EMV cards have been in the spotlight this year, with JP Morgan Chase, U.S. Bank, and Wells Fargo making announcements of portfolio migration from magnetic stripe cards to plastic that carries both mag stripe and a “chip”.

Market leading loyalty researchers, Colloquy, featured chip cards in the U.S. in their most recent issue, interviewing Randy Vanderhoof, the long time leader of the Smart Card Alliance, for insight into the wave of change hitting American shores.

Emerging from the smart card discussion, there are two key topics for debate.

1. Over what time period will U.S. migration to EMV take place and at what cost?

2. Will the widespread adoption of EMV cards by U.S. issuers represent a launching pad for loyalty program innovation?

Funny thing how history repeats itself:

• In 1996, Geno Pandolfi, a brilliant creator of payment and loyalty solutions who operated well ahead of his time, developed a smart card interface for his loyalty software, Cobrasys. The solution became part of the many smart card pilots trialed by Visa in Latin America during the late 90’s, and was the operating platform for the Bonus coalition loyalty program in Peru.
• During a 5-6 year stretch between 1998 – 2004, I attended the annual Smart Card Forum which brought together vendors and solutions providers focusing on bringing innovation to the payments business. Randy Vanderhoof was a prominent part of those discussions – most of which were addressing the same questions I have noted above. During those events, I tried on George Jettson-like Java-enabled rings that could be passed before chip enabled readers at POS and bought sodas at the conference events with my smart card loaded with a prepaid purse.
• During my years with Frequency Marketing through 2005, Jim Kuschill, the “godfather” of loyalty processing software technology (in my book at least) invested countless hours to understand what marketers could deliver to consumers in the way of loyalty via Chip that couldn’t be done with a mag stripe. The answer – not much.

Now, it seems, we’ve gone “back to the future” and are opening a similar debate once again. If you’re interested in a “Loyalty Lifehack”, I’ve got one for you:

• EMV cards are being introduced in the U.S. because the case to reduce fraud is so overwhelming that card issuers have no choice
• Trying to create buzz about EMV from a loyalty standpoint is peripheral to the discussion as the real debate is about cardholder protection and payment card utility.

You see, as the U.S. is the last significant nation in the world to adopt the EMV standard, the fraudsters have come to our shores to take advantage of the easiest mark on the globe. Add to that Americans traveling abroad are increasingly targets of fraud as they have only mag stripes cards to use, and the utility issue comes center stage.

Richard Sanders sounded this alarm in 2006 at the last Smart Card Forum which I attended. Richard is a globally recognized payments and loyalty expert, having run the credit card centre of excellence at Visa EU, launching the first “chip and pin” card program in the UK with Abbey (now part of Santander) and now sharing his wisdom with clients of ACI Worldwide, where he serves as a Solution Consultant. ACI recently published a comprehensive loyalty survey based on the retail field which garnered much attention in the press.

During a talk about loyalty and chip cards, Richard told a packed room that “whether they liked it or not” chip cards would come to the U.S. sooner than later. Richard predicted the timing of the introduction would correspond with the migration of other nations to the EMV standard, leaving the U.S. alone as the world’s “fraud magnet”. Some delegates listening scoffed at the idea, responding that our low-cost, always-on communication systems negated any benefits from EMV.

It took a few years for the prediction to come true, but Sir Richard was right. EMV is coming soon, and with the current legislative pressure on swipe fees, we may well see a Chip and PIN model taking hold just as it did in European markets. Whether the eventual form factor is based on contact or contactless acceptance at POS is another subject for debate.

To the question of whether EMV will spell differentiation for loyalty marketers, please don’t bet the farm on it just yet. One reasonably successful example that I have seen is BBVA Bancomer’s migration of its Puntos Bancomer program to Vida Bancomer circa 2006. That program used its new EMV capable cards to carry a purse of loyalty points which could be redeemed with merchants as part of a purchase transaction.

The success of that program was largely made possible through the fact that Bancomer not only was one of the largest issuers in Mexico but also a leading card acquiring organization. With the entire processing, authorization, and settlement lifecycle under its roof, Bancomer was able to recruit merchants to participate, and added some zip to a program originally motivated by the EMV migration.

What’s ahead? Maybe you should have Richard Sanders on speed-dial as he has been living with EMV and Loyalty for the past 10 years.

My guess is this:

For Payments: Count on the mag stripe co-existing with chip for the next 3-5 years and then gradually phasing-out. The speed at which terminal conversation can take place and the determination of “fallback” policies will dictate the horizon.

