How to sell access to your credit card transaction data
Today I received an e-mail, saw an unusual word and discovered a new corner of the payments business that prompted an idea for how to reshape the card processing industry.
Should AAuld AAcquaintance be forgot...
An e-mail from American Airlines contained the following offer:
The OED does have “dine, n.” listed, albeit as an "obsolete, except dialect"
noun, with the most famous quotation from the second-to-last verse of
Auld Lang Syne:
I suppose it could have been worse. The copywriter (or more likely, the lawyer) could have used "qualifying food-and-beverage-consumption event."
Perhaps the old standby noun for this very purpose, "meal," sounded too earthy for an airline. In addition, the all-encompassing "purchase," as in "every qualified restaurant purchase," may have been too vague, encompassing non-food-and-drink items such as restaurant-themed t-shirts, cookbooks, or whatever they sell at the Cracker Barrel. Still, that loophole could have been worked out in the terms and conditions on the website without having to resort to an archaism.
The Offer
As for the offer itself, it contains some unique features highlighting increased flexibility in the merchant banking payments system. According to the FAQs, you can participate by enrolling any of your credit or debit cards in the program. From that point on, all of your transactions at participating restaurants earn you reward credit, without you having to show a coupon, ID card or membership number at the point of purchase.
In traditional credit card reward programs, the card issuer makes a deal with the airline or other co-brand partner. And in traditional merchant affiliate programs, the merchant has the responsibility for keeping track of purchases (and thus the need for coupons and ID cards) at the point-of-sale.
So how does the airline do it?
L'subtraction, s.v.p
The answer is a fascinating company called Rewards Network (AMEX: IRN) based in Chicago. According to the company's 2006 10-K, Rewards Network has "contracts or relationships with nine major airlines," with 1.9 million accounts (of a total 3.3 million accounts) coming through airline partners. The airlines get commissions whenever one of its program members dines out, and the program members earn frequent flyer miles and other rewards, paid for by Rewards Network.
The revenue comes from participating restaurants, who through Rewards Network's "Marketing Credits Program," strike an unusual bargain. The restaurant gets cash in advance in exchange for assigning to Rewards Network the right to collect a significant portion of what its members spend in the future. To illustrate:
The Payments Angle
All of the above rests upon the ability of Rewards Network to cross-check its list of members and restaurants against the databases operated by the "processors, presenters and aggregators of payment card transactions."
Rewards Network can only sign up restaurants where it knows that it can ping the merchant's card processor, usually either Golden Retriever (a TSYS subsidiary), American Express or First Data. Each processor has to periodically send to Rewards Network the results of a monster query, consisting of all transactions at Rewards Network merchants involving Rewards Network members. In return, they receive compensation from Rewards Network (about $1 million in 2006) for their trouble. In addition, by cooperating, the processors can rest assured that Rewards Network won't be forced to entice the restaurants in its network to switch to a more pliable card processor. However, Rewards Network acknowledges that it would encounter difficulties if one of its major suppliers terminated a contract, or worse, if payment card association rules changed to prohibit the practice of third-parties tapping into the databases of merchant processors.
On balance, for a consumer, it's a positive development to be able to sell to a third party the right to access your card transaction data in a specific set of circumstances. (As long as the company avoids being the next ChoicePoint, that is.) It's good for restaurants that need an infusion of cash and/or new business. And it's good for the airlines who receive a transfer of value into mileage credit. And it's not as if banks or the card associations offer anything comparable...but could they?
A Proposal for Standardized, Processor-Enforced Contracts
Instead of arbitrarily regulating against this idea, I'd like to see the card processors, card networks or banks establish a standardized, open protocol for handling situations of this sort. There's no reason that a single card transaction always has to result in a single payment in a one-to-one relationship. In the Rewards Network example, a single card transaction results in two payments: one to the restaurant, and one to Rewards Network. Since the card processor verifies the transaction, neither side has to undertake expensive verification and collection tasks. It's a good deal for everyone involved.
(Taking the concept even further, a processor could handle many-to-many transactions, where a group of transactions fitting a certain criteria would trigger a split payment. Easy, once you have the initial mechanism in place.)
