Lessons for MFD Partnerships: LivingSocial Addresses Merchant Dissatisfaction

What About the Merchants?

As banks increasingly with banish their debit rewards programs or turn to merchant funded discounts (MFDs) to load share costs, there is a key lesson they can learn from Daily Deal schemes: What about the merchants? Daily Deal providers (Groupon, LivingSocial, Google Offers and Amazon Local) have been challenged to address this central issue and flaw in their strategy.

Below, we will outline both the problem and the efforts Groupon and LivingSocial are marking to address merchant ill will and attrition.

The idea behind Daily Deals was so simple it was brilliant (which is why there are so many large companies entering the fray). Consumers get a 50% discount on a great deal which could be for a service or a meal at a restaurant or a vacation but only if a specific minimum of other consumers signed up for the same deal. Each deal was limited to specific dollar values or specific dates.

Luring New Customers, but are they ones Merchants Want?

Merchants got new customers walking through their doors and the opportunity to sell them additional products/services. While merchants gave customers 50% off a retail price, and then gave the deal providers 50% of the balance (plus a 2.5% credit card processing pass-through fee), leaving the merchant with only 25% revenue, the lure of new customers proved enticing enough to make selling merchants into the Daily Deal stable remarkably easy.

But merchants have noticed that while Daily Deals bring in large numbers of new customers, those deal hunters seldom buy additional products/services and they don’t make return visits to the merchant. This means that merchants:

  • Lose money on their offers
  • May have hired additional staff to handle a burst of business volume, increasing the actual cost of their offers
  • Reinforce consumer’s interest in buying only when a huge discount is offered
  • May experience a surge in negative Yelp comments if there are any issues in order fulfillment

At the end of 2011, Susquehanna Financial Group and Yipit surveyed almost 400 merchants who had recently offered deals thought Daily Deal providers. While merchant satisfaction with the Deal providers was high (an 80% satisfaction rate), more than half (52%) of those same merchants said they had no plans to feature deals with the firms in the next six months and another 24% of merchants anticipated offering only a single deal in the coming six months.

Merchants Say: We Love You and Goodbye!

This creates an interesting landscape where almost the same percentage of merchants are satisfied with their Deal providers as have no plan (or only a single plan) to repeat their experience of offering a deal through the providers.

How are the Largest Daily Deal Vendors Responding to Merchant Pushback?

To address Merchant-Slam, Groupon is introducing a program to spread out the customer surge. It has launched a VIP program for the customers who are the largest consumers of its deals. For $29.99/year, customers get early bird access to deals along with access to refunds for the deals they paid for but didn’t use and the bonus for merchants is that they can manage their traffic. Groupon has also introduced a merchant loyalty program that allows its business customers to make follow-up offers to Daily Deal customers to encourage repeat business.

Creating Value for the Merchant

LivingSocial is trying harder (as the number 2 daily deal provider). In addition to launching its own version of a VIP program, it has announced that a new credit card is in the works. The new VISA card will be issued by Chase and while it will be publicly marketed to customers, its real intent is to sweeten relationships with merchants.

Early Buzz on LivingSocial’s New Credit Card

For customers: No annual fee and for frequent buyers (10 purchases per month), refunds of 10 “Deal Bucks) which will apply $10 to the future purchase of Daily Deals. While not finalized, the card may well include inducements for repeat merchant visits.

For Merchants: Build more enduring relationships with LivingSocial customers. No passed-through credit card processing fees, short-term funding, rewards and loyalty programs.

What Can Bankers Take Away?

As deals are worked out with merchants that will defray the FI’s cost of debit program, it is essential that the institution be proactive in crafting and offering merchant-focused features. Particularly if an FI is targeting local businesses, those small business owners may be game for trying a new strategy but may not be able to foresee some of the potential challenges looming down the road. How can a business track new and repeat customers? How can participation in a debit MFD program lift sales? How will funds be reconciled? What tools will the merchant be provided? How can a revenue split not harm the business by cannibalizing revenue it would have received anyway from existing customers?

These are not idle issues or idle questions and as new programs roll out, bankers must address them upfront. Otherwise, after dissatisfaction and frustration foment, bankers may have to make far more generous concenssion to frustrated partners.




Posted in Uncategorized | Leave a comment

Is That Crickets We Hear? Is Simple (aka BankSimple) Actually Up and Running? Or, The Case of the Missing Next Big Thing

Simple (formerly known as BankSimple) is finally opening its virtual doors to new customers. While arranging a bank depository partnership (necessary to hold customers’ deposits in an FDIC-insured institution) took 2 years longer than founders anticipated, the well-financed start-up, with its impeccable credentials is, apparently, open for business. Or is it?

