Can Mobile Answer The Loyalty Question?

How do merchants sustain mutually beneficial relationships with their customers? That’s the fundamental question at the heart of modern retailing, and one driving significant investment in customer relationship management schemes, branding exercises and highly targeted marketing efforts.

Getting the answer right makes a huge difference to the bottom line, even in boom times. But with consumer spending on the front line of the economic slowdown, acquiring and maintaining that essential customer relationship is more critical than ever. Both traditional local outlets and far-reaching web sites have to fight to keep their customers’ attention from wandering. Unfortunately for many retailers, changing market conditions, new technologies and an increasingly fickle customer base make it that much harder to achieve and sustain that vital relationship.

Rewards Or Incentives?

In many cases, retailers have not helped themselves. Research conducted by ACI Worldwide in 2011 shows that a prevalent tool ― the proprietary loyalty program ― has not delivered the intended results. Basic flaws within these loyalty schemes mean that as many as 85% of loyalty program members haven’t heard from their retailer since they day they signed on; only a third have received a reward or promotion that made them go back to the store again; a quarter have received a reward or promotion for something they would never buy; and rewards received by one in five were too insignificant to take seriously. In addition, only a quarter of U.S. consumers received a loyalty program reward or discount that made them feel like valued customers.

The real killer is that more than eight in 10 members claim to be enrolled in a program they don’t understand, and are unaware of the benefits on offer or how to claim them. In other words, loyalty schemes have let customers down and failed to maintain effective, two-way communication between customers and their retailers.


In its latest research, AITE Group suggests that the solution to this problem may lie in a change in emphasis. It predicts that the number of U.S. cardholders who subscribe to merchant-funded incentive programs will exceed 460 million by 2015, and will generate $1.7 billion in new revenue for card issuers. AITE goes on to advise that retailers will be differentiated by this move away from programs that reward spending by existing customers to merchant-funded schemes that offer incentives to existing and potential consumers who visit a website or store. Given the seemingly inexorable rise of Groupon, Google Offers, LivingSocial and other location-based marketing schemes, this is more than plausible.

The Arrival Of Mobile

To date, most loyalty schemes have been card based. But the real elephant in the room when it comes to loyalty is mobile technology, with its ability to push communications to consumers and the greater opportunities for interactivity that it offers. The question is, will it create a bridge between location-based schemes or will it provide retailers with an opportunity to deliver their own rewards dynamically?

So far, retailers have had something of a love-hate relationship with mobile technology. Web-enabled smartphones can provide real-time information and incentives to consumers and thus boost any loyalty scheme. But they also have weakened the relationship between the retailer and its customer, since customers can use their smartphones to check reviews, compare pricing, and receive coupons and offers from other stores.

Consequently, merchants who have always had immense difficulty connecting the ‘last mile’ ― what customers actually do once they are on site ―now are competing with a torrent of externally sourced information that makes that connection even harder. Consumers can be physically present in one store while purchasing products from a lower priced competitor. And whereas cutting-edge technology was a critical enabler of effective customer relationships 10 years ago, today it can tear those relationships apart, as brick-and-mortar retailers struggle to maintain a real-time, relevant conversation with customers in their own stores.

Harnessing Mobile Applications For Greater Loyalty

Retailers can harness this mobile functionality to their own advantage and develop new ways to capitalize on the widespread adoption of mobile devices. Mobile commerce applications enable retailers to provide highly personalized, time-sensitive communications to customers to entice them into the store. Once on site, customers can continue to receive real-time communications from the moment they enter to the time they check out.

These applications also can create new ways to interact with customers and enable retailers to promote individual products or influence purchasing behavior via coupons and offers while tying purchasing behavior with loyalty and reward programs. They also provide retailers with analysis of consumers’ in-store behavior, which enables them to assess which offers translate into purchases and target customers more effectively.

The question remains: How far can this technology be turned to advantage? It is generally accepted that customers will react badly to any loss of convenience; an incentive scheme that delays purchase fulfillment or lengthens ‘time in lane’ is unlikely to deliver hoped-for results. There also is the question of security and fraud prevention: customer are understandably concerned about the security of any data held on their phones – particularly as the hacking of celebrity phones seems to occur with depressing regularity.

