), compared with 6 percent a year ago.

Another potential reason for the increased satisfaction could be recent regulations surrounding disclosure and credit practices. The Credit Card Accountability, Responsibility and Disclosure (CARD) Act, signed in 2009 banned egregious billing practices, capped fees and limited interest rate hikes. It also required clearer disclosures.

"I think we can attribute much of the overall satisfaction to the CARD Act", says Ruth Susswein, deputy director of national priorities at the consumer advocacy and financial literacy group Consumer Action. This is supported by the finding that the largest improvement in satisfaction was in the category of 'credit card terms', which improved by 18 points from 2012 levels.

Consumer Confusion Still an Issue

Despite improved satisfaction ratings overall, the credit card industry still is impacted by consumers not fully understanding their reward structure, benefits and terms. According to the study, fewer cardholders reported they 'completely' understood how to earn rewards on their cards (59 percent in 2013 versus 66 percent in 2012). Roughly one third of the card holders surveyed said they were unaware of their card's benefits. 

Some of this confusion could be attributed to the many changes made to most rewards programs over the past 18 months (many programs have moved away from a clear 'points' program to a more confusing 'merchant-funded reward' structure).

Surprisingly, almost three-quarters were not clear about the interest rates they were being charged and 31 percent didn't understand late payment fees. "Customers who use their card's benefits spend an average of $400 more per month on their card, compared to those who are aware of these benefits but do not use them so clearly this is an area of importance to card issuers, said Jim Miller from J.D. Power. 

"While most customers change cards for a better rewards program, they often don't fully understand the rewards offered with their current card. There is a clear opportunity for issuers to better communicate rewards programs and benefits to not only keep customers loyal, but also attract new customers", says Miller.

Source: J.D. Power 2013 U.S. Credit Card Satisfaction StudySM  
© 2013 J.D. Power and Associates, McGraw Hill Financial. All Rights Reserved.

Source: J.D. Power 2013 U.S. Credit Card Satisfaction StudySM
© 2013 J.D. Power and Associates, McGraw Hill Financial. All Rights Reserved.

American Express Still Tops in Satisfaction

The satisfaction model used by J.D. Power looks at six factors (interaction, credit card terms, billing and payment, rewards, benefits and services and problem resolution), with five sub-factors being reviewed within the interaction category (website, online chat/email, automated phone, CSR and mobile interaction). The study also includes approximately 60 attributes that are rated based on customer experience.

Since the inception of the J.D. Power Credit Card Satisfaction Study in 2007, American Express has been ranked highest in overall customer satisfaction among 11 of the largest credit card issuers in the U.S. In 2013, American Express achieved a score of 816 (out of 1,000) and performed best in all categories measured, with notable performance in the areas of rewards, benefits and services and billing and payment. American Express again received top honors related to Customer Service Representative (CSR) interaction.

It is clear that American Express has not rested on their laurels despite being consistently ranked highest in customer satisfaction. Over the past year, American Express has introduced new offerings and has expanded digital support to improve the customer experience. Some of the enhancements include smartphone enabled gift cards, real-time purchase, account balance and alerts through Passbook, account alerts through a Facebook servicing app, online customer forums, and enhanced benefits on specific Amex and partner card offerings.

After American Express, Discover was ranked second in 2013 with a score of 812, performing well in credit card terms, interaction and problem resolution. The only other credit card issuer that ranked higher than the overall average score of 767 was third ranked Chase, with a score of 783.

Source: J.D. Power 2013 U.S. Credit Card Satisfaction StudySM
© 2013 J.D. Power and Associates, McGraw Hill Financial. All Rights Reserved.

Key Performance Indicators Provide Guidance for Success

Key Performance Indicators (KPIs) are considered the best practices that have the most influence on customer satisfaction. The 2013 J.D. Power study identified 14 core KPIs, with each having a different level of importance from the customer perspective. The KPIs were segmented into three levels based on prioritization that was determined by the potential impact on satisfaction as well as the percentage of interactions that meet the KPI. 

The importance of a satisfactory website experience is clear. The range of services that can be performed on the site, the usefulness of information provided and the clarity of this information all had an impact on the improved scores this year.

Based on the chart below, issuers should place initial focus on KPIs with the greatest potential impact.

