Editor’s note:

The recently announced merger of Cartera Commerce and Vesdia has sparked lots of conversation in the loyalty marketing business and there is more speculation than consensus at this point in time.

Loyalty Truth shared early thoughts here and we are more than pleased to be able to share insight from Michael F. Hemsey President of Kobie Marketing in this post. Michael’s thoughts are the property of Kobie Marketing and he has been kind to allow Loyalty Truth an exclusive on this post.

With all the recent press and advertisements announcing the merger of Cartera Commerce and Vesdia, I feel I’d be remiss if I didn’t join the discussion and provide some additional perspectives on this news. For reasons which you’ll likely surmise, I’m calling these musings “a grain of salt.”

First, as I have varying degrees of relationships and respect for many of the folks toiling within this newly formed organization, I say Congratulations! This merger has no doubt enriched many of the senior- and executive- and regular rank & file vice presidents we see listed on their merged “Leadership” page. (I think I counted 19 of them, this new company must be huge!)

This merger has, no doubt, provided some much needed breathing room from the Venture Capitalists and other Investors who insist on creating some version of a profitable company out of these two, formerly competitive entities.

[ Pop Quiz - Name that Film: "I love the smell of napalm in the morning." ]

I’m a curious cat, hungry for knowledge, so I studied the advertisements and press releases touting the exciting news of the merger of Vesdia and Cartera. And I studied the posts and industry blogs and their opinions regarding the pros and cons of this merger. I’ve searched all the promising words from all the sources I could find in a quest for one, particular, viewpoint.

Alas, I have not yet been successful. Where, oh where, are the clients of these two companies touting the benefits of the merger? I’ve searched and I can’t yet find any who have taken the time to share their thoughts on behalf of Cartera or Vesdia. Perhaps it’s too soon? Perhaps they weren’t consulted?

Regardless, when it comes to change management and announcements of this magnitude, I think the client viewpoint is not only important, it’s frankly the only viewpoint worth reading. Can the clients explain the benefits of these new teammates having to battle it out for resource – and platform – supremacy? Can they explain the benefits of one, unified platform? Will they have to convert and is there a cost to conversion? Are there proven benefits to that cost? What happened to their account teams? To their ability to get things done? Better? Worse?

Neither here, nor there?

So, yes, those questions come to mind, and without the voice of the customer, some other questions come to mind. If these companies were thriving, would they have merged? If it’s true they’ve been on the block for years, how focused have their management teams been on their client’s needs? Have they delivered on their promises? Mergers are sometimes inevitable – more so when the more traditional business model of Revenues, management of salaries and expenses against those Revenues, and an insistence on glorious EBITDA and Profits isn’t exactly working out.

[ This just in: The former CIO of Vesdia (now listed as a VP of Technology) has announced on his LinkedIn page that he's looking for a new opportunity, in 4 to 5 months. What does that mean for those clients on his platform? Hmmmmm. ]

Yes, mergers can be a good thing because running a business can be far more difficult when Payroll is funded by venture capital, versus profits from a strong business model. So one conclusion is: they needed to merge, to show accretive value to their investors. And by extension, their clients will experience employee turnover, a bit of technical chaos, competing resources, and maybe even loss of throughput because the larger entity is no longer efficient.

In the interest of full disclosure, Kobie provides its own merchant funded platform, and has partnered with Mall Networks, (and I suppose we now partner with Vesdia by extension), and we have partnered with Free Cause, and others, because we make it our mission at Kobie to constantly scour the marketplace for innovation for our clients. And while we believe in the merchant funded model, we’ve always believed it’s only a (relatively) small piece of the customer loyalty and rewards pie. And rarely is it a differentiating piece of the customer experience.

For our techie friends out there, do you remember when font software was sold separately in the ’80s and early ’90s, until Windows and Apple integrated them into the operating system level? Perhaps, this merger represents part of the definitive statement that ‘merchant funded rewards’ are more of a feature to be absorbed into larger offerings that have similar, or superior, data aggregation and reporting functionalities. When the history books are written on this business model, maybe it will be more accurately perceived as an “outer ring of Saturn” rather than an independent, viable offering.

There is always a way through the woods, and smart management teams figure it out. And so I muse on the continued need for responsiveness, a focus on the customer experience, delivered innovation, and reporting to show profitability and incrementality. Whatever the status of the players and the platform, I offer encouragement that this newly formed organization will do what they say they’re going to do. And I’m hopeful, in the interest of competition – and the fond relationships I have with many of their team – they will find common ground and create momentum for their clients.

