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Lanny Byers May 16, 2007 New York

Merchant – Centric Rewards: Imagine the Possibilities. Lanny Byers May 16, 2007 New York. Council Member Biography Lanny D. Byers

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Lanny Byers May 16, 2007 New York

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  1. Merchant – Centric Rewards: Imagine the Possibilities Lanny Byers May 16, 2007 New York

  2. Council Member Biography • Lanny D. Byers • Lanny has over 20 years of experience in the payments industry in card program management; loyalty/rewards, marketing, operations and product development for credit, co-branded, affinity, debit, prepaid, stored value and chip card products; sales management, co-brand contract experience and consulting. Demonstrated expertise in the start up of two national credit card programs: 1) American Association of Retired Persons (AARP) Visa portfolio; and 2) Sunoco MasterCard portfolio. Developed and implemented a variety of a stored value/prepaid card programs for First Data Corp • Lanny is currently the Founder & President, Guerdon Solutions, • Most recently, Lanny was Global Practice Leader/Senior Vice President and General Manager of the MasterCard Global Rewards Services & Loyalty Consulting business. The business provided reward and loyalty solutions around the world. He was responsible for all aspects of the business, from call centers and operations in the United States, Mexico, Brazil and the UK, to fulfillment of millions of dollars in merchandise, gift certificates and travel redemptions. The consulting practice completed numerous engagements which resulted in improved performance and profitability for clients. • Lanny began his career at Bank One in Columbus, Ohio in 1984 and held various operational and marketing assignments on the issuing side of the bankcard business. During his time there he was a Product Manager with responsibility for maintaining relationships with various bank partners, such as Vision Value Club and Northwest Airlines and was responsible for the product development and launch of the first “smart” chip card credit card issued in the United States. • In 1994, Lanny joined Bank of America. He was head of the Co-brand Marketing group, with the responsibility for developing and implementing the bank’s strategy for competing in this market and was the General Manager of all the co-brand/affinity programs. After the merger of the former NationsBank and Bank of America in October 1998, Lanny was responsible for all of the new Bank of America’s co-branded and affinity partnerships, which included Alaska Airlines, America West Airlines, Diamond Sports, Golden State Warriors and Phoenix Suns NBA affinity programs, REI Sporting Goods, Sunoco and Crown Oil, Time Publications/Southern Living magazine, US Airways and various other affinity programs • In 2000, Lanny joined Western Union (a First Data Company) as SVP and General Manager. Lanny launched the following prepaid card programs: 1) First USA/EBay Visa gift card, 2) ExtraMeasures MasterCard incentive card, 3) Revelation America MasterCard targeted to the un-banked and 4) developed a Virtual MasterCard that could only be used on the Internet. • Lanny graduated from The Ohio State University in Columbus, Ohio. © 2007 Gerson Lehrman Group Inc., All Rights Reserved

  3. Overview • Merchant funded rewards coalition programs can add value to both the participating Merchant and Card Association • Loyalty & reward programs utilizing data via technology solutions, within the payments infrastructure, can add value to a Merchant and Card Association • Card Associations are best positioned to facilitate a merchant rewards coalition program

  4. What Matters Most to Merchants? • Identifying profitable, repeat customers (acquisition & retention) • Growing their share of the customers’ wallet (preference) • Increasing customer frequency of visits and purchases (usage, ticket size) • Creating positive experience at the point of interaction (payment type) The Card Associations need to focus more on the merchant/acquirer community and understand what really matters to the merchant.

  5. Who Is Capable of Assisting Merchants with Identifying their Customers? • Card Associations (Visa, MasterCard, American Express, Discover)? • Private Label Processors (Alliance Data Systems, GE)? • Card Processors (FDR, Total Systems) • Bank Card Issuers (Citibank, Chase, Bank of America)? • Merchants THEMSELVES?

