Disruptors In Loyalty
5 minute read from Ellipsis
We find it helpful, for our customers and for us, to occasionally look up from our screens and survey the larger forces that are shaping the loyalty marketing world. So as 2018 ends, we thought an eclectic scan of the ‘disruptors’ in our business may be of interest to our readers.
This is no ‘Future Shock’1 but that ground-breaking book is our inspiration (Nostradamus is too obscure to us). Feedback welcome as always; have we missed anything you would like us to express a point of view about?
The Ellipsis ‘big 4’ predictions from the end of 2018
- Multi partner program operators will become ‘data scientist’ agencies for their partners or lose them
- The battleground will shift from cards to payments and e-wallets
- Loyalty to the platform will dilute loyalty to competitor retailers, and threaten loyalty to the manufacturers brands
- We will (finally) see the delivery of 1 to 1 marketing and a revolution in marketing operations as heuristic processes (segmentation, life-cycles, personas) are replaced by machine learning capabilities
Market forces are impacting the traditional loyalty landscape
The game is changing for Coalition Loyalty Programs
It has been quite an eventful 18 months for Coalition Programs – those multi-merchant programs that are run by an independent operator; in contrast to programs run by a large merchant (like an airline or a grocer) that include partners, even though (especially in the case of airlines) it may be a substantial contributor to company performance.
The most famous large-scale coalitions have experienced disruptions that are dramatic.
- Plenti (USA) came and went, closing its ‘doors’ after failing to gain traction with the American public. Owned by American Express, this operator still runs large ‘Pay Back’ programs in Europe, India and Mexico but the prized USA proved elusive.
- Aimia deserves special attention.
- Aimia’s largest program, Aeroplan: A spin-off from Air Canada, it came as a bit of a shock when the airline announced it was ‘cutting loose’ and launching its own program in 2020. This led to a collapse in the Aimia share price, and the sale of the Aeroplan program to a consortium of Air Canada, 2 banks and Visa. At, arguably, a low price. The program is moving in-house. Nectar (UK): the major partner Sainsbury's announced it was buying the program back from Aimia, at arguably, a low price. The program is moving in-house.
- Nectar (Italy): closed its doors. The largest Italian grocer is a member of competitor Payback, surely a contributing factor to the closure.
- AeroMexico made an unsolicited (and rejected) bid to buy back the Aimia share of its loyalty program. Stay tuned, Air Mexico clearly want to move the program in-house.
- MultiPlus (Brazil & Chile): launched in 1993 they now have 21+ million members. The airline LATAM announced in September 2018 that they will be acquiring the program operator, MultiPlus. The program is moving in-house.
What has caused this flurry of re-acquisition by ‘anchor’ participants? Some hypotheses:
Growing awareness of the value of customer data has encouraged participants to want the data back so that they can control their own destiny. Self-determination is easier with unrestricted access to your own customer data.
Additionally, the economies of scale once offered by joining a coalition are becoming less attractive. New entrants are providing cheaper off the shelf software solutions, established loyalty vendors are sharpening their pricing, and marketing cloud platforms increasingly offer integrated tools to manage loyalty.
Specifically, for the airlines, the availability of distressed seating has decreased since the days when the external program was a way to fill seats with passengers that had been subsidised by loyalty points. With full loads, cheap reward seats erode margins.
Overall, the multi-brand loyalty program is in good health because the ability to earn points on most of your spending is seductive for customers, but the independent operators who profit from breakage and points margin are under pressure. Important to note here that the Payback program (owned by Amex) passes all breakage benefit back to their partners and focusses on providing data services for income; it may be more resilient as a result, despite the failure of Plenti in the USA.
- Coalition program operators who do not also provide outstanding marketing and data services for their partners will see them leave. Providing the operational infrastructure and ‘back-office’ processes is no longer enough value to justify paying for coalition points. Technology advances in payments and the cloud have significantly reduced the hurdles to launching in-house loyalty initiatives so operators must turn up the marketing value they offer.