Source: J.D. Power 2013 U.S. Credit Card Satisfaction StudySM

© 2013 J.D. Power and Associates, McGraw Hill Financial. All Rights Reserved.

The importance of the KPIs identified is illustrated best when J.D. Power associates the meeting of KPIs with both satisfaction and bottom-line metrics. According to the research, when KPIs are missed, satisfaction declines considerably, with satisfaction falling below industry averages when an issuer misses more than 3 KPIs. Additionally, as more KPIs are missed, advocacy and loyalty metrics also decline measurably as shown below.

Source: J.D. Power 2013 U.S. Credit Card Satisfaction StudySM

© 2013 J.D. Power and Associates, McGraw Hill Financial. All Rights Reserved.

Future Opportunity

While not shown as a specific KPI, the sub-factor of mobile functionality had an impact on satisfaction, with ease of use and speed of completing a transaction being important. However, less than one-quarter of customers can currently use a mobile app to view their card benefits, redeem rewards or get special promotional offers. It was also found that there has been a much slower adoption of mobile app technology among credit card customers compared to retail banking customers (5% vs. 19% respectively) possibly reflecting the lack of functionality available.

It is expected that mobile offerings and functionality may be the next battlefield for customer satisfaction, providing a differentiator that doesn't currently exist in a relatively 'me too' product category.

For more information on this study, visit the J.D. Power website here.

Big Data Provides Big Opportunity for Bank Loyalty

In a new regulatory environment, banks are faced with changing the foundation of rewards programs that were previously funded by interchange income from credit and debit cards. With debit interchange funding gone, FIs still need to continue to find ways to improve bank loyalty and drive the desired card behavior. In addition, banks need to leverage “big data” and mobile payments in the hope that they can replace some of the revenue lost as a result of Reg E and the Durbin Amendment.

Optimally, the future of rewards and loyalty will allow banks and credit unions to take advantage of the “Loyalty Trifecta” (my term for bringing together the benefits of 1) payment and transactional insight, 2) targeted offers and personalized communication as well as 3) mobile offers and payments).

To get an insider view of the challenges and opportunities available to banks today in the area of rewards and loyalty, I reached out to the leaders of four companies that provide unique solutions to the banking industry and who also will be co-panelists with me at the upcoming BAI Payments Connect 2012 Conference & Expo in a session entitled “Rewards in a Mobile Banking Environment.” 

Thanks to Tom Beecher, CEO, Cartera Commerce Inc.; Rob Heiser, President and CEO, Segmint; Schwark Satyavolu, CEO, Truaxis; and Rod Witmond, senior vice president, Product Management & Marketing, Cardlytics Inc who agreed to participate in the panel and contribute to this interview.

Note: An abridged version of this interview is also located as a BAI Banking Strategies article entitled, Big Data Drives 'Loyalty Trifecta' for Banks.

Q: What’s the current status of the banking rewards environment today and how can it be improved upon?

Witmond: Previously, U.S. banks brought offers to customers in a separate section of the bank website – often referred to as an “online mall.” Only a small percentage of their customers went there. It was not a loyalty solution. Various bank rewards solutions required the customer to enroll their card at a separate site and then hope they remembered to shop at a group of merchants providing lackluster discounts. Low engagement or difficult-to-use approaches won’t strengthen a retailer’s relationship with customers or move the needle on sales – for the merchant or the bank.

The banks’ business cases for the early generation, merchant-funded rewards programs promised significant earnings to the banks driven by large revenue shares. For the reasons stated above, retailers did not see these solutions as adding value to their current marketing mix and budgets did not shift. U.S. banks ended up with a big piece of a very small pie. New enhancements from loyalty vendors have refined the early approaches on several fronts.

Beecher: The scope and strategies for banking rewards have changed dramatically in the past two years. Durbin has forced banks to re-imagine how loyalty programs are designed and funded. Also, the development of card-linked offers – where consumers earn cashback or points when using their bank’s payment card at participating merchants – has opened up new incremental revenue opportunities for banks. Finally, the growth of Groupon and deals in general has made consumers (and banks) much more aware of the power and importance of local merchants and online offers.

