How to Improve Your Bottom Line: 4 Steps to Develop a Successful Gift Card, Loyalty or Reward Program Merchants Want.

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1 How to Improve Your Bottom Line: 4 Steps to Develop a Successful Gift Card, Loyalty or Reward Program Merchants Want. A Practical Guide for ISOs and Acquirers Fifteen minutes after picking up takeout from a local pizza shop a man receives a text message thanking him for his purchase and a digital coupon for 15% off his next order if he comes back next week. At the end of the month a woman reads an from the dry cleaner that tells her she has saved $75 so far this year because she is a rewards member plus there are coupons for in-home rug cleaning. Stored-value programs have evolved. They are no longer simple gift cards hanging on a tree at the point of sale. Today they can be key drivers in the acquisition and retention of consumers for merchants. In these two scenarios, which is more valuable in the merchant s eyes? The firm that provided the card processing service or the one that provides the network and software to make these scenarios possible? When utilized correctly stored-value programs give ISOs and acquirers the ability to fundamentally shift their dialogue with merchants from one focused on price to one focused on driving value and revenue. What you will learn in this white paper This white paper from SparkBase highlights the primary steps organizations that are investigating stored-value programs should follow to ensure they are driving maximum return on investment SparkBase, Inc. All rights reserved. This document contains information that represents the present view of SparkBase on the issues discussed at the time of publication This White Paper is for informational purposes only. SPARKBASE MAKES NO WARRANTIES, EXPRESS OR IMPLIED, IN THIS DOCUMENT. Product or company names mentioned herein may be the trademarks of their respective owners.

2 Why Stored-Value Programs Are Important for ISOs and Acquirers Diversification is key to improving business performance Independent Sales Organizations (ISOs) and acquirers have always expended considerable resources seeking merchants and then boarding and servicing them only to see a significant portion leave every year. Low switching costs lead to 9-15% attrition per year and the Aite Group estimates that more than half of merchants that accept card payments have changed processors at least once since they started their business. 1 But times have changed and there is an undeniable squeeze on margins around the discount rate charged to merchants. To survive, acquirers and ISOs have to be creative in devising strategies to win new accounts, as well as retain the ones they have worked so hard to obtain. One of the primary ways to increase the net spread in merchant acquiring is by diversifying into value-add products and services such as gift card, loyalty and reward programs (referred to as stored-value programs going forward). Is there demand for stored-value programs? Small to mid-sized merchants see increased customer demand as being their primary growth driver in 2011 according to the American Express OPEN Small Business Monitor, a semi-annual survey of business owners. To help boost demand, more than a third (38%) indicated they would establish a loyalty or rewards program in the coming year. Supporting this 0% effort by merchants is the fact that 59% of consumers Increased Customer Demand were interested in hearing about small business loyalty programs, and just under half in rewards or incentive Tax Cuts programs. 2 The fact is, consumers want stored-value programs and over the next twelve months we will see rapid adoption by small to mid-sized merchants as they rush to take advantage of this opportunity. The only question is, who will provide the merchants their program? Improved Access to Capital Hiring More Employees 2011 Merchant Growth Drivers Other 10% 20% 30% 40% 50% 60% 1 Aite Group, Impact Report: The Allure of Greener Grass: An Analysis of Merchant Attrition, American Express OPEN Small Business Monitor, October

3 1. Don t Create a Program Just to Have One... Create a Program That Drives Your Business. Stored-value programs can deliver a number of different benefits to an ISO and acquirer. However, this is not a simple plug and play proposition. Organizations that rush development and launch a stored value offering without carefully thinking about how to construct a program see a decreased return on investment; wasting time, effort and capital. It is important to determine how much you are willing to invest in a program and what your expected return Whose brand is it anyway? A fundamental question when establishing a new on investment should be. This key information will guide decisions on stored-value program is whose company logo whether to resell software, build capability in-house, or white-label will represent the program. From the merchant s software and offer it as your own. perspective, the company whose brand is Minimal investment? Minimal revenue. If your objective is to increase revenue with minimal investment, establishing a business relationship with a software provider to resell their branded product into your merchant accounts for a small percentage of total revenue may be the best choice. This will generate on average $5-7 a month per merchant in incremental revenue with minimal overhead. This model has the fastest speed to market as there is minimal training and setup required to begin a program. While this model requires the least investment, it also delivers the lowest returns. Revenue is limited as is control and ownership of the merchant around the program. These programs are highly portable from one ISO to another and offer minimal differentiation. mentioned during customer service calls, is seen on reports, and to whom they write the check provides the program. Developing a new line of business. For those organizations looking to build a significant revenue stream within their portfolio of offerings, it is recommended that they either create the processing capability in-house or source it from an existing network provider and white-label the offering as their own. Either of these options delivers ownership of the merchant experience and complete control of the offering. White label? What s that mean? Also known as private label or OEM software. White-label software gives a company the right to change the logo, product name, color scheme, and pricing to appear as if they originally developed the functionality. Building a program in-house: In this scenario, either in-house IT resources or an independent software developer will build a processing platform, rules-based engine and terminal integration. The ISO or acquirer will own the underlying code and be responsible for the actual processing capability (datacenters, networking, terminal compatibility, etc.). Development typically takes 7-9 months to 3

