While I like a deal as much as the next person (note 1), I've never been much of a coupon clipper. To me, coupons are a hassle to collect, impossible to organize, and mildly embarrassing to redeem. 

But I love frequent flyer miles. Once registered, they pile up automatically, are maintained at the airline or card site, and there is no stigma to redeeming them. However, miles are pretty worthless unless you spend a lot and have the flexibility to use them during the off season.

That's why financial rewards programs have moved away from a sole reliance on airline miles and towards broader programs with cash and merchandise rewards. However, with falling fee revenues, especially interchange, these programs are becoming harder to justify cost-wise.

But customers have grown to expect them, especially the big-spending households that drive banking and card profits (note 3). And this is not a time when you want to irritate a lucrative segment of your customer base.

What to do?

Enter a new breed of loyalty program called "merchant-funded rewards." Instead of financial institutions buying goods and services to give away, the system is turned around. Merchants pay direct cash rebates to your customers. And they may even pay you for the privilege of giving away money.

The catch? Because the cash-back offers are targeted to customers who shop at the competition, merchants need actual cardholder-level spending data to make the right offer, e.g., a $25 rebate offer to Home Depot customers who come to Lowes and spend at least $50 on your card (note 2). And to boost awareness, they need to plug directly into your online banking and statements. 

Making this work takes sophisticated integration between spending data and merchant offers. Enter an important new vendor in the banking world: the rewards service provider. In the report, we look at the five biggest, each with 100 or more financial institution clients:

• Access Development
• Affinity Solutions
• Cardlytics
• Cartera Commerce (recently merged with Vesdia)
• RewardsNow

While these companies have the early lead, clever newcomers are creating their own hybrid programs connecting APIs with ad-serving and social networks. It's a wide-open field with dozens of players, including Finovate alums Billeo, BillShrink, Micronotes, and Segmint as well as others such as Clovr Media, DBG Loyalty, EDO Interactive, and Offermatic. MasterCard and Visa also have rewards programs that issuers can plug in to.

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About the report
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Merchant-Funded Rewards Programs (link)
Rewards 2.0: Turning a money pit into a profit center

Author: Daniel Thomas, principal consultant, Mindful Insights

Editor: Jim Bruene, editor & founder, Online Banking Report

Published: 28 Feb. 2011

Length: 32 pages

Cost: No extra charge for OBR subscribers, $495 for everyone else (here)

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Notes:
1. Probably more, as the son of a frugal Iowan (thanks Dad!)
2. Of course, private cardholder data is not revealed to merchants or service providers. It's done through computer matching programs.
3. According to COLLOQUY, the average U.S. household is enrolled in 18 rewards programs, and nearly a quarter of those are financial.