Satyavolu: Most banking rewards in the past had four defining aspects: 1) they were mostly available on credit cards and less frequently on debit cards (due to being funded by interchange from merchants); 2) they were mostly one-size-fits-all (everybody gets the same extra points/cash-back on certain categories whether or not you shop there); 3) they were typically limited to cash-back or points back benefits; and 4) merchants were not involved in the creation of these benefits.

Heiser: The way FIs interact, engage and communicate is driven more and more by their customers’ technological lifestyles. While merchant-funded reward programs were one of the first to react to this shift, success today involves the application and technology adoption that is driven by transaction intellect − knowing and understanding the needs of customers.

Q: What are the benefits of your solution (from both a bank and consumer perspective) compared to rewards programs used by banks in the past?

Whitmond: While most rewards programs in the past used a points currency to reward based on the number and/or level of transactions, we now can leverage all of the banks electronic transaction data to isolate customers into finely defined segments. By leveraging purchase transaction data, we enable retailers to invest aggressively to grow their business. Bank customers receive 20% when they shop at new retailer, not 1%. And since the customer is receiving these rewards as part of their online banking experience (where the customer is viewing their relationship 9 times per month and 25% view their relationship daily), retailers realize that customers interact with their offers over a 100 times more than with other digital channels!

Beecher: Instead of the bank funding the rewards program as in the past, merchants pay for the card-linked offers and also pay a commission on the sale which turns into revenue for the bank. Therefore, the bank gains a new incremental revenue stream, and increases customer engagement and card spend. Because Cartera runs these programs as a fully managed, pay-for-performance service, banks can launch and innovate quickly and at low cost. In addition, instead of the customer needing to visit a rewards site to select their gift, redeeming card-linked offers is as simple as swiping their payment card at the participating merchant. The reward is automatically added to the customer's account in the currency set by the bank.

Satyavolu: Due to the advanced analysis of robust transaction data (within the bank's firewalls), the merchant is willing to provide much richer rewards to the customer than they could in a normal online coupon based environment. They already know the customer is 'qualified', therefore a greater incentive can be offered. In addition, while there are national merchants involved in the program, the bank can include local merchants as well which can build a strong bond with a bank's small business and commercial customers. Finally, unlike previous rewards programs that are simply based on transaction levels, today's rewards are much more personalized with the selection of offers being improved as the customer engages in the program. This drives a higher degree of online and mobile engagement with 35% higher login rates.

Heiser: As opposed to being a program based on rewards, Segmint leverages digital marketing technologies to help FIs acquire, cross sell and retain bank customers through dialogue marketing. Our program is driven through the micro-targeting of bank customers and assigning of Key Lifestyle Indicators (KLIs) - unique identifiers based on individual spending patterns and lifestyle trends. If customer engagement is the primary goal, then FIs ability to use KLIs to understand bank customer life events and deliver a comprehensive set of relevant FI products and services is ultimately a win-win for both sides. With today’s savvy consumer expecting to receive highly-targeted and engaging information, this meets their growing demand for personalized service and simplicity.

Q: How can a bank 'customize' your solution to differentiate itself in the marketplace?

Whitmond: Banks have numerous ways in the user interface to design a solution that is completely integrated to their specifications. This not only differentiates our solution from others in the market, but also from other banks that may have installed our solution. Second, because the Cardlytics solution is software loaded onto hardware that is in the bank’s environment, the bank has complete control over the targeting solution. This also means the bank has complete access to any - and all - relevant data fields. As such, the bank has complete control over designing and deploying solutions around the rewards program. This has resulted in customized email, SMS, mobile and social solutions.

Beecher: Cartera programs are private-labeled and customizable for each of our bank partners. Each bank can control the program construct and currency (e.g., cashback, points) , marketing strategy and messaging, merchants and offers to include, consumer experience, and marketing channels to use. Cartera supports the full range of options with technology and services and allows each bank to launch and run a distinct, differentiated program.

Satyavolu: StatementRewards provides each FI access to a web-based dashboard where they can control the nature and quantity of offers their customers will receive. Some of the unique features of our solution include merchant-level purchase insights, geo-aware services, cross-sell capabilities, social networking distribution (customers can share rewards on Facebook and Twitter and brag about their loyalty status level as they shop), gamification (reward discovery incentives), and bill analysis (allowing customers to receive personalized, recommendations to help save money on monthly recurring expenses like wireless, TV service and gas).