The payment system well is drying up
Credit card issuers have long been a significant source of funding for consumers in programs – coalitions, frequent flyer, retail and bank programs. In many jurisdictions this funding is drying up as payment system regulators reduce credit card portfolio margins.
Credit Card issuers have traditionally included interchange (fees charged to the merchants for accepting the cards) in their loyalty budgets - using “other people’s money” to run their programs. It is getting harder to fund a program that is rich enough to interest customers as interchange rates drop from the 2%+ of sales in the USA to the 0.03% regulated in the EU, reducing the overall income available for rewarding customers.
We have written on this disruption before; ‘Credit Card Loyalty: How much is enough?’ In our home market, Australia, credit card portfolio income is also being squeezed by tougher rules on interest free periods and responsible lending limits.
The loyalty industry will have to innovate to keep members engaged as reward richness becomes harder.
- In low margin credit card jurisdictions banks will shift their cardholder loyalty efforts and compete on convenience as they strive to be the e-wallet of choice. Embedding merchant loyalty programs in their wallet will allow banks to tap into the loyalty investments retailers can still afford. But retailers will prefer to fund loyalty directly rather than join/fund the bank’s programs. The recent success of alternatives to bank credit such as Afterpay and Zip Money are an indication that consumers and retailers are looking for alternative financing options to credit cards, even with rewards
The Platform Economy is changing the nature of loyalty
“…And we consider them to be loyal to us – right up until the second that someone else offers them a better service…” (Jeff Bezos, 1998)
Leaving aside esoteric arguments about whether Amazon Prime is a loyalty program or not, there is no doubt that ‘platforms’ – online marketplaces – are potent competition.
The success of Amazon Prime has shaken up retail commerce generally and loyalty specifically. In Australia eBay has responded with ‘Plus’ and Flybuys with ‘Max’.
These programs are specific examples of subscriptions – where members pay ahead of time for future rewards. Costco also employ this model, with membership fees allowing members to access low prices. These programs are different as they disrupt the typical earn-accumulate-redeem sequence. Requiring payment before receiving the reward/privilege (free shipping, special pricing & exclusive offers, additional services like streaming TV) employs ‘loss aversion’ as the emotional mechanism – I have already paid for this…
Just as importantly, these programs have changed the definition of rewards, focusing on convenience, delivery and range of services as drivers of engagement and loyalty.
They build loyalty and engagement with the platform rather than the merchant or manufacturer, which is ironic; the internet was supposed to disintermediate retail, allowing manufacturers to sell directly to the consumer. Amazon and others seem to be very successfully intermediating by increasing convenience and removing transaction friction for customers.
- The 2020’s will feature the battle of the platform brands. It is hard to see Amazon losing the lead, but they face contenders. For example, Walmart has added a streaming service, Vudu, that recently struck a deal with MGM for content creation. In Australia the national grocery chain Coles has announced their first competitive salvo with Flybuys Max. This subscription program offers delivery benefits, discounts, a wide range of products including fresh food, streaming movies… stay tuned. The competition will revolve around the smart home because convenience is critical to winning loyalty. Expect to see Google Home in some of these platform plays to match Alexa.
Technology is disrupting loyalty (of course)
Convenience is a reward / Customer Experience Rules
The Ellipsis ‘CX Pyramid’ makes the point that customer relationships are built in an ordered sequence which should not be changed. First honour your promises, build trust, then be easy to do business with by personalising, then you have permission to be fun. Amazon is well on the way to exploiting the second layer of our pyramid; ‘Alexa order coffee and soap’ is easy, and before her there was Amazon Dash for product re-orders. Technology is making relationships easier.
Card linking, and digital wallets remove more friction
Loyalty operators are allowing members to link their payment cards to their loyalty programs so that when the cards are used, points are earned without the need to carry a separate loyalty card. The payment schemes (Amex, Mastercard, Visa) provide the transaction data for the merchant to close the loop and credit the member’s shopping.