But it is a very competitive marketplace, and patience isn’t always in great supply when the changes we enact don’t further the cause of the customer.

I recently shared a story in the Toronto Globe & Mail about how Canadian parents would rather talk with their children about sex, drugs or alcohol than money.

Sometimes when I talk with stakeholders responsible for loyalty program operations, I get the feeling that the question draining their complexion is not far from that mark. “Who pays for Loyalty?” is a simple question that can cause discomfort and spark lengthy discussion.

My first boss (just a few rungs up) was Hugh McColl, the ex-marine who built North Carolina National Bank (NCNB)into a regional powerhouse and set it on a course to become what is now Bank of America.  Mr. McColl taught me a lot and had a famous way to simplify the evaluation of a company’s commercial credit risk. In the middle of heated debates about which ratios should be included in a financial analysis to see if some Fortune 100 customer was able to handle a loan under consideration, Mr. McColl would remind us that “all loans have to be paid back from cash, somehow, sometime.”

This pure logic should be remembered by retailers as they push harder to lower interchange rates for card transactions. As the rush to meet implementation deadlines for the Credit Card Act of 2009 dwindles, attention is turning once again to interchange. A good take on the current debate can be found in this article.

The question before many loyalty sponsors today is actually closer to “How can I pay less for Loyalty points?” The behavior of card issuing banks responsible for loyalty programs during this recession speak loudly that reducing cost is high priority. The changes to program rules to hasten forfeiture of points or miles, added fees for redemption, and additional points needed to redeem rewards have all been applied in well known rewards programs over the past several months.

Funding the cost of loyalty can be borne by one party or shared by partners.  How the breakage of those points is shared influences how each party manages program rules and drives more (or less) breakage. In some pay-for-performance models where participating merchants fund rewards to debit card holders from their banking partner, breakage is not a critical issue for either party.

• The bank, typically paying out rewards as a cash back account credit, is not too concerned about the nearly “100% redemption rate” occurring since the retailer is footing the bill.

• Fortunately, the retailer is able to offset its expense with incremental sales earned, all of which is accomplished by a lower than average give-away (10% cash back equivalent versus 40% markdown).

Some people have tried to paint this “merchant funded” model as banks taking advantage of retailers, but I disagree. Intelligent targeting that drives incremental sales and reduces the retailer’s reliance on discounting, while delivering increased card spend at lower cost to the bank is a win-win for all parties.  With retailers papering the walls with “40% off everything in store” signs just to get consumer attention, funding the equivalent of a 10% cash back in points is an attractive alternative.

In my opinion, the renewed emphasis on legislating interchange rates is the red-herring of the year. Yes, MasterCard, Visa, and American Express have a lock on the acceptance network at the retailer. But any perceived threat of monopoly can be balanced with understanding that merchant sales increase when cards are accepted. The cost is high, but at this point, the opportunity cost  is unacceptable.

It is entirely reasonable that business wants to reduce cost, and here’s the lowest hanging fruit – train front-line personnel to stop asking customers if they want “debit or credit” and encourage them to enter their PIN for debit transactions. Consumers really don’t care how they use their card as long as the purchase is completed and there are significant cost reductions to be enjoyed by a continuing shift to PIN based purchases.

If the focus remains instead on reducing credit card interchange rates, card issuers will see a key driver of the rewards business case in jeopardy and could shut down the rewards nozzle even tighter. If cash is not available from the banks, if rewards cards were to go away all together (they won’t), retailers would be left to subsidize their own loyalty marketing efforts without the prospect of shared funding from another source. Private label cards are probably not a holistic answer as consumers have spoken that they want more utility from their payment devices and are only willing to carry the cards with highest utility in their wallets.

In a world without card based loyalty, retailers would be left one tool short of a solid toolbox. Breaking the cycle of discounts and endless sales will be increasingly difficult and consumers will be further trained to wait for the greatest discounts before “footfall” occurs in store.

Here’s the best part: consumers don’t care who pays for loyalty. They want the utility of their payment card, want to earn rewards, and want the best price with good quality from the items purchased in store. I would not want to be retail executive who puts a huge dent in interchange and, while celebrating a temporary victory, watches revenues shrink as the alternatives to ever growing rounds of discounts and pure price competition are diminished.

The visual image I leave you with is Leon Lett getting the ball knocked out of his hands just before he crosses the goal line and is denied his touchdown by Don Beebe on a play that should have led to a massive celebration.

PS: That play might be the only highlight for the Buffalo Bills in Super Bowl XXVII

One of the challenges in the Loyalty Marketing business is that few organizations share tangible results.