A neutral processor with a transaction-based funds allocation mechanism would enable all sorts of sales agency models that wouldn't work otherwise. For example, suppose that I wanted to create an affiliate program, where I offered 10 percent of sales revenue to people who refer new clients to me. First, you'd have to trust that I'll do the right thing and tip out. Sure, you can follow-up with your referrals to get an idea of what you should expect, but it's an imperfect verification system. In addition, you'd have to wait to get paid, at least until I got paid, plus at least a few days.
Instead, suppose we could sign a standard contract where I not only assigned to you the rights to 10 percent of revenues for clients that you bring in, but also gave you a guarantee that if one of your referrals came to me and paid with a certain credit card, that you'd get your 10 percent instantly. Furthermore, to create an incentive for your referral to use the preferred payment mechanism, let's also say that your customer gets cash-back or frequent-flier miles by paying with a certain card. Even if we've never met, you might take me up on the arrangement. As long as your referral used the designed payment mechanism, you'd get paid as soon as I do.
There would be a few issues to work out. You'd have to trust that I don't switch someone from the designated payment method to an off-the-books transaction by offering an incentive that's better than yours (i.e. the restaurant gives a cash discount). And I'd have to be confident that you're getting me customers that I couldn't get on my own, perhaps claiming a certain group of customers (i.e. the people who live within a half-mile of the restaurant) as exemptions to the agency agreement.
But overall, as Luke Froeb always says, mutually satisfactory transactions create wealth. Thus if bank-moderated agreements can structure and enforce contracts that wouldn't otherwise happen because of high contracting and verification costs, that's a clear benefit to the overall economy.
Now, all that's going to take is a few good systems. And some strategic marketing.
Should AAuld AAcquaintance be forgot...
An e-mail from American Airlines contained the following offer:
Now through October 31st, earn 5 additional AAdvantage® bonus miles per dollar spent on every qualified dine* – up to a maximum of 2,500 bonus miles.What’s a qualified dine?
*Qualified dines are dines after registering for this bonus that occur between 8/12/07 and 10/31/07 at participating restaurants …OK, then, what’s a dine?
The OED does have “dine, n.” listed, albeit as an "obsolete, except dialect"
noun, with the most famous quotation from the second-to-last verse of
Auld Lang Syne:
We twa hae paidl'd in the burnDoes lunch count as a dine?
Frae morning sun till dine,
But seas between us braid hae roar'd
Sin auld lang syne.
I suppose it could have been worse. The copywriter (or more likely, the lawyer) could have used "qualifying food-and-beverage-consumption event."
Perhaps the old standby noun for this very purpose, "meal," sounded too earthy for an airline. In addition, the all-encompassing "purchase," as in "every qualified restaurant purchase," may have been too vague, encompassing non-food-and-drink items such as restaurant-themed t-shirts, cookbooks, or whatever they sell at the Cracker Barrel. Still, that loophole could have been worked out in the terms and conditions on the website without having to resort to an archaism.
The Offer
As for the offer itself, it contains some unique features highlighting increased flexibility in the merchant banking payments system. According to the FAQs, you can participate by enrolling any of your credit or debit cards in the program. From that point on, all of your transactions at participating restaurants earn you reward credit, without you having to show a coupon, ID card or membership number at the point of purchase.
In traditional credit card reward programs, the card issuer makes a deal with the airline or other co-brand partner. And in traditional merchant affiliate programs, the merchant has the responsibility for keeping track of purchases (and thus the need for coupons and ID cards) at the point-of-sale.
So how does the airline do it?
L'subtraction, s.v.p
The answer is a fascinating company called Rewards Network (AMEX: IRN) based in Chicago. According to the company's 2006 10-K, Rewards Network has "contracts or relationships with nine major airlines," with 1.9 million accounts (of a total 3.3 million accounts) coming through airline partners. The airlines get commissions whenever one of its program members dines out, and the program members earn frequent flyer miles and other rewards, paid for by Rewards Network.
The revenue comes from participating restaurants, who through Rewards Network's "Marketing Credits Program," strike an unusual bargain. The restaurant gets cash in advance in exchange for assigning to Rewards Network the right to collect a significant portion of what its members spend in the future. To illustrate:
- In 2006 the company paid about $130 million to participating restaurants for "dining credits."
- The company helped to drive over 8 million qualified dines to participating restaurants, by marketing through its affinity partners (including airlines).
