Last week, Christophe Langlois @Visible-Banking tweeted a question about the value of in-statement rewards programs: 

And my answer:

My response was partly 140-character hyperbole. It's Twitter after all. But after sleeping on it, I think what I said might actually be true. 

What's the biggest problem facing online/mobile banking?

The cost to the bank. Always has been and always will be. And it's not going to get less expensive anytime soon (note 1). Every time we write about the next must-have online bell or mobile whistle, it just gives bank CFOs another gray hair.

Up until recently there were only three ways to pay for these extra expenses:

• Charge direct fees for the channel, which customers hate
• Cross sell, which is hard to attribute solely to the online channel
• Cover the costs with other revenue streams

The vast majority of banks, and every one in the United States, took the last approach. Unfortunately, this can lead to unwise pricing decisions such as the one that gave rise to the "$35  cup of coffee."

But thanks to Cardlytics, who recently took home Best of Show honors at Finovate Europe, and others, we are entering into a new era of advertising-supported banking. And that could finally make direct banking a revenue generator on its own. Not enough to pay all its costs, but enough to alter the game.

Let's assume banking customers redeem 2 offers per month and the average commission to the bank is $1 each (note 2). That's $2/mo in new revenues, almost entirely attributable to the online/mobile channel (note 3).

A bank with 25,000 online banking customers would earn about $600,000 annually. That will buy a several bells and a decent whistle.

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Notes:
1. It can be argued that in the long-term support costs per banking customer will fall dramatically as branches and human customer support are downsized.
2. Using Aite's forecasted $1.7 billion in-statement commissions in 2015 and dividing by 70 million online banking household (link).
3. You have to have the debit or credit card too, so the revenue might need to be shared with the card P&L.
4. We published a report on in-statement rewards in 2011 in our Online Banking Report.

If you are looking for an example of how to promote your rewards program, take a lesson from 140,000-member South Carolina FCU. The company just launched an in-statement merchant-funded rewards program called Simple Perks (press release) for its 58,000 online banking customers.

The CU posted a great 2-minute video showing how the program works (see second screenshot). It also posted a quality supporting blog entry, "Are you a 'clipper' or 'clicker' (note 1).

The new rewards program is delivered through the CU's PFM dashboard powered by Intuit's Personal FinanceWorks (see third screenshot). The rewards program is powered by Cardlytics, an Atlanta-based startup we've written about several times (previous posts).

Bottom line: Regardless of whether you personally think rewards programs pollute the online banking experience, this is a genie that's not going back in the bottle. Targeted advertising based on spending behavior is too lucrative to ignore.

It reminds me of the advent of keyword advertising on search engines. At the time, there was concern that the technique, based on actual user queries, was an invasion of privacy. It may have been, but it's worked pretty well for Google, and most users benefit from the well-targeted ads as well.

We are pretty confident the same scenario will play out with debit and credit card statements (note 1). As long as offers are relevant, unobtrusive, and probably opt-in, the majority of customers will like them and the rest will tolerate them.

South Carolina FCU homepage with six mentions of rewards (10 March 2011)

Simple Perks landing page with great demo video (link)

Simple Perks rewards module is highly visible within online banking

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Note:
1. Side note: This is how to blog about something new. Author Troy Hall doesn't just repeat the press release, he tells a story to make it interesting and relevant. (I would lose the salesy..."life simplified" line at the end, but that's just being picky).  
2. For more info, see latest Online Banking Report on merchant-funded rewards.  

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.

The latest Online Banking Report: 2011 to 2020 Online & Mobile Banking Forecast is now available. It was mailed over the weekend to all OBR subscribers. It's also available online here. There's no charge for current subscribers; others may download it immediately for US$495.

The report includes our latest 10-year online & mobile banking and bill-pay forecast. While our reading of the tea leaves is unlikely to be perfect, it seems clear that the demand for online banking in the United States has reached a plateau (note 1); in fact, we are likely within a year or two of online banking penetration peaking and slowly heading down.  