For Loyalty: Some loyalty programs will use available real-estate on the chip to facilitate instant redemption and other “in the moment” rewards, but look for more powerful innovation through mobile, social, and location enabled paths.

Feeling “chippy” about the subject? It’s a complex subject, so drop a comment and spark the debate!

After more than 100 posts I can say that Loyalty Truth has achieved a degree of permanency.

Founded on my own conviction and commitment, it is a welcome relief to have help. I express my gratitude to guest contributors Tom Rapsas, Jim Kuschill, Brian Kryzanski, and Mike Capizzi. They have each written about aspects of Loyalty Marketing where they have particular expertise and collectively they represent a growing foundation of support for this blog.

With so much to write about in the evolving Loyalty Marketing industry, the opportunity is here to establish some themes to follow for the future. Keep your eye out for articles categorized as “Loyalty 201“, “Loyalty in Any Language“, and “Loyalty Futures“. In addition, we’ll continue to document instances of the “Loyalty Asterisk“, to address the gotchas and tripwires of Loyalty Marketing.

• Loyalty 201 will address how essential elements of the business are evolving to meet the needs of increasingly empowered and knowledgeable customer groups. Here you will read about new directions in rewards, communications, and marketing technology which drive higher ROI for loyalty program sponsors. I’m assuming that my readers understand the basics and are ready to move on to consume solid food!
• Loyalty in Any Language will share learning from international markets. The influence of culture, custom, and unique business environments on the execution of effective marketing strategy is undeniable. These posts will provide a vital resource for any company with cross border interests. I will not only share my own first hand experiences working outside of our borders, but will showcase loyalty leaders from key markets around the world.
• Loyalty Futures will take inventory of just about anything that can be found in the crystal ball of Customer-centric strategic marketing. Where innovation in building brand loyalty and changing customer behavior is observed, we’ll share it here. Lots of big companies are trying to connect the dots of social media, millennials, digital CRM, and profitability and Loyalty Truth will makes its contribution to the cause.

According to what I read in the blogosphere, my approach to Loyalty Truth is somewhat non-conforming.

• I am driven by substance, not frequency of posting. Though I manage to get a dozen or so posts up each month, I have yet to publish a “throw away” article and hope I never do. There is so much change underway in Loyalty marketing that my inventory of “posts-to-do” is outpacing my time to properly research and post. This approach should translate into high quality posts that are almost mini case studies by themselves. You can be the judge.
• Balancing quality and readability is the next challenge. Beyond a certain length, you won’t spend time to read what’s posted, so I am saving some bigger topics for white papers to be published on the Hanifin Loyalty website.
• Lastly, I have to admit that while writing is an enjoyable pursuit, I publish Loyalty Truth with a purpose. The perspective, opinion, and experience that is baked into each post is meant to offer a teasing glimmer of insight into the value that Hanifin Loyalty brings to its clients. We confidently offer the highest level of strategic advice as well as exacting project management and tactical execution services to make sure clients reach their profitability targets. Give us a chance to serve as your portal for top-tier decision making. You’ll find there is still quite a value to be found in the dollar these days.

I hope you will enjoy these new features and spread the word about Loyalty Truth.

Enjoy the journey….

Editor’s note: The build versus buy decision is visited often by loyalty program sponsors. Jim Kuschill is the architect of one of the original – and still market leading – platforms in the industry. This is the Second in a several part series about loyalty software and it will be sure to fascinate loyalty junkies whether working for software vendors or internal IT teams.

In the first installment of this series, we saw that it was possible to decompose loyalty software systems into 23 separate major functional areas – 16 modules and 7 shared services.

In this installment we’ll take a look at how shared services impact modules and whether a developmental lineage can reasonably be established across a wide variety of loyalty software systems.

In general terms, modules interact with users while the shared services support the modules and interact with the operating environment (e.g. the database system). As a consequence, the capabilities provided by (and observable in) a system are largely dependent on the modules. But, how (well) those capabilities are provided is often highly dependant on the shared services. In particular, if a shared service does not exist, is poorly implemented, or minimally implemented, then the capabilities, reliability, or some other aspect of the system will be compromised.

Because shared services can affect large portions of a system, some correlation always exists between overall system flexibility and efficiency and the depth/quality of the shared services. However, if there was little correlation between shared services implementations, we’re again in a position where it would be difficult to show how investments would yield more cost-effective systems.

