ST. PETERSBURG, Fla.-Merchant-funded rewards-those coupon, cash-back, and instant savings programs-are gaining steam. But for merchants to keep those discounts coming for the lower-cost alternative to standard rewards, card issuers must show retailers the program's value.

Experts say issuers are going to have to work closely with card processors that offer merchant-funded programs to demonstrate to retailers that the discounts they are providing are actually leading to new business. CUs, too, need to make sure the merchant-funded programs they participate in are simple, concise, and easy to use, with a dash of local flavor to drive card transactions, sources added.

Merchants are all in right now, willing to gamble that delivering discounts in exchange for a new way to advertise and reach consumers will pay off, report several analysts. But a potential issue that may be in the offing is that merchants are participating right now even though there aren't many metrics to measure benefits. Those metrics are going to be needed, card processors and industry observers say.


Things Heating Up

According to PSCU, things have heated up in merchant funded, and not just from banks looking for a less-expensive way to pay for debit rewards as interchange revenue falls. PSCU rolled out its CU Rewards Mall in late in 2011, and has about 140 credit unions live on the merchant-incentive program.

"Interest started picking up a lot more as you saw Durbin come through," said Kenton Potterton, VP of product development for card payments. "Even though most credit unions are exempt from Durbin, they still see their interchange falling and are looking for ways to continue to add incentives to debit without full-blown costs for promotion."

Sources told Credit Union Journal that merchants are carrying about 90% to 95% of the freight right now, and that they believe merchant-funded programs will be around for at least five years at their current discount levels. But what could change things, experts say, is if new metrics eventually indicate merchants are not getting the lift they need from the discount programs, leading retailers to cut back.

"Merchants do not want to spend marketing dollars to obtain the same customers they normally get," explained Bob Legters, SVP of loyalty for FIS, Jacksonville, Fla. "I see merchant-funded being around without any changes for the next five to seven years. However, the programs are one of the most invested in and least proven marketing models out there now."

Legters acknowledged FIS originally hesitated to enter the merchant-funded space because measurement is key and there are not many measurement tools are in place. He said merchants mainly look at movement of their top line in correlation to the timing of merchant-funded offers. "The top line can be impacted by many things."


Shifting Consumer Spend

Legters said businesses are quickly developing methods to accurately gauge the lift they are getting from merchant funded, acknowledging that what the incentive programs try to do is difficult-shift consumer spend. Legters said merchant-funded programs are able to shift about 1%, possibly 2%, of consumer spend.

What bodes well for the future of the discount offers is the fact consumers are far more bargain conscious than before the recession. "The economy has leveraged us into a deal shoppers network," said Legters. "The consumer is more apt now to pay attention to discounts. Before, anyone who used a coupon was considered frugal, now they're just a regular shopper."

But to wait for merchants to develop measurement tools and come to their own conclusions may not be the best solution, insisted Jeff Russell, senior advisor for the Des Moines, Iowa-based The Members Group, who urged credit unions to begin developing ways to share how the CU participating in merchant-funded efforts is bringing retailers more business.

"Merchants already believe that paying for swipes is not as valuable as it used to be. But they will pay for new sales. If they don't see a lift from merchant funded they will see this as another expense against the same sales volume. This is an emerging strategy that is very interesting because it gets at the idea that issuers and merchants need to work more closely together."

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At, search: Merchant-Funded Rewards Rise; Coupons Part of New Revenue Platform From CUSO; Daily Deals? Time To Capitalize on Value Sitting in Data

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