  6. Who Is Best Positioned To Gain? • Card Associations are in the best position to gain from continued growth as a result of merchant rewards programs. • MasterCard growth is up (4.2 billion transactions in the March period, up 19% from a year earlier). • Visa is positioned to launch an IPO in late 2007/early 2008 (they will have the capital to change the competitive payments landscape) • American Express continues strong growth. “Our ability to customize marketing and reward programs for areas with the highest returns helped us to start the year with strong momentum.” • Discover will launch IPO in 2007, but is least likely to benefit from merchant coalition reward programs due to their lack of merchant acceptance. • Cash and checks continue to decline as form of payment • By 2010, the Nilson Report, a payment-industry newsletter, estimates consumers will make more than half their purchases with cards instead of cash and checks. • Card Associations can grow their revenue significantly via rewards programs and by working closer with Merchants to establish reward coalition programs.

  7. What Is the impact? • Every $1 million dollars in credit card spend provides a Card Association with approximately $1,500 in assessment revenue. • $1 billion provides $1.5 million in assessment revenue (if the average spend is between $5000 to $9000 dollars per account, this equates to 134,000 incremental active accounts to produce $1 billion • Currently there are ~$80 trillion in paper-based transactions in the world and MasterCard processed $2 trillion. • If checks are declining ~4 to 6 percent every year in the USA, this could provide the Card Associations with huge growth potential • Reward programs drive this volume • financial service loyalty programs have soared by 164% this decade with 239 million members. New research from Colloquy found that the average household belongs to 12 loyalty programs. • Card Issuers are finding it difficult to fund growing rewards programs and are increasingly looking to Merchants to fund the rewards (over and beyond interchange) • Another opportunity for Card Associations to become value-added broker between Merchants and Card Issuers

  8. How do Merchants identify their Customers today? • Via in-store reward (frequency) programs • Via in-store promotions • Via private label programs • Via Co-brand bankcards • Other acquisition channels Only private label provides the merchant with individual customer purchasing behavior insights and maybe a frequency/reward program Source: Representative of yearend merchant report for $2+ billion US based retailer with 500+ stores

  9. What Customer insights do the various payment types provide today? Customer Data Name Address Telephone E mail Address Customer Number Source of Customer Transaction Data Amount Date Time Stamp Payment Type Authorization Number Transaction Type Department Number SKU Reporting Total sale volume by payment types Average ticket by payment types Department sales by payment types Associations and Issuers capture only a percentage of these data elements. Merchants’ are not requiring their acquirers to capture and send additional insights to bankcard issuers.

  10. Merchant Can Card Associations provide the same Customer insights as Private Label? A C Q U I R E R P R O C E S S O R Issuer Private Label transaction processing systems are known as “closed-loop” systems, where the issuer directly connects with the merchant and their acquirer to improve the customers’ point of interaction experience. Discover and American Express have similar “closed-loop” networks.

  11. Issuer Visa/MasterCard/Discover/AmEx Networks Merchant Direct connect to Processor or cardholder Direct connect to CA Network If the Card Associations' technology platforms could see all of their Transactional Data – they could re-create the “closed-loop” A C Q U I R E R P R O C E S S O R $25 $25 $25 $25 $25 Their network platforms can track each cardholder and merchant transaction to provide the merchant specific customer insight.

  12. Issuer Issuer Issuer Issuer Visa/MasterCard/Discover/AmEx Networks Only the Card Associations can expand the Merchant’s Customer insights beyond Issuers and Private Label P R O C E S S O R A C Q U I R E R P R O C E S S O R A C Q U I R E R Only the Card Associations are positioned to see all of Shell’s transactions and encourage cardholder loyalty to the merchants.

  13. Retailer without Rewards Program Why do merchants need a reward program? • Customers continue to select cash & check • Private Label programs provide merchant value • Card Associations need to demonstrate added value to these merchants Source: Representative of yearend merchant report for $2+ billion US based retailer with 500+ stores Card Associations and Merchants must work closer together to become more relevant at the point of interaction.