At this point, it was time to revisit each of the loyalty systems and identify whether they implemented a module or shared service, and if so, how. As this work progressed, it was possible to see patterns across systems that once appeared to have very little in common. Not only were there patterns, but there were also common approaches to the implementation of modules and services. Certainly not with 100% correlation, but with fundamentally similar approaches.

Upon a review of the results it also seemed as if there were 23 timelines, each illustrative of the lineage of a separate technology. In essence, each of the 23 timelines contained a version 1, a version 2, and so on. Each of the versions essentially indicated how “mature” the functionality of a module or shared service was.

This seemed a little too good to be true, so further research was done on the history of some of the systems. To do this, I spoke with developers and others who had insight into the modules and services of previous versions with any eye toward whether those versions fit the patterns identified. There was not 100% correlation, but the patterns were unmistakable, with well correlated progressions in every area.

Once the maturity levels were identified, it was then possible to consider the associated operational characteristics to understand the benefits, problems, and most importantly, the costs of operation for being at a specific maturity level. It was also possible to anticipate what more advanced maturity levels would look like, functionally and operationally, even if they had not yet been seen in a deployed system. Finally, it was possible to estimate the cost of enhancing a system from one maturity level to the next, a critical component of any ROI analysis.

Even with all of this, it was not yet possible to evaluate whether a particular loyalty system was inefficient at handling the job it was tasked to do. For that, it was necessary to understand the demands on the system, which requires us to consider such things as the vertical market, membership size, and program complexity.

By observation is was clear that each vertical market had a fairly distinctive pattern of needs and these tended to correlate with membership size and program age. This provided a baseline read but analysis of the following elements was especially useful:

• Reviewing the current software to identify its level of maturity
• Survey the loyalty program’s recent operating history for insight into the functions being performed and the associated costs
• Scan the strategic plan for the loyalty program (ideally a 2 or 3 year vision) to understand what maturity level of software is required to reliably and cost effectively implement the vision

The form of analysis yields a reasonably quantitative illustration of how well a loyalty system aligns with marketing realities and also where any gaps exist relative to the future marketing vision. Comparison of the gaps against the frequency of the needs and the cost of enhancement provides good insight into the areas into which investments should be made.

In Part III of this series, we’ll look at why a loyalty software maturity model is a necessary step and explain why being able to configure 95% of a solution is still not enough.

Stay tuned.

In the beginning, there were punchcards. Since then, man has created magnetic stripe and bar code cards, smart cards, java rings, and RFID cards. Technology has evolved greatly over the past 25 years, and loyalty sponsors and providers are still seeking the silver bullet of delivery devices.

While we’re busy debating which technology will win out, I wonder if The KeyRing Thing will make a good bridge to the future?

My friend and Loyalty Truth contributing author Jim Kuschill wrote a great article for Colloquy entitled a ”World Without Cards” in which he weighed the pros and cons of whether we needed cards at all. If we’ve learned anything over the past decade or so, it is that the technology or device used as a membership card is the not the sweet-spot of the value chain.

The right strategy, targeting, and value proposition are the keys to engaging consumers in loyalty programs. Get that right, and you could get away with giving members something akin to a gas station bathroom key (the small key attached to a large wooden dowel), and they would carry it.

Admittedly an exaggeration, I hope you understand the point. Sometimes the sexiest technology, after thorough vetting, is revealed to be not much more than a ”solution looking for a problem to solve“.  Jim Kuschill and I debated the added value of smart cards to loyalty program execution for literally years and, in the end, we agreed that it wasn’t the smart card that would make the difference.

What we did learn from our debate was put to the test as we worked with card issuers in Latin America and Europe as they introduced EMV standard chip cards into their markets. The lesson: it was the synergy of technology and circumstances that made the difference.

With many Latin American banks owning a strong acquiring business, we were able to recruit merchants to support POS bonusing and point redemption at POS to pay for purchases. It was this combination of factors that helped us migrate traditional points programs from magnetic stripe to EMV cards and we allowed the smart card to grab most of the glory.

After lots of debate over technology, I appreciate a return to simplicity. That’s why I find a particular brilliance in the Key Ring Thing, highlighted by Good Morning America as part of their coverage of the “best” discount shopping cards. In the GMA piece, Shop Smart Magazine Editor Lisa Lee Freeman profiled the device as she also highlighted her favorite discount cards found on Shortcuts.com.

