Cross Currents in Loyalty

Merchants are asserting more control over their rewards programs, and everyone in the loyalty chain is trying to figure out what works best in a fast-changing market.

If you’re in the market for mixed signals, rewards programs are sending out plenty of them.

Some big merchants such as Target Corp. are taking the private-label route, shunning banks as cobranded card issuers—while private-label stalwarts such as Starbucks Corp. are bringing in cobranded partners.

Retailers are letting customers who don’t have their credit card earn rewards. And others, including mid-priced department-store chain Kohl’s Corp., are simplifying their programs to make sometimes complicated rewards programs easier for customers to use.

Years after card-linked loyalty programs debuted, debate still rages about just how many entities should be involved in creating and operating them, what are the most effective rewards, and how customers should redeem them.

“There’s so many forces, if you will, so many entities, involved in rewards,” says Kevin Morrison, a senior analyst at Boston-based Aite Group LLC who researches the loyalty market. While the market has given mixed signals, Morrison believes the underlying message is becoming clearer: merchants, which pay for most rewards, want to call the shots. “If you look at what merchants are doing, they’re really starting to move to a store card,” he says.

Cash Back’s Comeback

This debate is dominated by larger merchants, since many small businesses have yet to embrace loyalty programs. Market insiders say a leading reason for that is a lack of knowledge about how to create and operate an effective program—but that could be changing.

Loyalty programs remain highly popular, and industry executives still expect them to grow. Americans last year had 3.8 billion memberships in loyalty programs, up 15% from 3.3 billion memberships in 2015, according to the 2017 Colloquy Loyalty Census from Colloquy, a part of the marketing-services unit of Plano, Texas-based retail payment processor Alliance Data Systems Corp.

Also popular: cash. Despite the growth of mobile-linked loyalty programs and redemption options, cash remains the most popular reward, according to results of an Aite Group survey released in February. Half of the more than 1,400 Americans surveyed said the rewards credit card they use the most provides cash back (chart, page 42).

“Cash back is now coming back as the leader in rewards because you can use cash wherever you want,” says Morrison.

Anecdotal evidence of faith in loyalty’s future comes from investors who have strongly embraced merchant-funded rewards program provider Cardlytics Inc., which had an initial public offering of stock on Feb. 8. As of mid-June, Cardlytics’s stock had risen 65% since the IPO.

“Loyalty programs are here to stay,” Theresa McEndree, vice president of marketing at Lewisville, Texas-based Hawk Incentives, tells Digital Transactions by email. “Shopper habits have evolved and the world has become increasingly digitized, but the research demonstrates that loyalty programs and modern reward options have kept up with consumer trends and continue to appeal to younger generations.”

Still, there are warning signs that marketers can’t sit back. The 2017 Colloquy study noted that the 15% growth rate was considerably lower than the 26% increase the company found in its similar 2015 study.

“The membership growth slowdown signals the U.S. loyalty market is maturing, and retailers need to up their game on how to attract and retain members within their loyalty programs,” Melissa Fruend, author of the Colloquy research report, said in a statement last summer. “In order to improve loyalty marketing, brands must optimize the overall experience by creating more personalized and relevant experiences for their best customers.”

A Double-Edged Sword

Just how to “up their game” is now top of mind for many merchants. Keeping it simple is the formula being pursued by Menomonee Falls, Wis.-based Kohl’s, which offers a private-label credit card and mobile app with payment functions, electronic coupons, and rewards redemptions.

In late May, Kohl’s said it would unify its three loyalty programs—the Kohl’s Charge card, Kohl’s Cash coupons, and the point-based Yes2You Rewards program with 30 million active members—into one, dubbed Kohl’s Rewards. The new program, which focuses heavily on Kohl’s Cash, is being tested in about 100 stores in eight markets, with chain-wide rollout planned for next year.

Features include 10% in Kohl’s Cash coupons for every Kohl’s Charge purchase, and non-cardholders can earn 5% back regardless of how they pay. Sales events will offer $10 in Kohl’s Cash for every $50 spent. To encourage redemptions, customers can track Kohl’s Cash balances through the mobile app and get balance reminders at the point of sale.

“[Customers] asked for more savings, made easier,” Kohl’s chief marketing officer Greg Revelle said in a blog post. “With this input, we set out to evolve our loyalty platform to make it simpler, more convenient, and bring greater value.”

The big department-store operator Macy’s Inc. in May announced it was opening its Star Rewards loyalty program to customers without its credit card. Similarly, Minneapolis-based Target began testing a loyalty program earlier this year in the Dallas-Fort Worth area called Target Red, which isn’t tied to its Redcards, according to the Minneapolis Star-Tribune.

Still, credit cards remain closely linked to loyalty programs. Private-label cards, which lost ground for decades to ascendant general-purpose cards, today are making a modest comeback, in part because some retailers have paired them with mobile-payment apps.

The Kohl’s Charge card accounts for nearly 60% of store sales, the company reports. Target, once a strong promoter of a Visa-branded cobranded card issued by its own bank, has chucked it in favor of its private-label credit and debit Redcards.

Banks today issue most private-label cards on behalf of retailer clients. But private-label cards generally leave the merchant calling more of the shots than in a cobranding program, which will involve a general-purpose card network and an issuer partner that will get transaction-based interchange.

While a private-label card can be used only at the sponsor’s locations or online site, some executives consider cobranded cards, despite their broad utility, to be a double-edged sword because they can used for purchases with the sponsor merchant’s competitors.

“The merchants are looking to take back the relationship to where it all started—the merchant and the consumer,” says Aite’s Morrison.