This card linking technology has several implications for loyalty:
- Card linked merchant offers – promotions hosted by the card issuer that result in an automatic reduction in the card balance. Already quite common
- Closing the Online to Offline loop. Customers with linked cards that view offers online then purchase the products in-store can be identified and the success of the online promotion tracked. This quest for accurate attribution is important to the business models of vendors selling online advertising and re-targeting services. Also, this recently caused a privacy ‘stir’ when it was revealed that Google has been accessing data from Mastercard for this purpose
- Earn points automatically when you use your linked payment card, and also spend points automatically as tender at checkout, both reducing the need for a plastic card to be carried
The battle has already moved to the wallet, as banks, telcos and handset manufacturers compete to own the customer’s digital wallet. Smart wallets can decide which card maximises your points/discounts/status for each transaction and automatically select it during the transaction. As a result, winning the wallet battle is strategically important for all the payment loyalty contenders.
The intensity of the battle for the wallet went up a notch on September 12 this year when Apple made it possible for “…any external device to open an app automatically or trigger an Apple Pay payment by simply sending a NFC signal. The difference from last year is that the user doesn't have to manually open an app anymore...triggering an Apple Pay payment doesn't require an expensive POS terminal anymore. Instead of using a POS terminal for in-store card-present NFC payments, the Internet of Things (IoT) device would trigger a mobile card-not-present payment – just like when using Apple Pay online.2” Processing payments no longer requires a POS terminal and wiring to the payment network.
Vending machines, parking meters, buses and trains… can now all send a signal to start a payment in an Apple wallet. Loyalty Program operators will be lining up to be part of that wallet!
Three classes of vendors have emerged that are applying card linking technology in their products and services.
- Loyalty vendors who provide an easy to implement loyalty program for retailers. The merchant proposition is; let us set up and run your loyalty program for you. No cards to issue, we will host the web sites and manage the membership and direct marketing for you. Customers simply link their payment cards to your program and receive credit for shopping with you. Examples are bink, thanx, OpenSparx and UTU
- Vendors who link merchant offers to your payment cards, typically for banks/card issuers so you receive the discounts or credits automatically. Example vendors are Cardlytics, Truaxis (now owned by Mastercard) and Linkable Networks.
- Aggregators who ensure you are aware of the best offers available for your cards. These vendors scan the web looking for offers on cards you have registered with their app. Examples are; Sift, Kard and potentially Stocard.
We have also seen ‘virtual cards’ offered by the payment schemes lead to loyalty innovations - and we expect to see many more.
A good example of this facility in use; with a browser plug in, the loyalty operator intercepts a member’s online shopping transaction at check-out, looks up their points balance and asks if they would like to pay with points instead of charging to a card. If the member selects Yes, the operator spins up a virtual, single use payment card through the schemes and uses it to pay the online merchant (without them having to know they have just been paid with points). Points balance is reduced by the reward cost and the transaction is complete.
Blockchain gets plenty of mentions (and offers to solve some loyalty problems program operators did not know they had)
This is not the place for an explanation of what blockchain is and how it relates to crypto currencies, coins and tokens. But you would have to have been off the grid in the last 12 months to have not heard the clamouring about blockchain and loyalty. Already loyalty platforms are being marketed by a range of vendors; including, LoyalCoin, Loyyal, Livenpay, Ezytoken Rewards, and the Elements Project. Singapore Airlines and Delta have announced their programs now run on blockchain platforms.
What do these vendors present as their unique customer value proposition? They offer to address a range of security and technology challenges, to offer a cheaper IT platform - but also to solve several loyalty program’s “problems”;
- Claim: Operator Balance Sheet liabilities grow as points are issued. Issuing a crypto token that is independently owned and traded spares this accounting ‘disaster’.
- Observation: Most operators do not consider this a problem. The liability is booked as deferred revenue and they have the cash already. Using the money to buy crypto tokens instead of issuing points impacts cash flow, lowers future revenue, increases expense accounts. It also removes any financial benefit the operator can gain from points that expire unused (breakage). Generally, not a problem.