When I opened my morning newspaper and read another profile of this device, I had to spread the word. The Fort Lauderdale Sun Sentinel chronicled how for $3.97, you can get yourself a high quality PVC card that holds 5 or 6 barcodes of your favorite rewards program. Through the web interface, consumers can select from popular programs or load their own if it does not appear in the list.

Apps to aggregate loyalty cards don’t end there, as My CardStar allows consumers to catalogue their favorites on their iPhone, Blackberry, or Android and JustOneClubCard.com, created by Gregory Pinero, serves as a more casual hobby site for the same purpose.

I like the idea of turning my night-watchman style keychain into something more sleek courtesy of the KeyRing Thing. I like even better having a “wallet” to store all my favorites on my iPhone, though I wonder how many bar code readers are enabled to read from the iPhone screen (an acceptance issue needs to be resolved).

In the end, it just might be that the highest purpose of “high tech” will be to deliver caveman-like simplicity to consumers. For today, the KeyRing Thing delivers on that count.

For tomorrow, who knows? It might even be that the Poken Girl has the answer….

Editor’s note: The build versus buy decision is visited often by loyalty program sponsors.  Formal market studies by COLLOQUY and others have arrived at the conclusion that “internal IT” might be the market share leader among loyalty software providers.  Jim Kuschill is the architect of one of the original – and still market leading – platforms in the industry. He has been asked every question about loyalty software that could be asked and is so well versed that, if you bore him, he’ll go ahead and answer the questions you forgot to ask! This is the first in a several part series about loyalty software and it will be sure to fascinate loyalty junkies whether working for software vendors or internal IT teams.

I’ve spent a lot of time over the years studying loyalty system technology. This includes the consumer touch points such as the web site and IVR, the data touch points that drive accruals and perform fulfillment, and everything between.

At first, second, and third blush, each of the systems looked very different, the only thing in common seeming to be that they all cost too much to operate and never really seemed able to (easily) do what marketing wanted. As a result, I started to wonder if there really weren’t patterns, whether it would be possible to identify and make some sense of them, and if there might not be substantial benefits in teasing them out. In particular, I wanted to see if there might be a way to understand how loyalty systems “grew up,” to be able to predict operating capabilities and costs, and then to leverage this knowledge into more flexible and efficient systems, but most of all, into more cost-effective systems.

An interesting truism relative to loyalty processing software is that they seem alluringly simple to build. After all, tracking points is merely a matter of addition and subtraction and tracking names and addresses is pretty basic functionality as well.  I would go so far as to say that if you sat down with 100 bright software analysts or software engineers that had not previously worked with loyalty systems, fully 90% of them would confirm they could build just what you needed!

While this isn’t a good thing for loyalty software vendors and ultimately it isn’t a good thing for those that operate programs, it turned out to be a really good thing for my analysis. Partly because so many different systems existed and partly because it was easy to see that the vast majority of loyalty software systems started with pretty much the same kernel – typically a little member management, a little points accrual, and a little redemption support.

Then they grew.

And new parts were added.

And they grew some more.

And then parts had to be rewritten.

And those parts started to grow.

This approach to development appears haphazard, but it is actually driven by market forces that influence the needs of the marketer. This in turn drives the software requirements and ultimately the form of the software. Given that market requirements, particularly in the same vertical, will in large part be similar, it’s not unreasonable to assume that the solutions within a vertical will exhibit a good deal of consistency as well. That is, every loyalty system within a vertical should provide similar core functions, albeit perhaps in different ways and to a different degree.

A subsequent comparison between several systems within a number of different verticals confirmed that functionality wasn’t highly variable, but it did not immediately yield insights into the operational cost drivers, much less how such costs might be reduced. This was somewhat of a disappointment, but should not have been unexpected. To some extent I had fallen into the “loyalty systems are simple” trap by trying to categorize at too high a level.

At this point, some functional decomposition was in order and so I took inventory of the major functions performed by loyalty systems. For example, point expiration is a common major function. Similarly, and much more complex, redemption is an obvious “must-have” function. People often refer to these as modules, that is, the points expiration module, the redemption module, and so on.

While modules are readily identifiable, loyalty (and other) systems generally include a large amount of supporting code. In terms of software design, this code is often identified as “shared services” or “service modules”, because the functions are needed (shared) by a number of different modules. For example, handling batch files, logging of data changes, and so on, are typical of shared services.

