Heartland Gets Into the Loyalty Business with Its Chockstone Deal

In buying Chockstone Inc., a provider of gift card and loyalty services and technology for merchants, Heartland Payment Systems Inc. essentially is making a bet that merchants with loyal customers make more loyal clients for merchant acquirers. “That certainly is part of the thought process,” Heartland president and chief financial officer Robert H.B. Baldwin Jr. tells Digital Transactions News. “As we looked to continue to round out the suite of products and capabilities that Heartland can offer to the merchant community, we have long felt that having our own gift and loyalty capability made a lot of sense.” Heartland also is getting a tech provider with merchants that have more than 65,000 restaurants, convenience stores, and other retail locations throughout North America, Doctor's Associates Inc.'s Subway sandwich chain being the largest. Chockstone provides gift cards for 27,000 Subway outlets in the U.S. and Canada, and 20% of the outlets also take Chockstone's loyalty offerings. Other clients include Tully's Coffee and Plaid Pantry. The platform that runs Chockstone's programs is fully developed, Baldwin adds, noting that Heartland was just starting work on its own loyalty program when the opportunity to buy privately held Chockstone presented itself. “By making this acquisition we were able to eliminate that,” Baldwin says. “We were years away.” Princeton, N.J.-based Heartland disclosed at its Nov. 4 third-quarter earnings call that it had a deal to buy Chockstone, but wouldn't talk about it in detail until announcing on Tuesday that the transaction had closed. Heartland didn't reveal the purchase price, but Baldwin says Heartland paid less than half the price up front. The rest of payments to Chockstone's former owners depend on performance; if Chockstone does really well, the upfront payment will account for only one quarter of the purchase price. The Portland, Ore.-based Chockstone operation will continue to be headed by chief executive Jeff Lipp. Should they desire, merchants could enlist for a Chockstone gift card or loyalty program without getting a Heartland merchant account, but the Chockstone product suite will now be sold by Heartland's sales force that serves 250,000 merchant locations. Customers of Chockstone merchants can register for points-based loyalty programs by providing a credit or debit card, or even a phone number. Of particular interest to Heartland was Chockstone's real-time technology to use receipts to build repeat business based on individual customers' buying patterns. For instance, if Chockstone's database shows that a Subway customer comes in only once a week, the receipt from the latest sale could offer a free cookie if that customer returns within a few days, Baldwin notes. One thing neither Heartland nor Chockstone has much interest in is micropayments. In 2007, Chockstone bought Peppercoin Inc., a small but prominent player in the micropayments niche. Chockstone mainly wanted Peppercoin's patents and technology applicable to loyalty programs rather than its technology for aggregating small transactions into bigger ones intended to lower merchants' unit costs (Digital Transactions News, April 19, 2007). Merchants didn't bite on aggregation, according to Baldwin. “More often than we all would like, the payments industry has shown an ability to come up with a solution before there was a problem,” he says. Earlier this year Heartland bought Alliance Data Systems Corp.'s Network Services merchant unit, comprised mainly of gas stations and convenience stores, for $77.5 million (Digital Transactions News, May 5). The Chockstone buy shows that Heartland is willing to shop even in a tough economy in which same-store sales at many of its merchants have declined in recent months. Baldwin expects that more companies will come up for sale as investors in specialty firms of interest to merchant acquirers find returns may not be to their liking for some time. “It's a phenomenon of the current environment,” he says. “Undoubtedly there will be more.”