4 build gift card functionality and integration with a single terminal and your organization will have the greatest degree of control and ownership of the project. When you build in-house, the developers, the business analysts and the business itself is in close proximity, working in the same operating environment. This provides for very close coordination between the teams and integration with existing business processes. The downside is that this strategy requires significant overhead both for initial development (e.g. development team, testing team, hardware, tec.) and ongoing support (technical support team, continued R&D.). Initial investment can be north of $1.5 million. Often ISO s and acquirers that pursue this strategy Get your head in the cloud do not take into account the cost of continued upkeep and There is a lot of talk about cloud-based computing innovation when determining ROI. close coordination between also known as software-as-a-service (SaaS). the teams and integration with existing business processes. The Cloud-based computing is accessing software downside is that this strategy requires significant overhead both functionality via the internet as opposed to having for initial development (e.g. development team, testing team, the software installed on your computer or on a hardware, tec.) and ongoing support (technical support team, server in a datacenter. In 2011, 25-30% of all new software sales will be in this format. Businesses continued R&D.). Initial investment can be north of $1.5 million. choose cloud/saas software because it: Often ISO s and acquirers that pursue this strategy do not take into account the cost of continued upkeep and innovation when Reduces capital requirements: There is no need to determining ROI. invest in hardware or network capability. White-labeling software as your own: IT administration is limited as maintenance One of the key drivers for an ISO or acquirer to white-label is taken care by the software company and a stored value program is financial; to set up and run a upgrades do not need to be installed. They are development department with the technical expertise of a available instantaneously as they go live. software company takes considerable time and money and there is no guarantee that your existing staff will be able to handle the requirements of each new innovation or terminal/pos integration. In this model, ISOs and acquirers typically pay a low start-up fee to configure the platform and either an annual license or a small monthly fee per merchant. This pricing model gives the client the ability to set pricing (monthly and/or per transaction fees) and see margins in the 70+% range. But it wouldn t be accurate to say that firms choose to white-label over inhouse development only because of finances. White-label software firms are significant drivers of innovation in the market. They are set-up to not only deliver scalable solutions today, but their very existence is predicated on begin able to drive innovative solutions to the market tomorrow. This capability is due to the fact that white-label software companies provide service to a wide range of clients. The functionality and integration demands of this diverse client set often drive significant innovations in each new release of the software. This shared innovation concept is one that is unique to the software-as-a-service (SaaS) or cloud software model. 4

5 Of the three options covered: reselling software, building capability in-house, or whitelabeling software and offering it as your own, white-labeling an existing network has the highest incremental rate of return as it limits the capital investment required for start-up and ongoing overhead while increasing speed to market and still delivering control of the merchant experience. Decrease marchant attrition One of the biggest advantages in offering a stored-value program as a new line of business is that it can significantly lower the merchant attrition rate. Various industry reports peg merchant attrition rates at 14% annually. Continually finding, converting and boarding merchants to replace lost accounts is an expensive proposition. With new account acquisition costs being well over $1,000, the payback on a new account is often more than a year. While card-processing services have become commoditized with low switching costs for a merchant, it is not as simple to move a gift, loyalty or reward program from one provider to another. Programs that are viewed as revenue drivers as opposed to costs are infinitely more valuable to a merchant. Enhance your value proposition How do merchants view your company? Are the services you offer nothing more than a cost of doing business for them? Or, do you offer services, such as a stored-value program that helps a merchant grow their business? ISO s have an opportunity to take advantage of a fundamental merchant need: Increasing consumer traffic and spending. Merchants look at stored-value programs as a way to drive new traffic to their location, encourage higher frequency from existing customers and encourage repeat business. A well thought out stored-value program can help a merchant achieve these goals and we have seen many clients reposition their company so that they are viewed as a valued provider of customer acquisition and retention programs. 5