- Claim: Customers have many memberships with point balances that are too small to claim meaningful rewards, so allowing them to combine their balances into a single crypto token will maximise their benefit from widespread, light participation in many programs.
- Observation: Operators do not want light users to get high value rewards from their programs. They want a reasonable level of breakage for low value members. They prefer their points to be spent with them; or they would buy currency from a coalition operator. Few are happy with customers taking their points and spending them with competitors. Points are not meant to be fungible in most cases!
- Claim: Unscrupulous operators can devalue the value of their points if the program becomes too expensive or shorten expiry periods for unused points to the same effect.
- Observation: Yes, they can. Banks can also increase the interest rates on outstanding mortgage balances in variable rate loans. Customers have recourse through the legal and political systems (Ottawa made loyalty point expiry illegal recently). But we have an example in Australia of a loyalty crypto token that was sold at $2 in the initial coin offering and has dropped to $0.05 now. There is no legal recourse, so members with a crypto value that has tanked are out of luck. Coin prices do not always go up just as point values do not always stay the same.
Artificial Intelligence will/is changing relationships with customers
The perfect headline: “Artificially Intelligent Blockchain system uses Big Data…”
Apart from some simple automation examples like chat bots on help screens and in redemption catalogues, AIs biggest impact will only be visible through the relevance of the marketing we receive from the program operator. Ellipsis believe that the AI field most likely to impact our industry is the application of machine learning to loyalty marketing.
The blunt application of ‘always on’ rewards is a dated approach necessary when we did not have the ability to observe, automate micro-segmentation and deliver relevance in real time in mass. It is in the same class as those other popular marketing compromises that we used because we did NOT have machine learning tech, for example;
- Segmentation; grouping customers to emulate 1 to 1 treatment was a necessary compromise
- Customer life-cycle models; used to estimate customer needs at stages in their relationship with your brand was a compromise, by looking for groups of customers with predictable sequences of needs
- on-boarding programs that create differentiated treatments for new customers (but don't account for differences within those new customers)
This quote from The Wise Marketer puts it well; "...if machine learning can learn how individual customers feel about your brand and experience, and then craft personalized, relevant messages based on that learning, then why do we need a loyalty program to deliver reward and recognition to best customers? If an algorithm can learn what offer will best prevent a customer from leaving, then why include a mechanism as cumbersome and expensive as a loyalty program to deliver that offer3 "
Our answer? A blend of hyper-personalised marketing and traditional loyalty rewards (if the individual customer requires them) will be the Loyalty Program of the future. It should be already, really. Applying AI to manufacturing will allow personalised products to be built as well… then we are really getting relevant!
Back to the present, and there are some examples emerging. For instance, the most often quoted example of AI and loyalty is the application of propensity insights to redemption offers made by HSBC USA to its credit card portfolio, (using some poetic license to call it AI), and more will certainly come.
Loyalty initiatives will finally deliver the 1 to 1 marketing treatments that were first discussed in the 1970’s. We still like to use the simple framework from that era - IDIC;
- Identify your customers individually and addressable. Online commerce and recognition technology is making this easier and ubiquitous
- Differentiate customers based on their value to you and what they need from you. AI is the answer here
- Interact with them and remember what they tell you through their feedback and behaviour – and increasingly their social media activities
- Customise your products, services and communications to reflect what you know about the individual customer from the steps above.
Voila! Your customers see that you are truly interested in them and are offering a genuine relationship that is worthy of their loyalty and advocacy. 1 to 1 Marketing.
It is not necessary to change. Survival is not mandatory4
There is a lot going on in the loyalty business, significant disruption, many challenges,
Who would work anywhere else?
- A futurist book that was a massive best seller, published 1970 by Alvin Tofler it created a market for books that predict social & market disruptions
- How Apple's update may turn the payments space on its head
- Welcome to the machine: Will AI replace loyalty marketing? - The Wise Marketer
- Edward Deming 1980 “Basic Statistical Tools for Improving Quality”