Heiser: Data-driven CMOs can utilize Segmint’s analytics engine, instantly-actionable campaign management tool, and ad delivery platform for the micro-targeting of bank customers and to initiate and manage customized experiences. Whether a mix of FI products/services or bank partner offers/discounts, Segmint's solution helps FIs initiate interaction and generate real-time offers when it is the right time for the bank customer. Segmint’s solution also provides unparalleled speed-to-market and comprehensive metrics – ultimately resulting in optimization of marketing spend. 

Q: How can your own solution be leveraged in a mobile environment as opposed to an online banking or bricks and mortar environment?

Witmond: The Cardlytics solution is already leveraged in a mobile environment. We have bank solutions for SMS, mobile, and email in the marketplace. Additionally, we have ATM and social media solutions close to deployment. Most banks start with online banking because it provides the greatest exposure to the rewards platform. However, they quickly recognize the value of extending into mobile applications where they have complete control over the data and data fields. As such, they can drive mobile solutions at their own speed. Where a bank cannot deploy a mobile solution quickly, we offer a white-label mobile solution that can be deployed alongside or within an existing FI application.

Beecher: Mobile is an increasingly important channel for communicating with consumers -- particularly with the growth of in-store (national and local) offers. Cartera powers mobile apps that show consumers where they can use their payment card to redeem card-linked offers from nearby merchants. As Cartera partners roll out support for mobile wallets, this capability will become even more powerful by enabling consumers to find and redeem offers entirely via their smartphone.

Satyavolu: Truaxis’s StatementRewards product easily integrates with a FI’s existing mobile banking app to provide additional benefits to banking customers. Through the existing mobile app, bank customers will be able to view all of their rewards, both purchased and available, via the user dashboard. From this user dashboard, customers can instantly view, purchase and redeem rewards directly while they’re on the go.

Heiser: Segmint is not a merchant-funded rewards provider and, as such, our philosophy is grounded on generating loyalty through digital engagement with customers. Segmint is device-agnostic and can deliver across virtually any electronic medium. There is no doubt that opportunities exist within the mobile environment, but as with all mediums/channels, success revolves around the actual content delivery.

Q: What innovation do you see on the horizon around loyalty and reward platforms, both in banking and non-banking industries, in terms of leveraging social media?

Witmond: We have banks that have already designed how our solution can extend into social media and are deploying the same. The challenge with social media is that it is a “social experience” all about engaging on a person-to-person basis. That being the case, the extension of the core platform into social is only the first stage and the true challenge is in making the rewards solution one that engages on a person-to-person basis.

Beecher: Innovations in payments, big-data-driven marketing, and loyalty are all merging together to form what will ultimately be a new playbook for companies in these spaces and a new set of winners, including the new card-linked offers space. Mobile payments are seeing new non-banking entrants, all realizing that the incorporation of offers into the wallet is central to consumer adoption.

One of the new frontiers of leveraging big data with marketing is anonymous payment data, where new technologies and entrants are helping banks use transaction data that preserves privacy and provides real benefits to consumers. An example would be my purchase at McDonald’s alerting Burger King to make an offer to me. The entire funding model for bank loyalty programs is being turned on its head with merchants paying consumers through banks to shop with them rather than banks focused on taking money from merchants (through interchange) and then funding rewards themselves.

Satyavolu: The biggest innovation for these platforms will be the continued use of data to drive personalization and cut-costs. Both banking and non-banking industries are sitting on piles of data that they both don’t have the resources to utilize and if they did, they wouldn’t know where to begin. By working with third-party vendors like Truaxis, these companies will finally be able to utilize this data through innovative new techniques.

Analyzing transaction data from FIs is only the tip of the iceberg. As these platforms become more integrated across multiple channels and industries, companies will be able to understand and connect with their customers to provide them with the most value and ensure that each customer has a completely personalized experience that provides them with exactly what they need and want.

The data buried in social networks adds an interesting new twist to the personalization capabilities that are made possible, when you add them to the transaction data streams that FIs already have today. The concept of loyalty marketing will undergo a quantum shift in how it operates and who is in the key enabler seat for merchants, where FIs have a huge opportunity and upside to facilitate these interactions.