6 2. Craft a Program That Merchants Want. Understanding your merchant s needs allows an ISO or acquirer to provide a relevant program. For years ISOs and acquirers have focused on basic gift card programs to merchants operating in the hyper-competitive retail or food service markets. To stand out from the crowd, it is important to differentiate your offering. This can be done two ways. First, you can create a program targeting industries that are not saturated with programs, such as auto repair, healthcare or beauty care. Second, you can expand upon a simple gift card program by adding marketing (such Types of Programs: as or text messaging), reward or loyalty capabilities. Merchants today compete not only with other local outlets, but also large national chains and big box retailers with massive advertising and IT budgets. They see the consumers in their backyard participating in the rewards and gift card programs offered by these chains, and are looking for ways to level the playing field. ISOs and acquirers who provide innovative stored-value programs give merchants the ability to offer programs that are just as sophisticated without the capital investment in IT. Membership: Deliver a standard discount on purchases. Often used to reward VIP customers or as a quid pro quo for either a fee or demographic information. Outbound messaging to remind consumers of total value delivered is important. Repeat: A digital punch card. A reward is triggered based on visits/frequency. Great when paired with SMS text message couponing to drive repeat visits from new or infrequent customers. Offer relevant capability today and tomorrow. Your program should be built on a platform that can easily be modified to suit merchant expectations and evolve to take advantage of emerging trends. For example, Forbes Insight estimates that more than 39% of major retailers will have a mobile component to their loyalty program or offer mobile couponing by Small and mid-sized retailers will soon clamor for the same functionality. Will your system be able to handle this demand? Similarly, at the outset of a program, it may not be possible to see the myriad of ways that a platforms functionality may be applied in a retail setting. A good system will enable you to build upon and enhance your initial offering over time, rather than restricting you to a limited feature set. Rewards: Consumers earn points based on behavior. Points accrue and can be redeemed for merchandise or a gift card. Prepaid / Gift: An additional revenue stream for merchants. The amount spent by a consumer during redemption is often more than the value of the card, increasing a merchant s average ticket. Multi-application: The next evolution of gift card and loyalty programs. A great example is a gift card that can also function as a rewards card. This incentivizes the holder to share additional demographic information with the merchant. This also allows the merchant to load any monetary rewards onto the card as opposed to creating a Make it simple. paper gift certificate. Customers and a merchant s staff need to easily understand the program and how it operates. The value of the program needs to be immediately apparent. Staff needs to be able to explain the program and process the transaction. Instant gratification, reasonable reward thresholds and even expiration dates keep customers engaged at the same time it helps keep costs under control. 3 Forbes Insights, Retail s Mobility Imperative,

7 Help merchants earn customer trust. Consumers don t want to sign up to loyalty programs that require them to spend months saving up enough points for a flashlight that they don t really want. Instead, almost half (47%) of consumers say they are more motivated to join loyalty programs that provides instant gratification, such as cashback and discounts at the point of purchase. 4 Make it profitable. In an effort to, hide the value of a reward, merchants will end up giving away significant margin. For example, it does no one any good to offer every member of a coffee club both a 15% discount on every purchase and a free cup of coffee after every 9th cup purchased. While this does not sound like much, this is essentially a 25% discount for the consumer. With a normal 60% gross margin on a cup of coffee, you have effectively cut profit by more than half. It s great for repeat business but not so great for keeping the lights on. Help merchants reach current customers and make new ones. Merchants need to tell their customer more than once about the program. While many programs rely on receipt messaging for couponing, best of breed programs have automated communication with participants via or text messaging to communicate immediately after the transaction and incent repeat purchase, at key anniversary dates to incent participation, and at month or quarter end to communicate value (such as dollars served or points earned) to increase loyalty. For example, just after a transaction a highly relevant text message can be delivered. This has both immediate and long-term benefits. Location and context are powerful tools. A customer may not be in the mind to act on the SMS communication at the time it s received. But, people often remember where they were when an idea entered their minds. As such the consumer may not immediately respond, but they make a mental note and then go back at a later date. 4 Mintel International Group, Mintel Oxygen Report: Instant Redemption Opportunities Lure In Loyalty Program Customers,