How could that be? Mobile of course. In fact, through the end of 2020, we project an increase of 40 to 45 million U.S. households using mobile banking, to a total of nearly 60 million. During the same period, online banking penetration is actually expected to drop by a few million households.

If we are right, sometime near the end of the decade mobile banking will surpass online (note 2), although by then, the two will look pretty similar. 

The report also includes a revised 10-year forecast for U.S. peer-to-peer lending. After more than doubling in 2010, we expect continued strong growth of around 40% compounded annually through 2020.

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Top innovations & trends of 2010
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The report includes a summary of the top ten innovations or trends during the past year (in alphabetic order):

• In-statement merchant rewards goes from zero to 100 financial institutions
• Loan preapproval wizards reduce uncertainty for applicants
• Location-aware mobile services for banking debut
• Mobile banking goes mainstream
• Mobile capture removes the paper from commerce
• Mobile payments gains real momentum
• Online personal financial management (outside of the bank) struggles
• P2P lending solidifies its niche
• Social media proves it can have real impact in financial promotions
• Transaction streaming and sharing gain a foothold

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New entrants on the list of the top 43 innovations of all time
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Each year we rank the top online/mobile innovations of all time (North America). There are a total of 43 products listed from 42 unique companies:

• 15 banks
• 5 credit unions
• 9 non-bank financial services companies
• 13 technology companies

The class of 2010, which was unusual for being all technology companies rather than financial institutions (note 3):

• Blippy for its automated transaction-sharing network
• Cardlytics for its merchant-funded in-statement online rewards service
• Finsphere for its location-aware fraud-targeting service, PinPoint
• Mitek Systems for its mobile photo bill pay

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Notes:
1. The penetration of online banking into U.S. households is relatively flat going forward. However, because each households accesses a larger number of financial accounts, growth at individual financial institutions is still growing on average.
2. Forecast is for the United States. Mobile has already surpassed all types of banking in some developing countries.
3. Perhaps this can be explained by the necessary focus of financial institutions on getting through the global banking crisis beginning in 2008.

One of the best innovations to come out of this recession is in-statement, merchant-funded rewards. First-mover Cardlytics launched at last year's BAI Retail Delivery (see post).

A year later, it was already reaching 30 million consumers  through relationships with more than 100 card-issuing banks and 100 merchants (see notes 1, 2). That's unheard of growth in financial services. If just one-third of the 30 million customers look at their statements each month, Cardlytics would have more unique visitors than Groupon (note 3), which has been called the "fastest growing company ever." 

We're not saying Cardlytics has anywhere near the $60-70 million in monthly revenues attributed to Groupon, nor the $6 billion valuation. But enough similarities can be seen in their business models that I'd be very, very happy if I were an early Cardlytics investor (note 3). For example:

• Both earn revenue directly from merchants who pay only when sales are made
• Both leverage online channels to deliver significant discounts to targeted users
• Both are first movers with aggressive growth tactics

And Cardlytics is different too:

• Cardlytics focus (for now) is national merchants, whereas Groupon is closely associated with local merchants (but is adding national merchants)
• Cardlytics can target much more precisely and keep offers out of the hands of the merchant's existing customers, a huge and unique benefit
• Cardlytics does not need to market its own site to consumers; it rides on the coattails, and leverages the trust, of its banking partners

Mobile opportunity
Cardlytics operates at the intersection of payments and advertising. And while the online card statement is the place to be in 2010 (see screenshot below), clearly the future for any shopping-related service is mobile.

Although no specific products or partners were revealed, the startup signaled its intention to go mobile with its ClairMail partnership announced today (press release).

Cardlytics example: in-statement McDonald's offer made to Burger King customers

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Notes:
1. Cardlytics will be demoing the latest innovations in its service at our Finovate Europe conference on Feb. 1, 2011.
2. BillShrink won a Best of Show award at Finovate Fall for its take on the concept (video).
3. On the strength of its early growth, Cardlytics landed a huge $18 million C-round in August.
4. According to Compete, Groupon had more than 8 million unique U.S. visitors in October.