Heiser: Social media is a huge game changer for FIs and will become the “biggest bank branch” they operate. With nearly a billion active monthly users on Facebook, FIs must become socially actionable and interact with customers in their channel of choice. Last year Segmint introduced SegmintSocial, our social media technology solution that gives FIs the power to precisely identify their customers on the bank’s Facebook page, customize their experience and engage them in real-time, personalized dialogue.

EMBARKING ON A NEW ERA FOR BANK LOYALTY

We are obviously entering a new era for bank loyalty and reward programs, where banks can leverage transactional and payment data to build a personalized engagement process. Whether the program includes merchant-funded offers or simply uses customer insight to drive greater share of wallet and retention, banks can significantly improve the value of the relationship from both the customer and bank's perspective.

Since we are treading on new territory regarding the use of customer insight, there may be consumer push-back at first as they see rewards/ads integrated on their online banking statement, ATM screen or even their phone. There will be tests of geo-locational marketing with many of these reward program in the near future, where customers may receive their offers via an email or SMS message as they near a participating merchant. 

The potential payoff for this new level of engagement is significant, however. According to recent Aite Group research entitled, The Case for Merchant Funded Incentives: New Opportunities for Card Issuers, merchant funded incentives could drive US$1.7 billion in annual revenue for card issuers by 2015. In addition, the number of U.S. cardholders (credit, debit, and prepaid) who subscribe to merchant- funded incentive programs could exceed 460 million by 2015.

“Merchant funded incentives programs are a good deal for card issuers, and offer a new revenue stream,” says Madeline K. Aufseeser, senior analyst with Aite Group and author of the report. “Because the cost to operate merchant-funded incentives is less than that of traditional reward programs and will generate a greater profit per account, card issuers will most likely consider swapping some existing traditional reward programs for merchant funded incentives programs, especially on debit portfolios.”

It is definitely a time of change for loyalty, and a time when marketers will be armed with significantly more customer insight to build marketing programs. Rewards and loyalty programs only scratch the surface of opportunity available to savvy bank marketers who can make use of 'big data'.

Is your organization considering or already implementing a new rewards and/loyalty program? How will you engage your customers to participate? Will you 'localize' your program, including local merchants? Will you leverage social media to enhance your customer profiles or help market your program. I would love to hear from you.

Checking Changes Make Onboarding and Cross-Selling More Important

Over the past several weeks, many of the larger banks across the country have announced significant changes to their checking account continuum, including elimination of traditional Free Checking, discontinuation of rewards programs, ceasing reimbursement of foreign ATM fees, as well as potential fees and transaction limits on debit cards.

While each of these strategies are intended to reduce costs or generate revenue in response to Reg E and the Durbin Amendment, these changes could also present a challenge to banks as they seek to increase engagement and gain share of wallet. This is because debit card use and rewards program enrollment were two of the more important account engagement criteria and basis for a broader relationship growth.

According to an economic analysis on the effects of the Durbin interchange amendment presented to the Federal Reserve Board on February 22, between $33.4-$38.6 billion of debit card interchange will be lost during the first two years the new rules are in effect. This reduces the revenue on a personal checking account by $56-$64 and by $79-$92 on a small business checking account according to the study. These impacts make it more important than ever to optimize onboarding and cross-sell efforts for retail and small business customers thereby reducing costly attrition, improving engagement and providing a stronger foundation for ongoing relationship expansion.

Here are several of the steps financial institutions should consider as they begin to implement changes to their deposit accounts and debit products.