  14. Compelling Rewards Program Why do merchants need a reward program? • This multi-channel retailer provides a 5% cashback at the POI • The store associates are rewarded for promoting the card • Avg. rewards ticket over 22% higher than bankcards Source: Representative of yearend merchant report for $2+ billion US based retailer with 500+ stores Payment type is affected by the reward

  15. Why should the Card Associations and Merchants cooperate and create a compelling rewards program? Response Rates & Promotional Results

  16. Growth of Reward Programs • There has been a 23% increase over the past five years in the number of credit cardholders who use cards that accumulate points for merchandise and/or airline tickets*. • Debit card usage has decreased from 55% in 2003 to 44% in 2007*. • Other research points out that Debit card usage continues to grow in the 20% range year over year • The use of general-purpose credit cards containing no benefits has decreased from 38% to 31% since 2003*. • MasterCard Unique Experiences" offers access to fine dining, plush spas, high-end shopping, live performing arts events, golfing, and other unique experiences. • Will MasterCard/Visa steal market share from American Express? * Source: Research by Vertis

  17. Leveraging Technology • Customers are increasing demanding instant gratification –real time rewards at the POS will respond to that need • Internet channel builds customer value and reduces expense. Typical functions provided to cardholders include: • Apply online / instant decisioning • Transaction history • Balance inquiry • Reward balances/redemption • Customer service inquiries • Card payment / payment confirmation • Chip loyalty applications • The ability to import/export rewards to other payment devices

  18. How do the Merchants Themselves Compete? • Merchants can create a compelling rewards program amongst themselves to compete with the payment processing industry. • Why is it possible? • Cost of technology has dropped drastically over the past few years. • Most merchant/retailer POS systems are connected via the Internet • POS applications/switches/gateways are flexible – allow for other payment types and card types to be handled at the POS • Discount rates paid by merchants is at an all-time high • Current bankcard reward programs are 100% funded by the merchant/retailers themselves via their discount rate (interchange to issuers)

  19. How do the Merchants Themselves Compete? • Imagine a merchant/retailer coalition – wherein the merchants create not only a rewards currency BUT a competing method of payment. • If merchants created their own method of payment network via ACH –imagine the possibilities • Merchants could create a “cheaper” method of payment and generate significant savings over current methods of payments and the discount rate associate with these cards • Merchants could create a “best in class” rewards program and rewards currency by taking the expense currently associated with paying discount rates and fund significant rewards for their customers • Merchants could form a coalition wherein the rewards currency is “interchangeable” and “accepted” at all participating merchants • Merchants can develop customer profiles of their customers based on their respective transactions and the transactions at other participating merchants Today a $100 dollar transaction via Visa/MasterCard/AmEx/Discover can cost a merchant $3 to $4 dollars versus ACH transaction costs of approximately .10 to .25 cents flat per transaction.

  20. Issuer Merchant’s Joint Rewards and Payment Network VIA ACH NETWORK Merchant Merchants can expand Customer insights beyond all other payment methods via a Merchant Reward/Payment Coalition Retailer’s POS system switches via payment type. On-us via ACH and all other payment types via their acquirer/processor A C Q U I R E R Customer’s Checking Account Merchants can create a very compelling rewards program via the savings associated with their own payments network - instead of paying the high discount rates. This would allow for the creation of a merchant funded rewards program wherein the rewards currency is accepted by all participating merchants. Merchants’ could be positioned to see all of their customer’s transactions at other merchants, allowing the merchants to profile their customers – in essence the merchants can create their own “association”.