I still am occasionally asked the question “Does Loyalty Work?” and wish I could point to more specific evidence in public forum as an answer. Telling people that you are restricted from disclosure due to confidentiality agreements meets ethical standards, but is frustrating.  And, the information shared at conferences is typically sanitized in case competitors are listening.

The dearth of proprietary data shared by program sponsors makes continuous improvement in our sector a bit problematic. That’s why Hanifin Loyalty is fortunate to be able to share the results of Zion Bank’s merchant funded rewards program launched in 2005 in a new case study published on our web site.

Merchant Funded Rewards models represent the innovation of choice among today’s card rewards programs in North America. It’s not a big surprise as “Pay for Performance” affords benefits to participating merchants, card issuers, and cardholders alike.

At the same time, merchant funded programs have proliferated so quickly, almost exclusively centering on online shopping, that banks are challenged to differentiate their offers.

Zions Cash Rewards is unique in that it centers its value proposition on an extensive brick and mortar network of everyday spend merchants which brings high relevancy and interest to the bank’s cardholders.

Documenting this case study would not have been possible without Cynthia Smith, SVP & Director, Bank Card Products and Services Zions Bancorporation and Kelly Passey, EVP, Access Development. Thanks to them both and to their organizations for supporting this effort.

I hope you will download and enjoy this detailed Case Study which shares results of the collaboration between Zions Bank and Access Development to achieve success.

There are some things that people just can’t live without these days. The mobile phone tops the list and, depending on your age and demographic, is closely followed by the Blackberry, iPod, Instant Messaging service, or Xbox 360.

Fortunately for bankers, the 7.16 square inches of plastic known as a credit or debit card is high on the list as well. Each of the associations has contributed to reinforce the importance of payment plastic in our lives. American Express implanted the enduring message “don’t leave home without it”. MasterCard successfully reminds us that their card is “Priceless”, while Visa punctuates the importance of cards by shouting “Life takes Visa”.

Once universal acceptance was established and association brands gained global recognition, it was the rewards business that propelled cards to their next phase of development. Though there is a card for everyone, reward cards continue to capture the highest levels of consumer attention and drive profitability for issuers.

Don’t believe me? Then hear what Visa, Tower Group and McKinsey have to say:

• A 2005 Visa study reported that 50% of all general purpose cards offered rewards in the US market and accounted for 77% of all purchases.

• The Tower Group reported that ““Reward programs may be a lifesaver for an industry experiencing a 0.3% response rate to card-acquisition letters and long-term threats from new technology such as cell-phone payments”

• McKinsey provided more evidence with this comment: “Loyal customers typically generate 30 – 70% more value than run-of-the-mill clients do”

This body of evidence for card rewards has a dark side. It exists in the strong sense of entitlement for rewards by most cardholders and the lack of differentiation in card reward program structure in the market today. The question is, where do we go from here?

To establish leadership in the issuing business, 4 key questions must be answered:

• How can the rewards game be played at lower cost?

• How can program liability be better managed?

• Can rewards currency be used to achieve multiple goals beyond retention?

• Is there life after “points”, and how will the next wave of innovation take form?

Answers to these questions are complex. To merely focus on cost control may jeopardize cardholder perception of the value proposition. The industry is in desperate need of true innovation and fortunately some answers are in sight. Current attention getting trends include Relationship Banking and Merchant Funded rewards programs. Successful examples of each concept are in evidence though relationship banking has yet to promulgate through the industry and merchant funded rewards programs need further evolution.

Not yet on the radar is a rewards structure that will solidly engage the 80 million Americans known as Generation Y (the Millennials). Social networking and viral concepts including the patent pending “Xcelerator” might hold answers for the industry to break the code with younger consumers, but market trial is needed for validation.

One key to creating true innovation might be to set aside the traditional “product launch” mindset and approach the business from a consumer/cardholder viewpoint. Granted that many card marketers might discard this comment as dated, but if that’s so, why don’t we see the tree bearing fruit?

As example, I was on the ground in 2002 when the first Relationship Banking program was launched in North America. Despite the success of that program, I have not seen independent research indicating that offering rewards across multiple products will significantly change consumer opinion of their financial institution. In other words, are we creating products that enamor industry practitioners while we miss the mark with our customers? Are we even sure that consumers desire a relationship with their bank or will service, trust, and advocacy define brand loyalty in banking?

The card rewards race will continue to intensify and the issuers which emerge to capture market share will be those committed to pursuit of true innovation and have their ears tuned to the customer drumbeat.

Bill Hanifin