C-Store Buys Loyalty with Bank Rewards

Loyalty programs can be costly propositions that require longer commitments than many smaller companies are comfortable making.

“You don’t want to set up something that you can’t get out of,” says Jon Stewart, president and CEO of Tri Star Marketing, a third-generation family-owned chain of gas and convenience stores headquartered in Champaign, Ill. “We need something we can go into and pull back out of when we want to.”

That’s why Tri Star jumped when its lead bank asked it to help test drive a new bank-directed rewards program. The test offered bonus points to customers who used PIN authorization with their Busey Bank debit cards when making purchases at any of the 50 Super Pantry convenience stores Tri Star operates in Illinois and Indiana.

PIN authorization is an option commonly available on bank-issued debit cards. Although most are prominently branded as Visa or MasterCard products, they also feature ATM network logos. The majority of PIN-authorized transactions are cleared and settled through these regional ATM/POS networks (Star, NYCE, etc.) for less than most credit card payments.

Stewart was eager to see if he could shift more credit card payments to these lower-cost PIN debit payments at Super Pantry pumps and stores, and Busey Bank was seeking to boost usage of its MasterCard debit card product.

Tri Star agreed to foot the bill ($10) for 100 Busey Rewards points for each customer who used PIN debit at least four times at Super Pantry stores during the month of April. The bonus points were sufficient to qualify cardholders for awards like binoculars or hammocks.

“We were hoping we could induce people to use their debit cards,” Stewart says. “We figured if we could change behaviors and also get a larger spend from our existing customers, that would be ideal.”

Urbana, Ill.-based Busey Bank marketed the program with statement stuffers, e-mail messages and messages on the rewards website. The promotion drove a 27 percent increase in customers using the debit card PIN feature at least four times during the test month, resulting in a $53,000 spike in spending at Super Pantry stores by this group of “active” debit cardholders.

Traditionally, the interchange on PIN debit transactions has been priced at a flat fee that is substantially less than the interchange on most credit card payments, which can run from 1.15 percent to more than 2 percent of sales at some gas stations.

Some processors, however, have been revamping their price sheets, charging a flat fee plus a percentage of each debit card sale in interchange, depending upon the network used to clear and settle a transaction.

Gas stations and convenience stores like Super Pantry have been especially hard hit as interchange payments on credit and signature debit cards have spiraled upward in tandem with prices at the pump. “We wanted to see if we could get more customers to use their debit cards because it saves us money,” Stewart says.

(In recognition of the rising cost of interchange fees on fuel sales, Visa plans to restructure and reduce interchange on those purchases beginning this fall.)

While PIN debit payments may seem less costly to accept on a per-transaction basis, Aite Group analyst Adil Moussa warns that those savings can be erased by the overall cost of some merchant-funded rewards programs. Stewart says that this wasn’t the case with the Tri Star test; in fact, he’s interested in running additional rewards promotions with Busey Bank.

Many rewards companies rely on the notion that consumers prefer bank loyalty programs over those that are retailer specific; Aite Group research suggests this is the case by a factor of 2 to 1.

Bank endorsement
“Banks enjoy solid reputations in their communities,” says Doreen Rademacher, director of product development for Austin, Texas-based My Rewards. “When a bank asks a local merchant to participate in a program like this, it’s like getting an endorsement from that bank.”

Such programs are “a great way for local merchants, especially new merchants, to get known,” Moussa says, but ultimate success “is going to be dependent on the merchant and the provider.”

Dianna Reinhart, senior vice president for sales and marketing at Busey Bank, says its program “is a sure-fire way to drive business, and the merchant only has to pay for what it’s receiving.”

In addition to Super Pantry, a coffee shop with five locations and the official University of Illinois apparel store took part in the Busey Bank test. All three merchants saw significant boosts in the number of PIN debit transactions and associated spending increases of 25 percent or more, according to Rademacher.

My Rewards, which provides back-end support for the Busey Rewards program, identified 871 debit cardholders who began making trips or increased the frequency of trips to Super Pantry in April. Nearly 30 percent (257) of those shoppers had not shopped Super Pantry at all the month before.

Also identified were 600 existing Super Pantry customers who either spent less with their debit cards or did not use them at all during the test period. “In fact, there was a 45 percent leakage rate,” Rademacher says. “That begs the question of loyalty and what it takes to keep customers coming into the location for fuel but, more important, for other in-store merchandise.”

One of a handful of companies that provide back-end support for loyalty programs, My Rewards leverages proprietary segmentation strategies to help banks drive consumer usage of debit and other card products. Other providers in this market include names like Affinity Solutions, Chockstone, First Data, RewardsNOW and Vesidia.

These companies typically handle fulfillment, manage distribution channels and mine transaction data for nuggets that can help banks and their business customers better understand purchasing and payment trends. Success also depends on the quality and scope of merchant networks and the value of rewards.

Moving loyalty into the store
Many of these firms started out supporting online rewards programs and only recently fixed their sights on bricks-and-mortar establishments. The programs are a natural fit for the click-through aspect of online shopping, Moussa says.

My Rewards works with more than 100 financial institutions, many of them community and regional banks that collectively bring four million checking accounts to the table. The company also works with more than 100 online merchant partners.

With the April test a success, Stewart is eager to see if he can leverage the Busey Rewards program to help boost foot traffic inside his stores. “We know we can drive debit card usage at the pump, now we need to drive it to the back court,” he says.

Gwenn Bezard, research director at the Aite Group, says this is all part of a shift from rewards as a “marketing gimmick” to something more sophisticated. “The rewards industry is shifting from pushing one-size-fits-all rewards to delivering highly personalized rewards through advanced segmentation. Junk goods manufacturers are out and PhDs are in.”

In a 2007 report, Bezard predicted that U.S. financial institutions would spend $18.4 billion on rewards by 2010, up from $10.3 billion in 2006.