The Potential Of Mobile Wallets

Proponents of near-field communication (NFC) technology argue that NFC can address both of these problems by bringing contactless payment capability to a phone and integrating it into a mobile wallet, which transforms a phone into the single repository of various types of accounts, rewards, discounts and payment services. In addition, mobile wallets store account details either in a secure ‘vault’ in a cloud-based service, or on the secure element of the phone. Because transactions are conducted over the same short-range network as the contactless card rather than a mobile phone network, inherently they are more secure.

Through third-party mobile vendors, retailers can negotiate a ‘top of wallet’ position for their own prepaid, gift or stored value cards and avoid the interchange fees charged by debit and credit card issuers.  However, third-party vendors create another network brand that stands between the retailer and its customers. Instead, retailers can include mobile wallet functionality into their own mobile applications, which preserves brand equity, helps maintain a much closer customer relationship and leaves the retailer in control of the customer data.

From Potential To Reality

ACI’s research shows that a multi-application payment token of some kind would be popular with U.S. consumers, many of whom are keen to save wallet space and consolidate their myriad loyalty and reward schemes on a single device. Once upon a time that device may have been a smart card, token or fob. Now it is more likely to be a smartphone. All that has changed is the form factor of the payment and customer-relationship device.

However, assuming that consumers will embrace mobile payments, commerce and wallets, there remains a number of challenges before the industry sees any widespread adoption, and it is not yet clear whether these hurdles will be overcome.

The first challenge is one of infrastructure and cost. Visa and MasterCard now are pushing for the “Europay, MasterCard and VISA (EMV) standard to be adopted in the U.S., which is significant. Firstly, EMV makes contactless payments, which have no signature or PIN authentication, inherently more secure. Secondly, should the U.S. adopt EMV, a new POS infrastructure will be needed. The argument is that if a POS replacement is being considered then there is no reason not to go for the most flexible option that will support current requirements ― in the form of NFC payments ― as well as any future developments that come down the line.

To compensate for the extra cost involved, Visa and MasterCard are proposing to allow exceptions to PCI compliance. This raises the next big question, which revolves around interchange fees. If NFC contactless payments are made, it presumes the card is present and a lower interchange fee is applied. However, if retailer wallets are adopted, the card brands may decide that the contactless payment is in fact a card-not-present transaction, which would attract higher fees that could kill off the scheme before it gets off the ground ― just as biometric authentications died at the height of their hype cycle largely because they were being designated ‘card-not-present’ transactions. If fees are set too high, any incentive for adoption dissolves rapidly.

The Debate Continues

Integrated mobile payment currently is an emerging and highly experimental field. A few organizations have enjoyed some success with mobile phone-based payment and loyalty schemes, with Starbucks perhaps the most widely known. But at present, there is no universally recognized standard for accepting coupons, incentives and loyalty cards, and integrating them with payment methods. Initially at least, consumers are likely to have multiple wallets on their phones, and will decide which one to use in any situation. We probably will see several pilot schemes operating in series as merchants test the waters. This will add more pressure to retailers, who will need to ensure they can accept any form of payment from any wallet. Flexible POS technology that relies on software updates rather than hardware replacements will be a prerequisite for success.

The idea of mobile payments is attracting plenty of hype, but in practical terms is very much in its infancy. There are questions to answer and decisions to be made that will shape the market and determine how far mobile technology will be deployed in B2C commerce. But if technology can be utilized to create more intimate relationships with customers then it is worth investigating. The first step is participating in the debate.

Pamela LaTulippe is a marketing professional skilled at developing and marketing innovative software solutions.  As a Principal Product Manager at ACI Worldwide her focus is on creating and executing a global mobile product strategy including mobile payments, mobile banking and mobile commerce across ACI’s product portfolio. LaTulippe brings to ACI more than 20 years of experience in the high tech industry inventing and launching new products in emerging new market categories both as a co-founder in early stage companies as well as the Fortune 500.

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