By Andrew R. Johnson
More lenders are cashing in on their transaction data as they look to spur card use and capture new sources of revenue.
U.S. Bancorp (>> U.S. Bancorp) is the latest bank to announce its move into the growing field of "card-linked offers," which allow customers to earn discounts and rebates by swiping a piece of plastic instead of handing over a coupon to a retailer. The services are intended to save customers money on places they like to shop, though they have also raised eyebrows among privacy advocates who worry about the misuse of personal information.
U.S. Bancorp said Thursday it is offering customers a service from third-party vendor FreeMonee Network. The program generates what amounts to a gift card to be used at a participating merchant. When a consumer receives an offer, they can redeem it by using their existing U.S. Bank debit card at the retailer.
"It gives another reason for them to want to use their U.S. Bank check card, and that gets us to be more top of wallet" with customers, said Mike Shepard, senior vice president of consumer credit and debit products at U.S. Bancorp.
The Minneapolis bank has been testing the service with credit- and debit-card customers since November and is now rolling it out more broadly to its debit cardholders. Existing credit-card customers who are in the program will continue to receive the offers, which customers receive via email, Shepard said.
To redeem a gift, a customer makes a purchase at the retailer, and the gift amount shows up as cash back in their account within about two weeks.
The "black art" of FreeMonee's service is its "adaptive matching technology" that can pinpoint cardholders that are not only likely to use an offer, but are also likely to spend more than gift amount based on their spending patterns, said Jim Taschetta, chief marketing officer for the San Mateo, Calif., company.
"It matches you to gifts that you'll find attractive," Taschetta said. "There's almost an eHarmony aspect to this."
But the use of data also raises questions over customer privacy, especially in light of security breaches that have opened consumers up to fraud.
FreeMonee and competing vendors Cardlytics Inc. and Edo say they don't actually access personal information. Rather, their systems rely on software that banks deploy behind their own firewalls that mask the true identity of individual customers with codes. In many cases, the vendors have separate software programs that they run that allows merchants to input specific types deals.
For example, Cardlytics, whose clients include Bank of America Corp. (>> Bank of America Corp), PNC Financial Services Group Inc. (>> PNC Financial Services) and Regions Financial Corp. (RF), says retailers can target offers to cardholders who have shopped at a competitor in a specific ZIP code within a defined time frame. When a merchant inputs a deal into the program, the system looks across all the transactions of Cardlytics' bank clients.
"We never pull individual transactions out of the bank," said Lynne Laube, president of Cardlytics, which has about 230 bank clients. "The only thing that comes out is an answer to a query that is aggregated across--at a minimum--hundreds of customers."
Bank of America announced earlier this year it was testing the service, which it is calling BankAmeriDeals, with employees. The Charlotte, N.C., bank is likely to make it available to customers later this year.
The offers appear within the list of transactions in a user's online bank account. A user would click on an offer to activate it, and then use their Bank of America credit or debit card at the merchant to redeem it.
"Our customers have told us ... they are looking for better deals when they shop," said Aditya Bhasin, who heads consumer marketing and online and mobile banking for Bank of America. "They don't want to do it in a way that causes them to jump through a bunch of hoops or clip a bunch of coupons."
Using transaction data does present the opportunity for privacy abuse, said Larry Ponemon, chairman and founder of the Ponemon Institute, a Traverse City, Mich., privacy and security research group. The key is to give consumers the option to participate in the programs.
"If an organization wants to maintain a level of trust with their customers ... it's important for the company to give the consumer the ability to turn it on or off," Ponemon said.
U.S. Bancorp is auto-enrolling select customers who have opted in to receive email communication from the bank, Shepard said. The offer emails contain a link customers can click to turn the service off.
"By and large I do think these programs are fairly successful," said Madeline Aufseeser, a senior analyst with Aite Group LLC, noting they can increase the average size of card purchases and bolster customer loyalty.
Ally Financial Inc. (GMA.XX), which uses a service from vendor Edo, has seen the number of deals redeemed per day double over the last six months, a bank spokeswoman said. The number of cardholders who have opted in to receive weekly emails with new offers has increased more than 60% in that same time, she said.
"The integration that we do with banks is very light weight and extremely secure," said Mark Marinacci, Edo's chief revenue officer. "We take our technology and we put it inside the bank environment so we can help banks understand its audience and match the right deal to the right consumer."
The services present a new revenue stream for banks, given most vendors' programs are paid for by participating merchants and share a fee on each offer that is redeemed with the banks.
Such services are expected to generate $1.7 billion in annual revenue for card issuers by 2015, according to a report last year from Aite Group.
New limits on how much big banks can charge merchants on debit-card purchases and new rules for debit-card overdraft programs are expected to eliminate more than $12 billion in annual revenue for lenders, according to Javelin Strategy and Research.
FreeMonee, which is working with three other banks in addition to U.S. Bancorp, charges merchants a "success fee" of about 5% to 10% of the total dollar amount a bank customer spends when redeeming one of its gifts. A portion of that fee is shared with the bank, though Taschetta declined to say what that amount is. Merchants also pay to fund the gift amount.
U.S. Bancorp's Shepard declined to discuss its financial arrangement with FreeMonee, but said the bank is looking to tighten relationships with customers.
"It's certainly a competitive environment," Shepard said. "We're always trying to find ways to be ... better than our competition."
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; [email protected]