8 3. Secret Programs Don t Work. You Must Sell and Support a Program to See Growth. Stored-value programs are a business strategy that requires proper alignment of people, business processes and technology to create long-lasting, profitable relationships. Just having processing capability and an innovative program will do little for an ISOs or acquirer s bottom line if your sales people cannot explain the program or see little value in selling it. The same can be said for a program that is easy to sell, but doesn t have processes created to board a merchant or answer technical questions. For sales, ISOs and acquirers typically utilize both call-center and the agent channel. The #1 predictor of success is sales force education. Not only do agents and call center representatives need to understand the program, but they must also be able to communicate its key features and benefits to a merchant. Your agents need to know the product that they are selling and be excited to sell it. What s in it for them from a financial standpoint? They need to understand that stored-value programs both increase their commission, but also limit the attrition of their book of sales. Selling the program is only the start. Once a contract is signed, a merchant must be boarded. This includes configuring the program a merchant has chosen to their specifications, downloading software to their terminals, ordering plastic cards and training them on the program. Establishing a standard process and integrating it into your business flow greatly increases your chance of success. 8

9 4. Pick the Right Partner for Success. Finally, finding a stored-value program provider who fits your needs, whether to resell their software, build your own program, or white-label an existing package to offer as your own, is more than just selecting a brand name (especially if you are looking to differentiate your offering from your competitors), a simple feature set, or a low investment model. Your vendor should set you up for success. The right vendor can help ensure that your system is set up properly, consider all of the options from the outset, counsel you on effective program creation, and assist in process development for merchant boarding. A supportive partner can make all of the difference. How that vendor supports your needs, not just during the initial rollout of the offering, but also through your company s growth evolution and changing needs can have a major impact on the long-term value and viability of your offering. It s common for ISOs and acquirers to focus on the initial implementation and rollout, but it s important to think about post-implementation needs as well. At some point during or following the launch of a program, your organization will encounter new needs or challenges whether they are minor support incidents, resource constraints, unique requests or a need to modify their system. Consider the kinds of support you will require to meet your objectives both today and tomorrow. Does the program provider act more as a partner in helping you solve problems or is this just a simple business agreement? Industry knowledge and experience pay dividends. Working with a stored-value program provider that has experience in the financial services industry can provide a tremendous advantage, as they will require less time and education to familiarize themselves with your business processes. Furthermore, they will often be able to add value by applying best practices and benchmarks by gleaned from past experiences developing programs. By examining a potential partner s credentials, references and successes in your industry you may also find inspiration and ideas to enhance your own offering. 9

10 Questions to Ask As You Evaluate Your Options For your organization... How will a stored-value program support your business objectives and strategy? Have you established key business metrics for the program? How can stored-value program work with your company s specific business processes? Do you have a strategy and communications plan for the rollout of the program to employees, agents and merchants? What training requirements will agents and customer service representatives require? Who will provide the training? Have you planned for change or growth? Could you outgrow a quick fix and wind up spending more money a few years down the road? For vendors... Can the stored-value program evolve with changing market needs and trends? What technology infrastructure is needed to support the system? Who will own the merchant when it comes to the stored-value program? What percentage of total revenue will you keep from the program? How will you be paid? How often? Who is responsible for upkeep and maintenance of the network? Can a merchant retain his stored-value program if he chooses not to use your other services? Does the vendor have experience in the industry? Does the vendor sell directly to merchants too? Is this a problem? Are you selling a program with the vendors name on it or yours? Does it matter? What kinds of implementation or ongoing support does the vendor provide? Are there additional costs? What kind of technical support and resources are available? 10

11 About SparkBase In the financial service industry, SparkBase is the behind-the-scenes partner whose stored-value platform and network allows ISO s and merchant acquirers to offer the most successful and innovative gift card, loyalty and reward programs for small to midsized merchants. SparkBase is located in Cleveland, Ohio and provides white-labeled gift card, loyalty and reward programs to a variety of channels that provide key services to merchants. ISOs and acquirers interested in learning more about accessing the SparkBase gift card and loyalty network to resell as a white-label solution to their merchant accounts can contact SparkBase at (216) or sales@ 11