Every start-up has its can’t miss plan and this is Simple’s: it’s an Alternative to Traditional Banking which appear to mean that it’s a prepaid VISA card with the reporting detail of a traditional online bank and the nimble savings features of SmartyPig.

The Simple account is accessed online or by mobile device and the account displays both cleared and pending transactions. This allows the Simple interface to show its customers their spendable funds (“safe to spend” which reflects pending transactions, coming bills and savings goals), rather than just the balance based on cleared transactions.

Recurring payments can be scheduled and with both checking and savings functions, customers can allocate direct deposit savings to be parsed multiple ways. An example could be that a customer using direct deposit wants to save $500 a month. There could be a rainy day fund ($100/month), house down payment ($250/month) and a vacation fund ($150/month). Like SmartyPig, Simple can split that single deposit according to the customer’s directive and show each savings bucket separately when the account is viewed.

One of its nifty features is that the Simple software is set up to search for the best savings vehicle for each savings bucket. Without the customer having to set up multiple accounts, Simple can deposit funds into its own variety of accounts (rather like a traditional trust account) which allows the home down payment to go into a longer-term, higher interest rate account while the rainy day fund remains in a traditional savings account and can be accessed at will or even act as an overdraft account.

So all of this sounds fantastic, but it has taken 2 years to get even the most basic functionality up and running. First there was the problem of the bank partner but now Simple is using The Bancorp Bank ($3.4 billion in assets) and CBW Bank ($8.5 million in assets). Second, there was the lure of account openings but none seem actually to be open.

Back in 2010, 20,000 individuals had registered with Simple, expressing their interest in opening an account with a non-bank committed to doing banking differently. Currently, its CEO, Josh Reich, says that Simple is activating 100-200 accounts a day. But where are those customers? The Net is usually afire with news from early adopters of any technology or service, but to date, the only comments from current Simple customers sound a lot like the chirping of crickets.

The site has high expectations to meet, in part because its team includes one of the engineers who helped create Twitter’s technology platform. It has received $13.5 million in start-up funding from the premier early stage investors in Silicon Valley.

— Elizabeth Rowe, February 2012

Posted in Uncategorized | Leave a comment

Square Converts Underbanked Small Businesses

Cash-Based Small Businesses are the Bane of Banking Industry

Small businesses can use banks for loans, deposits and payment processing services. The vast majority of those small businesses use banks for their cash and check processing, but as cash based businesses, they haven’t accepted credit cards from their customers. Bank card issuers and processors have always been at a loss for a successful strategy to convert those oh-so-20th century cash and check payments to cards.

Welcome Square

Payments analysts greeted the arrival of Square with intense curiosity and more than a smidgeon of skepticism.  Would a start-up be able to distribute free card readers to any merchant, charge transaction fees small merchants would tolerate AND be able to make money while absorbing a seemingly bottomless exposure to risk?

The answer to all of those questions appears to be yes. Processing more than $11 million in credit card transactions a day, Square has tapped a brand new market by allowing a million small merchants to switch their preferred transaction type from cash to card. That growth from 0 to 1 million merchants happened by word of mouth by a company that cannot afford mass market advertising campaigns.

Square’s Main Competitor: Cash

While many industry analysts contextualize Square in relation to VISA, showing how Square’s daily processing volume is .44% of VISA’s U.S. daily volume, we would posit that comparison to the world’s second largest card network is a false comparison.

For instance, in the most recent quarter, VISA attributed its transaction volume growth to the larger monthly volumes of its customers. Its growth is among its current customers while Square is bringing new small businesses into the card-centric economy.

While much of the cash-to-card market conversion has already occurred, small merchants and their seemingly intractable preference for cash has remained the bane of the credit card industry since 1958.

Most of the nation’s 27.8 million businesses have no employees and altogether, these 21.7 million businesses account for only 3.4% of business receipts. Depending on their industry, these sole proprietorships and the 3.6 million micro businesses with 1-4 employees are the new business development sweet spot for Square and its competitors.

Market Opportunity of Square is 5.1 million small, cash-based businesses

Our analysis shows that the market potential for Square is the 5.1 million businesses (in specific niche industries) that either have no employees or have no more than 4 employees. These industries are either mobile (caterers, mobile food venders, specialty contractors) or craftsman businesses selling to consumers with a price point above $40.

Altogether, these 5.1 million businesses employ 6.3 million employees and each of those employees, equipped with a smart phone, is a potential user of Square’s payment processing services.