• Double Down on Onboarding Initiatives: While most banks currently have an onboarding process for new retail customers, many have yet to build an onboarding process for small businesses. In addition, many programs only reach out to the customer once or twice and don't leverage a robust mix of communication channels. The impact of recent legislation makes the opportunity cost of attrition more expensive than ever. Banks need to increase the number of 'touches' a customer receives by email, phone and direct mail with the message centered on maximizing the benefits of using the account the customer just opened. When the account becomes active, then begin to expand the relationship.
• Don't Walk Away From Debit: While the economics of the debit card have definitely changed, the use of this payment vehicle remains better than many of the alternatives and provides the consumer with constant brand reinforcement each time they open their wallet. David Stewart from McKinsey & Company wrote in a recent BAI Banking Strategies article entitled, "Keeping Debit in Focus Post-Durbin" that debit cards remain an important component of the anchor DDA. As a result, getting new customers to activate and use their debit card as part of the onboarding process should continue to be a primary objective.
• Expand The Definition of Engagement: In the past, most banks focused on debit card utilization, enrollment in online banking (with bill pay) and the sign up for direct deposit in their onboarding messaging. While you don't want to cover too much in the onboarding communication, there are some households you may want to encourage to apply for a credit card and/or activate an autosave transfer as part of welcome process.
• Encourage Channel Migration: Another way to stem attrition, potentially reduce cost and build share of wallet is to increase alternative payments channel use. As part of the onboarding process, some of my clients are building messages around the use of mobile banking early in the relationship lifecycle. This makes sense based on recent trend research done by Javelin Strategy and the potential for offline customer mobile adoption found in research done by Fiserv. While there may only be minimal channel shift from a payments perspective initially, there could be significant savings if call center inquiries are reduced.
• Focus on Share of Wallet Early: While I totally agree with Ron Shevlin in his Marketing Tea Party blogs (Honeymooning and Why Engagement Matters) that a new customer must be courted and engaged before they can be cross-sold, customers define the pace of this trust building as opposed to the bank. This level of engagement/trust is usually found by looking at transaction volumes and whether engagement services are active. Once actively engaged, the customer should be offered additional services that may improve their overall banking experience. This is where product propensity models and behavioral segmentation can be effective.
• Leverage the New Account Desk: Many of my clients have found that the new account desk can  be an effective cross-selling environment for the customer, especially if credit services such as credit cards, personal or small business lines of credit and even equity credit are pre-approved at the point of sale. The point of sale is also the best place to discuss the correct account to open in the first place and the benefits of engagement services and rewards alternatives.

The effective communication of your checking account changes to existing customers has been discussed in my recent blog (Minimizing the Impact of 'Unintended Consequences'). It is just as important to communicate well with new customers at the new account desk in the days, weeks and months immediately following the new account opening. Without an aggressive communication process, leveraging multiple channels and customized to the customer's stage in the engagement process, the investment in acquiring the customer will be lost or the value of the relationship will not be optimized.

How are you going to ramp up your new customer communications to maximize your marketing ROI? Are you considering new ways of onboarding your customer in the first 30, 60 or 90 days? Have you found a way to leverage any social media in your onboarding process? I would love to hear your ideas.

New Smart Card Geared to Convenience and Safety Conscious Consumers

As banks continue to innovate around the use and rewards structure of both debit and credit cards, the penetration of smart cards in the United States has lagged other countries. That may soon change, however, after Pittsburgh-based Dynamics, Inc. won the first prize ($1,000,000) 'DemoGod' award at this week's Demo tech start-up conference in Silicon Valley.

Leveraging a programmable magnetic stripe that can be changed at any time (but still able to be read at today's magnetic stripe POS readers) the MultiAccount card can carry different card accounts on one piece of razor thin plastic.

This could be a debit card and credit card, personal and business card, etc. Push a button on the card, and an integrated light source highlights the account being accessed. A card with a light source alone provides a WOW factor for the user.

For those users interested in an expanded level of security, another card (called Hidden) presented at the Demo conference by 31 year old Dynamics Chief Executive Jeff Mullen only shows an abbreviated account number on the card. To get a complete account number to appear, the user needs to type their PIN on a set of five buttons on the surface of the card. When the correct PIN is entered, the electronic stripe is then populated with the appropriate magnetic information so that it can be used in today's readers. In other words, the card is of no use to a thief unless they have the integrated PIN.

Both cards are thinner than traditional cards in the marketplace today, yet still have a small built in microprocessor with integrated memory which is powered by a battery with a three year life. Oh yeah, and the cards are both scratch resistant and waterproof, which Mullen displayed as part of his 5 minute presentation demonstrating the card at the Demo conference.