No More ‘Minor Partner’

But cobranded cards sponsored by airlines, hotel chains, and other merchants remain highly popular. If the cobranded shoe fits, even a private-label stalwart like Starbucks, whose Starbucks Rewards program and mobile app is linked to the coffee giant’s prepaid card, will put it on. Starbucks is facing slow-growing sales in the U.S., so cards that promote point counts and potentially drive more redemptions could be a sales booster.

In February, Starbucks introduced a Visa cobranded credit card issued by JPMorgan Chase & Co. In June, it followed up with a Chase-issued reloadable Visa prepaid card. Both cards allow holders to earn Starbucks Stars, or points redeemable for free drinks and food, on purchases outside of Starbucks.

“It’s important to us to make earning rewards as easy for our customers as possible, and the Starbucks Rewards Visa Card is a powerful tool for us to do that because of how easily it fits into their daily lives,” Matt Ryan, executive vice president at Seattle-based Starbucks, said in a news release announcing the new credit card.

Merchants and their bank partners closely guard details of their cobranding contracts, but some experts believe merchants are becoming more assertive with card issuers than they were in cobranding’s earlier days.

“I don’t think the merchants are willing to hand over the reins to the big banks,” says Mark Horwedel, chief executive of the Merchant Advisory Group, a Minneapolis-based association of 140 mostly large merchants concerned with payments issues. “In partnership arrangements, the merchant will cease to be the minor partner.”

Horwedel, however, sees the Chase-Starbucks pairing as different from traditional cobrand relationships because Starbucks could take advantage of ChaseNet. That’s the service in which transactions from Chase Visa cards used at merchants served by the bank’s huge merchant-acquiring affiliate are processed in a closed-loop network.

Chase says the service can save merchants money, and generate valuable data. Starbucks happens to be a Chase merchant. A Chase spokesperson confirmed to Digital Transactions that Starbucks is participating in ChaseNet.

More services similar to ChaseNet are likely to be developed as merchants try to create better rewards programs that will attract and retain customers, Horwedel predicts.

“I think that’s what’s going to happen, because it’s not just interchange any more,” he says. “There’s data to be harvested, as well as a better shopping relationship.”

At the same time, Chase’s new prepaid card could be one sign of that such cards are becoming a bigger part of loyalty programs (box). “Prepaid is getting into the space a little bit,’’ notes Morrison.

The Right Mix

While large merchants wrestle with the particulars of their loyalty programs, many small merchants have yet to offer them at all. Some that do are still using old-fashioned paper punch cards, according to Doug Mearkle, senior vice president and head of U.S. cards and merchant solutions sales at Cherry Hill, N.J.-based TD Bank, the U.S. affiliate of Canada’s TD Bank Group.

TD’s U.S. portfolio consists of 20,000 mostly small merchants generating about $5 billion in annualized volume. Very few of them offer an electronically based rewards program, though “we’re seeing about 20% of customers inquiring about a loyalty program,” says Mearkle.

TD Bank’s answer to those merchants is the Clover system from its processor, First Data Corp. Clover provides card-accepting hardware and an app marketplace of business-management programs, including loyalty.

“Punch cards don’t provide data” such as frequency of shopping, average spend, what type of product users are buying, says Mearkle. “What small-business retailers don’t realize is that that technology is available to them.”

Mearkle says merchants themselves can set up a loyalty program through Clover, though they can get help through First Data if they need it. If they do set up a program, TD Bank as the acquirer stands to generate revenue, he says, but the real payoff is reduced attrition and more growth among customers.

“Merchant processing used to be the only relevant conversation,” says Mearkle. Now, helping small businesses grow is “becoming more and more relevant.”

Also increasingly relevant to loyalty-program providers is finding the right mix of convenient signup and redemption options for customers, rewards amounts, form factors, technology, and partners.

“The merchants are tying all that together,” says Morrison.

 

Younger Adults Are Loyal to Loyalty

Young adults like loyalty programs even more than older consumers, and the so-called Millennial generation has its own preferences for loyalty form factors for connecting merchants and consumers, according to recent research from Hawk Incentives.

As a group, respondents to a Hawk Incentives survey belong to an average of 6.2 loyalty programs. But the Millennials surveyed belong to an average of 6.5 programs, according findings from the Lewisville, Texas-based unit of gift and prepaid card services provider Blackhawk Network Holdings Inc. And while the overall group is active in 3.9 loyalty programs on average, Millennials are active in 4.2.

Hawk Incentives commissioned Montreal-based market-research firm Leger to do the poll of 1,500 Americans age 18 and older, including 645 Millennials. Leger conducted the research online between Feb. 5 and Feb. 15. The firm defined Millennials as respondents age 22 to 37.

A majority of Millennials, 55%, told the researchers that some type of loyalty card would keep them most engaged with a loyalty program compared with only 47% of Baby Boomers, the generation entering retirement.

Some 82% of Millennials also said they would be interested in redeeming loyalty points for a prepaid or gift card. Millennials were more likely to prefer to redeem loyalty points for a prepaid card than any other generation, according to the findings.

“Millennials entered the financial world in the era of digital payments, alternative payments, and gift cards as everyday tools,” Theresa McEndree, vice president of marketing at Hawk Incentives, says by email. “They have an inherent familiarity and trust of digital payments and gift cards.”

Millennials also were most likely to prefer digital rewards in the airline, retailer, and gym categories, and were more likely than any other age group to belong to online retailers’ loyalty programs, according to the findings. But they were less inclined than older adults to belong to airline and hotel loyalty programs.

The findings have a margin of error of plus or minus 2.5 percentage points at the 95% confidence level.