We are not including franchises in our market sizing because while these armies of plumbers and moving men are prime consumers of hand-held POS terminals, they need robust accounting features for their head offices that the Mom and/or Pop Square customers just don’t need.

Conservative Estimate: $116.5 billion in transactions is Square’s Market Opportunity

These nonemployee and microbusinesses have a combined revenue of $233 billion. If only ½ of their revenue switched from cash and checks to credit cards, that would represent new credit card business of $116.5 billion. At the moment, Square is processing $402 million (annualized). That means there is small business revenue of $116 billion that is fair game for new card payment technologies.

That’s a big piece of payment business to bring back into the banks.

Square’s CEO, Jack Dorsey, attributes the success of Square to the power of design and straight forward simplicity in creating a trustworthy brand for the one million small merchants processing credit card transactions using the Square plug-in to their smart phones. To that simplicity, we would add transparency, corporate responsiveness to consumer demand and elegant technology.

Almost Zero Cost-of-sales + Evangelical Word-of-Mouth + Huge Retail Distribution System = Goooooooooal

With a cost-of-sales that is the price of a card swipe widget and a web page, Square has offered small businesses a flat fee structure (2.75% of all transactions), next day payout and the ability for any small merchant to accept a full suite of U.S. credit cards.

By early 2011, investors were pounding on Square’s door to add their millions to its early funding of $10 million. Series C investors had added $103 million in funding which is allowing Square to add features to its core product, build relationships with retailers (if you can wait for Square to mail you a card reader, the plug-in is free. If you need it right now, you can pick it up at one of 9,000 retail stores including Target, Wal-Mart, Apple stores. At a retailer, the readers cost $10 and come with a $10 coupon that is instantly credited when the merchant account is set up).

Low cost of sales, a rapidly expanding card reader distribution network, easy to set up processing and a flat fee structure combined with that $116 billion in potential new business make Square a thrillingly obvious (easy to say now!) winner.

Posted in Payments Small Businesses Underbanked, Payments Underbanked, Underbanked | Tagged , , , | Leave a comment


With Industry Growth Stagnant, Growth Will Come from Taking Market Share

The organic growth and displacement of traditional forms of payments has either flat-lined or regressed. In addition, consumers’ household income continues to fall which means those consumers are cutting back on the services that generate recurring payments. Also, since they have less discretionary income, the overall number of small dollar payments is stagnant (at best).

In brief, the domestic payments industry has stopped growing.

For the foreseeable future, growth by individual companies will come at the expense of fellow competitors. This will ratchet up pressure on both product/channel innovators and marketers alike. Consumer Payments in the U.S.: Trends Driving Credit, Debit and Prepaid Cards outlines solutions for payments firms marketing to new demographic cohorts through emerging channels and with new products.

These strategies for successful product deployment and marketing are essential. Particularly with Millennials, social media, communities of peers, mutable/fluid loyalty are the New Normal. Marketers who don’t keep pace with the seismic changes among payment users will indeed flounder.

Profoundly Different Market

For the past 10 years, the consumer payments industry has taken a multi-prong approach to growth:

  • A growing economy has equaled organic growth in the size of the payments market
  • Cash and checks continued to be displaced through innovative use of emerging products, technologies and channels
  • Small dollar purchases switched from cash to electronic payments
  • The number of recurring payments per household has grown steadily over time

Growth at Others’ Expense

To date, the traditional participants in the payments industry have not helped themselves. Rather than focusing on developing market advantages, banks have worked tirelessly to alienate consumers (threatening to impose debit card fees, dropping debit loyalty programs and suddenly switching marketing dollars from debit to credit cards) even as nimble competitors have crafted new mobile or prepaid products. These non-traditional competitors have grown transaction volume with a combination of marketing prowess and transparently valuable products.

Stagnancy is a Long-Term Trend

Another sobering issue for payment providers is that these are long-term trends. The overall economy will remain stalled until 2013 or 2014 and in combination with the changing payment and channel preferences of the newest adult generational cohort (Millennials), it is essential that issuers, retailers and marketers optimize the potency of each product differentiating feature.

Demographics of Payment Product Choices

Older Americans continue to demonstrate their loyalty to MasterCard and Visa. While they use Internet bill pay, they do not use it to the same extent as other cohorts, but they do use the Internet intensively when they are researching new product or service providers.

Older and younger Baby Boomers along with GenXers demonstrate declining levels of product loyalty and while each successive generational cohort is broadly more likely to use Internet bill pay and to be heavy users of Visa and MasterCard, as their product choices and behaviors are parsed into levels of demographic detail, income, education, race/ethnicity can each correspond to striking different preferences and behaviors.

February 3, 2012

Posted in Uncategorized | Leave a comment