After a re-review of the systems with an eye towards functional decomposition, 16 major modules and 7 major shared services were identified. Of the 16 modules, 4 were large enough that they could have undergone a similar decomposition process, but rather than complicate the process further, this was simply noted, with an expectation that any findings may not be quite as applicable for these modules.

Now it seemed that some progress was being made as it was possible to break down the formerly monolithic systems into a manageable number of readily identifiable parts. The next interesting question was whether there was a discernable “lineage” associated with the parts. Without a lineage, without correlation, it would be much more difficult to show what type of investments would yield more cost-effective systems.

In our next installment we’ll review each loyalty system against the identified modules and shared services and see if  clear relationships exist between investment in specific sets of modules and more cost-effective loyalty marketing systems.

Editor’s Note: Jim Kuschill is a leading marketing technology advisor combining 15 years of loyalty experience with 15 years of technology experience. He consults, writes, and speaks on the implications of strategy on technology and vice-versa, with an emphasis on loyalty marketing systems.

If you need to understand why your marketing systems get in your way, to refresh your systems through build or procurement, or to understand best practices, you can contact Jim at kusch@perfectlytargeted.com. Jim is also the latest Contributing Author at Loyalty Truth and we are proud to showcase his important article on Loyalty Program measurement.

I’ve been in several senior-level meetings over the last bit where there was substantial discussion concerning the issue of Cost-per-Point (CPP).

While definitions of CPP vary, a common definition is the total financial currency cost (e.g. USD) of awards redeemed divided by the total promotional currency amount (e.g. points) used to make those redemptions over a defined time period. Note that CPP can be calculated for subsets of a membership base and for individual redemption items, both of which are valuable calculations for a Loyalty program measurement plan.

The aforementioned meetings are generally unhappy ones between programs operators and awards providers, because the CPP is rising and “something needs to be done” to bring it back down. Compromises are made, value propositions are generally diluted, and off everybody goes.

Given the magnitude of awards expense, attention to CPP makes perfect sense. The conundrum from my perspective is that CPP is often the only “cost per” metric that’s discussed. In particular, I almost never see a CPM – cost per member – metric tracked and reported against.

Historically, the largest loyalty program expense has been awards, followed by communications and operations. With the continuing emphasis on electronically delivered communications, reductions in communications frequency, and technology for self-service, it’s likely that operations costs now exceed communications costs in many programs.

Incredibly, the value of the second largest program expense, operations, is not often definitively known. Even if there is a figure provided, it’s viewed differently by siloed stakeholders and, while there may be acknowledgement, there is seldom agreement on a usable metric. As a loyalty software vendor I always thought this was a “job security” decision by program operators, as it’s tough to argue that a new solution represents a cost reduction when there’s nothing to compare against.

After looking at individual situations more closely, there are many reasons for the lack of consensus. Sometimes, the tactical overwhelms the strategic, and there’s no time to engage the debate. Sometimes, I think organizations don’t really want to know the answer because, if they did, there would be uncomfortable repercussions.  Sometimes, well, organizations are too complicated to make sense of it all, even with a concerted effort.

As loyalty marketing and loyalty marketing technology both slowly inch from art to science, I believe that measurement of the cost of delivery and the associated CPM needs to be defined and scrutinized just as closely as CPP.  The availability of this metric will help us hone the efficiency of reward delivery and to make more informed decisions for program improvement.

I would approach estimating CPM as if I were creating the expenses portion of an “income statement” for my program:

• For the numerator, I would list the cost of each major service category separately. Some programs earn revenue from partners, both internal and external, and from other sources. If this is the case for your program, I would net out the costs associated with earning this added revenue. That is, I want cost numbers that exclude “extraordinary items.” I would also exclude revenue for selling promotional currency and the cost of rewards.

• The denominator should go beyond raw member count as this overlooks the disparity in costs for servicing active versus inactive members. Ideally there are established criteria for determining whether a member is active or not. Apply this formula to create two buckets of members and weight the inactive total with an appropriate factor, for instance 20% indicating that 5 inactive members use the resources of 1 active member.

The process doesn’t sound overly complex, but in practice it can be. Nevertheless, tremendous value results from the discipline of measurement which yields the true cost breakdown for servicing a member and illustrates whether the cost of each service category is trending up or down.

This knowledge allows executives to weigh investment strategies, evaluate alternatives, and make better cost projections. And of course, knowledge is power whether negotiating with my service organizations or with an internal team.