This new card technology is definitely coming at an opportune time, as bank marketers are looking for new ways improve engagement by stimulating the use of card products and the participation in rewards programs. With the Durbin Amendment set to impact interchange income for debit card transactions next year, bank marketers need to find ways to get top of wallet placement in the consumer's mind and through usage. The benefit of combining multiple card accounts on a single piece of plastic alone could have major financial benefits for banks. This type of product could also impact retention of relationships, further impacting the customer lifetime value.

As the planning process is well under way at many banks, an introduction of this type of product (which has been in a stealth test mode for an extended period in the marketplace by Dynamics) could provide the foundation for a new payments strategy. With behavioral segmentation already built into the product's benefit continuum, this could be the answer to many concerns of card product managers and bank marketers alike in 2011.

Update (October 5, 2010): It was announced yesterday that Citibank will be the first bank in the country to leverage the Dynamics, Inc. card programmable magnetic stripe, embedded battery and chip as well as integrated buttons on a payment vehicle in a well publicized pilot. The Citi 2G Credit Card will allow consumers to make a choice whether to pay for a purchase using a traditional credit account or to utilize points for the purchase.

“People don’t typically think of credit cards as an innovative product, but we are excited to be the first issuer to pilot these advanced technologies and additional choice at checkout through the ‘next generation’ of credit cards,” said Terry O’Neil, executive VP of Citi’s North America credit card division. “With Citi’s latest feature, customers now get a credit card that better fits their lifestyle and needs, putting more options right in their hands.”

At a cost of about three times the cost of traditional plastic cards, it will be interesting to see if other banks get on the bandwagon and develop innovative and segmented products based on this technology.

What's in Your Wallet?

In the past, bank marketers have relied on models based on demographic, geographic, psychographic and purchase variables to better understand their customers and prospects. Some financial institutions even use attitudinal, lifestyle or customer value segmentation to improve the targeting of their marketing communications.

As consumers are provided more and more options as to how to transact business and make payments, however, a better way to segment may be achieved by using advanced behavioral segmentation based on payment decisions. In other words, when consumers open their checkbook, reach for their wallet, turn on their computer, or use their phone, what payment option they choose may help bank marketers improve targeted engagement, channel and relationship expansion communication.

Payments behavioral segmentation may also be the best indicator of future financial services purchases since it can gauge changes in consumer purchasing, saving and investment patterns and enable Payments to effectively join Product, Pricing, Place and Promotion as the fifth P of marketing for bankers.

There are definitely challenges posed by payments behavioral analysis, however, since it introduces an element of time into the analysis that is different from other types of modeling. As opposed to using a single point in time like marketers can do for age, income, geography or even attitudes and lifetime value, behavioral segmentation requires analysis over a period of time with the length of time impacting the nature of the segmentation. Different conclusions can be made when looking and long vs. short-term trends. This is especially true during a time of significant economic change like we have today, where people's buying, saving, borrowing and payment behavior may be in transition.

Another challenge is presented by the number of channels and insight capture options available within the payments landscape, since consumers can pay using checks, debit, credit, ACH and even P2P or P2B using mobile devices in person, online or through the mail. As a result, it may be easier to capture ranges of transactions (high/medium/low) or develop a segment grids measuring ranges of transactions based on method and channel. As a starting point, marketers could potentially track tendencies using just one component of the payments continuum like measuring just point of sale transactions over time.

A final level of complexity is added when you consider whether how the consumer decides between funding today's purchases out of current income, wealth or borrowed funds. This adds the element of financial management into the picture.

Using all or singular components of payments data, bank marketers can build attitudinal segments that answer the questions "what payment instrument does a customer usually choose" and "why does a consumer choose a particular instrument (or channel)". While no easy task, it is one that can reap significant rewards. This is because the foundation of most financial management decisions revolve around the consumer's choice of payment method. Their attitude around safety and security, borrowing and saving, electronic or traditional all provide insights not available with traditional segmentation and open the window to the customer's potential level of engagement and potential value for your bank.

While certainly not a flawless segmentation process since the environment is constantly changing and is far from frictionless, payments behavioral segmentation could provide a level of insight not found in with other modeling processes and could assist in proactively addressing customer needs, improving customer lifetime value and enhancing the customer experience.

I would love to hear from banks that may be employing some form of payments behavioral modeling to drive marketing communications beyond the selling of payments products. Are other behaviorally modeling techniques working?