Financial Reform Gave Banks a Reason to Cozy Up to Merchant Rewards

When the sweeping Dodd-Frank financial reform became law in 2010, it included an amendment reducing the fees that banks could charge retailers for debit transactions. Little did Senator Dick Durbin of Illinois know that when his amendment passed, it would help a startup foster partnerships with many of the country's largest banks, gaining access to nightly feeds of bank data including massive amounts of customer transaction data. After bank revenues from debit transactions dropped substantially as a result of the so-called Durbin amendment, Cardlytics, a firm founded in 2008 by two former Capital One execs, saw an opportunity. The company manages rewards programs for banks, aiming offers from retailers and other merchant partners to people based on previous credit and debit card purchase transactions and even information in money market portfolios. "It took significant revenue out of the banking ecosystem and that revenue was often used to fund consumer rewards," said Lynne Laube, COO, president and co-founder of Cardlytics, and former VP and COO at Capital One. "We approached banks and said, 'We would like to help you bring in new revenue while increasing customer loyalty and engagement.'" Today Cardlytics has partnerships with more than 1,500 financial institutions, giving it access to data showing transactions made by 120 million consumers. A fast food restaurant might use the system to target discount offers to people who spent $10 or more using their bank debit cards or credit cards at McDonald's last month, for instance. And that advertiser can measure whether spending at its locations increased as a result, based on the bank data Cardlytics accesses. PNC Bank, one of the larger banks Cardlytics counts among its clients, considered working with the rewards program management firm because the legislation reduced the debit card revenue it used to fund its previous rewards offering. "From a profitability perspective, the cards would have kept losing money to provide those rewards," said Tammy McIntosh, senior VP and customer rewards manager at PNC. The bank implemented its merchant-funded rewards program through Cardlytics in 2010. The move towards merchant-funded rewards programs among banks was a result of the Durbin amendment, said Carlo Pirillo, executive VP of digital solutions at Bond Brand Loyalty, a consultancy that manages loyalty programs. However, he added, "It's not just the Durbin clause" that prompted banks to seek ways to get others to pay for their rewards programs. There was also downward pressure on fees in states including California, he said. "Everyone was attracted to the notion of somebody else paying for your loyalty program," said Mr. Pirillo. Senator Durbin's office did not provide a comment in time for publication of this story. Cardlytics partners with thousands of small, regional banks via two online and mobile bank processing firms, FIS and NCR. But it has direct relationships with the nation's top 20 banks including giants PNC, Bank of America and Citibank. And these are some very close relationships. The Cardlytics software sits behind its bank partners' firewalls on their servers, where banks have custody of their data. "We don't share any customer information with Cardlytics. It stays within the bank walls," said Brent Reston, digital sales and service executive at Bank of America, which began working with Cardlytics in 2012. The company delivers merchant offers to customers via its BankAmeriDeals program directly in online statements and in its mobile app. Bank of America has 30 million active users of its online banking service and 20 million active mobile banking users. Bank of America said it did not begin its BankAmeriDeals program in response to the Durbin amendment or other regulations. Being behind those firewalls means the rewards program employs bank data without having to transfer it outside of its protection by the stringent security operations of the banks. This is key to the success the firm's founders have had scoring bank clients, said Ms. Laube, who started Cardlytics with another former Capital One Payments exec, Cardlytics CEO Scott Grimes, former senior VP and GM of Capital One Payments. The fact that the system works within its bank partners' secure environments "was one of the things that sold us on going with Cardlytics because PNC is a very conservative company when it comes to privacy and sharing of data," said Ms. McIntosh, noting the company went through a governance process before approval to go forward with the Cardlytics relationship. "Data security and privacy continues to be a top priority for banks. That hasn't changed and we don't anticipate that changing," said Maria Pallante, VP loyalty solutions at Bond Brand Loyalty. "Organizations that work or want to work with a bank need to meet their strict data and privacy requirements." Also key is the fact that the data used in the Cardlytics system is not personally identifiable. Each night, Cardlytics gets a feed of the most recent customer transactions. The software stores Cardlytics IDs which are associated with purchases made by the people they represent. According to Ms. Laube, the firm never pulls data showing an entire history of a customer's transactions. "We access only the transactions required to meet an advertiser's needs. We never pull out the entirety of an individual's transactions at any given time." However, the Cardlytics software has a long memory, storing on average three years' worth of data, according to Ms. Laube. In February, Cardlytics launched a consumer insights service called Platform Solutions which provides information about consumer segments and helps clients target and measure ad and marketing campaigns. For instance, clients might use the data to help determine whether local TV spots had an impact on sales in that region. Cardlytics works with a variety of data partners including social sharing company AddThis, Acxiom-owned offline-to-online data firm LiveRamp and other third-party data matching firms to make connections between an advertisers' customer list and purchase transactions for audience building, ad targeting and measurement. When PNC originated its merchant-funded rewards with Cardlytics in 2010, the firm displayed offers inside online bank statements. Yet, because the targeted offers sometimes involve advertisers targeting people who shopped at a rival retailer or restaurant, some merchants complained. "We had some negative customer feedback from the offers that were there from a competitor standpoint," said Ms. McIntosh, noting that PNC stopped showing offers inside online statements less than a year ago. Today, the bank displays offers in its mobile app and on various pages of its website. PNC and Bank of America are mulling the addition of location-targeted offers that would display offers for nearby businesses based on customers' mobile device locations. Cardlytics gives its large bank and processing partners a portion of what merchants pay to target offers to bank customers, but smaller banks that use the system through processors might not get a cut, said Ms. Laube. "It's at the discretion of the processor," she said, suggesting that simply having a rewards program they don't have to pay to run is an incentive for banks to partner with the firm. Some suggest that banks would benefit from more robust loyalty programs than merchant-funded offers like those that Cardlytics enables. According to Mr. Pirillo, targeted offers through merchant-funded programs cannot replace the "emotional connectivity" that can be created through a loyalty program offering things such as personalized services. Scott Robinson, VP of design and strategy at Bond Brand Loyalty, also noted that with systems operated by an outside firm, the merchants themselves can't foster consumer loyalty, in part because the merchant does not own the relationship. "We would want the work of that investment in that promotion to drive loyalty to the brand," said Mr. Robinson. For Bank of America, the program does drive loyalty, said Mr. Reston, noting that the bank's customers that use its rewards program log into the mobile app at "about a 30% higher rate" than other customers. "There's a big loyalty play here," he said. "Customer satisfaction is higher and you can equate customer satisfaction to loyalty." ~ ~ ~CORRECTION: An earlier version of this article erroneously identified Chase and Wells Fargo as partners with Cardlytics. They are not.

Financial Reform Gave Banks a Reason to Cozy Up to Merchant Rewards

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