- The qualified dines generated $330 million in credit card transactions.
- Rewards Network collected 70 percent of that amount, for about $230 million.
- On average, for a qualified dine, the restaurant gets 40 percent up front and 30 percent upon payment.
- The company receives the other 30 percent of each restaurant bill. Of that, it pays out a total of 8 to 9 percent in frequent flier miles, partner commissions and losses that occur when restaurants go out of business. The other 21 percent, or $70 million in 2006, counts as net revenue.
The Payments Angle
All of the above rests upon the ability of Rewards Network to cross-check its list of members and restaurants against the databases operated by the "processors, presenters and aggregators of payment card transactions."
Rewards Network can only sign up restaurants where it knows that it can ping the merchant's card processor, usually either Golden Retriever (a TSYS subsidiary), American Express or First Data. Each processor has to periodically send to Rewards Network the results of a monster query, consisting of all transactions at Rewards Network merchants involving Rewards Network members. In return, they receive compensation from Rewards Network (about $1 million in 2006) for their trouble. In addition, by cooperating, the processors can rest assured that Rewards Network won't be forced to entice the restaurants in its network to switch to a more pliable card processor. However, Rewards Network acknowledges that it would encounter difficulties if one of its major suppliers terminated a contract, or worse, if payment card association rules changed to prohibit the practice of third-parties tapping into the databases of merchant processors.
On balance, for a consumer, it's a positive development to be able to sell to a third party the right to access your card transaction data in a specific set of circumstances. (As long as the company avoids being the next ChoicePoint, that is.) It's good for restaurants that need an infusion of cash and/or new business. And it's good for the airlines who receive a transfer of value into mileage credit. And it's not as if banks or the card associations offer anything comparable...but could they?
A Proposal for Standardized, Processor-Enforced Contracts
Instead of arbitrarily regulating against this idea, I'd like to see the card processors, card networks or banks establish a standardized, open protocol for handling situations of this sort. There's no reason that a single card transaction always has to result in a single payment in a one-to-one relationship. In the Rewards Network example, a single card transaction results in two payments: one to the restaurant, and one to Rewards Network. Since the card processor verifies the transaction, neither side has to undertake expensive verification and collection tasks. It's a good deal for everyone involved.
(Taking the concept even further, a processor could handle many-to-many transactions, where a group of transactions fitting a certain criteria would trigger a split payment. Easy, once you have the initial mechanism in place.)
A neutral processor with a transaction-based funds allocation mechanism would enable all sorts of sales agency models that wouldn't work otherwise. For example, suppose that I wanted to create an affiliate program, where I offered 10 percent of sales revenue to people who refer new clients to me. First, you'd have to trust that I'll do the right thing and tip out. Sure, you can follow-up with your referrals to get an idea of what you should expect, but it's an imperfect verification system. In addition, you'd have to wait to get paid, at least until I got paid, plus at least a few days.
Instead, suppose we could sign a standard contract where I not only assigned to you the rights to 10 percent of revenues for clients that you bring in, but also gave you a guarantee that if one of your referrals came to me and paid with a certain credit card, that you'd get your 10 percent instantly. Furthermore, to create an incentive for your referral to use the preferred payment mechanism, let's also say that your customer gets cash-back or frequent-flier miles by paying with a certain card. Even if we've never met, you might take me up on the arrangement. As long as your referral used the designed payment mechanism, you'd get paid as soon as I do.
There would be a few issues to work out. You'd have to trust that I don't switch someone from the designated payment method to an off-the-books transaction by offering an incentive that's better than yours (i.e. the restaurant gives a cash discount). And I'd have to be confident that you're getting me customers that I couldn't get on my own, perhaps claiming a certain group of customers (i.e. the people who live within a half-mile of the restaurant) as exemptions to the agency agreement.
But overall, as Luke Froeb always says, mutually satisfactory transactions create wealth. Thus if bank-moderated agreements can structure and enforce contracts that wouldn't otherwise happen because of high contracting and verification costs, that's a clear benefit to the overall economy.
Now, all that's going to take is a few good systems. And some strategic marketing.
© 2007 Tael¥en LLC
Labels: corporate actions, payments, shareholder activism
posted by Ivan Schneider @ 1:50 AM
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