Card-linked offers ("CLO") have existed for several years in various forms, but have gained increased prominence in Europe as card issuers explore ways to create new revenue streams in the face of interchange regulation.
Based on our market observations to date, we believe that card-linked offers are an important and significant step forward in the broader commercialisation of payment platforms, but CLO is not revolutionary stand-alone revenue model.
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CLO is a technical solution which enables automatic redemption of offers via card payment by (typically) linking the offers platform to the card issuer’s back-end system such that offers are recognised as statement credit. Note that there are variations on this use case and also merchant or acquirer facing implementations of CLO, but for purposes of this article we focus on issuer implementations. This technology means that customers do not need to present a coupon to redeem an offer, they simply need to pay with the card which was previously linked to the offer.
This technical solution for redemption generally works well. More often the challenge comes from the other necessary components of the proposition – namely the merchant/advertising network, the offer acceptance process, and analytical capabilities necessary to target offers. CLO offers are frequently served from online or mobile banking which means the cardholder is typically presented with offers while not actually shopping. There are currently several technical vendors that can enable CLO for issuers (e.g., Cardlytics, Edo Interactive, RedZebra, Reward Insights, Plebicom) with a focus to-date on the U.S., U.K., French, and German markets.
The business case for CLO is typically three-fold: to reduce rewards program expenses via replacing or complementing traditional issuer-funded rewards with merchant-funded rewards, to differentiate card and current account products, and ultimately to generate revenue from new revenue streams such as charging merchants for redeemed offers.
While the theoretical revenue pool for merchant offers is significant (e.g., Turkish banks generate significant revenue on merchant campaigns), results to date for CLO in Western Europe and North America are underwhelming. In the U.S., issuers were quick to embrace CLO (e.g., Bank of America, American Express, Capital One), but there is little evidence of CLO gaining significant traction, and some programs have been withdrawn (e.g., Capital One). In 2014, Bank of America reported that since its launch 2012, its BankAmeriDeals program has helped merchants generate more than $730 million in incremental revenue; however, Bank of America’s annual card volume is more than $550 billion.
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By GlobalDataThe lack of significant penetration in the U.S. puts a damper on expectations for CLO in Europe, where issuers are seeking to find ways to plug a 5 billion – 6 billion annual revenue gap resulting from European Union interchange regulation which will be effective in December 2015. European CLO efforts to date in Western Europe include Edo Interactive’s partnership with Visa Europe in 2014 (which does not seem to have generated live programs to date), Lloyds Banking Group’s Everyday Offers powered by Cardlytics, RBS and NatWest’s Cashback Plus and BarclayCard’s Bespoke Offers powered by Reward Insight, Wüstenrot Bank’s program powered by RedZebra, and Banque Casino’s program powered by Plebicom.
Factors limiting the success of CLO in Europe and North America to date include:
1. A decoupled offer acceptance and redemption process (and therefore low rates of recurring usage)
2. Shallow offers pool lacking flagship merchants or high degrees of localisation
3. Minimal targeting
4. Low visibility (current CLO models requires customers to regularly check their online or mobile banking, rather than a "push" model")
5. Lack of integration with social networks, mobile wallets/apps, and other popular technologies
In order to capture the CLO opportunity, issuers will need to drive towards a few objectives, most likely via partnerships:
1. Enable an effortless user experience (push them an offer, "just say yes") via mobile technologies; develop a single process for offer acceptance and redemption
2. Improve the relevance of offers (e.g., location-based targeting, integration with social networks, better analytics to present more individualised offers, etc.)
3. Develop a deeper merchant network and the capacity and capabilities to serve this network (analytics tools, etc.)
Ultimately, we view CLO as a stepping stone to more robust offer propositions and data commercialisation business models in the future which are real-time, mobile, rich, and targeted. This is not to say that issuers should wait and see, however, as it is advisable to begin the journey along learning curve now to prepare for a more lucrative future.
The level of competition from social media and mobile powerhouses such as Facebook and Google will intensify and leading financial institutions would be wise to carve out partnerships and operating models which position for the future, even if today’s investments face long-term and uncertain returns.
Chris Dickey and Erik Howell