  21. 6 8 7 Merchant Coalition Process Explained Participating Merchants Issuer Data Warehouse scrubs data 4 Data Warehouse Merchant Rewards Network Merchant Offers 1A 1B unscrubbed data GCMS passes Merchant Reward Program Parameters Enrolls cardholders 5 3 Cardholder MRS creates rebate transaction Merchant Settlement System Cardholder makes qualifying transaction's) at merchant 2 After qualifying, customer spends AGAIN at merchant to release reward funds 1 Merchant defines program parameters to merchant system and enrolls their customers 2 Customer makes transaction at a participating merchant 3 Merchant Network captures customer transaction data and sends to Data Warehouse Data warehouse scrubs data and forwards to settlement system Merchant Network determines rebate due and creates rebate 4 5 After qualifying, customer returns, spending again to use his earned reward funds 6 Merchant Network provides merchant reconciliations Merchant Network pushes rebate through clearing cycle to POS for discount 8 7 Tomorrow: Merchants are funding 100% of their customer Rewards

  22. Benefits to Merchant • ACH is the most cost effective payment method available today • Cheaper than PIN-based Debit • Cheaper than Signature-based Debit • Cheaper than Private Label • Cheaper then Bankcards • Merchant can use the savings realized by the switch from bankcard to ACH to fund a significant reward value • The merchant coalition allows the merchants to create a “closed-loop” environment for both the reward currency and payment transaction data captured when the customer uses the Rewards/ACH customer card • Increase in customer’s transaction amount and shopping frequency • Creates a more loyal customer

  23. What are the benefits? • Merchant fundedrewards coalition programs canadd valueto both the participating Merchant and Card Association • Rewards drive sales • Higher average sales tickets • More frequent shopper • More loyal customer • Reward transactions provide quantifiable results • Data on sales, promotional programs, etc… • ROI of their marketing programs • Provides in-store and outside the store data collection • Profile their customer • Segment their customers • Better able to target market their best customers

  24. What are the benefits? • Loyalty & reward programs utilizing data via technology solutions within the payments infrastructure can add value to a merchant • The current payments technology infrastructure can be leveraged to provide merchants with value-add programs such as: • Reward programs • Data collection • Customer Profiles • Customer Segmentation • Calculate ROI of marketing programs • Card Associations are in the best position to leverage the technology to their advantage

  25. What are the benefits? • Card Associations are best positioned tofacilitate a merchant rewards coalition program • Card Associations are best positioned to facilitate the merchant coalition programs? • This could provide the “winning” Card Association with: • A broader acceptance network • A more valuable card in the wallet – higher spend • A higher percentage of card volume processed via their network • A higher Association revenue stream • A more diversified business model – marketing services company • American Express is a “closed-loop” system – but they have not leveraged this advantage to create a merchant coalition • Discover is a “closed-loop” system – but lack the acceptance network • Visa/MasterCard are well positioned - they have the brand and the global acceptance network to succeed. Both (Visa after their IPO) will have the capital to invest in their technology infrastructure to provide merchants with valuable enhancements • It moves the conversation away from the costs of acceptance (interchange)

  26. Impact of Interchange on reward programs • The standard credit card reward program valuates a point equal to 1% or greater of each dollar in spending on the card. The Merchant is indirectly funding the Issuers reward programs via their discount rate. • For every $100 dollars spent on the card, the issuer is typically rewarding their cardholder with 1 point for every dollar with a value that equals .01 cent per point. • Any negative impact on interchange will have an immediate impact on the card issuers and their respective reward programs.

  27. QUESTIONS

  28. THANK YOU!

  29. APPENDIX

  30. Examples of Merchant Coalition Programs • Malaysia's REAL Rewards program • Is one of the largest coalitions in Southeast Asia. • Beginning with 15 founding merchant partners at launch, the program now includes 26 major partners, including telecom Telekom Malaysia Bhd, Petronas Dagangan Bhd, American International Group, Bumiputra-Commerce Bank Bhd, TOPS Supermarkets and newest arrival Tenaga National Bhd. Electronic Commerce Technology Sdn Bhd, the program operator, expects to have signed 40 members by the end of the year. • Canada’s AIR MILES Reward Program • Canada's premier loyalty program. With more than 100 top Canadian companies participating and nearly 14,000 service and retail locations. • AIR MILES reward miles can be redeemed for more than 800 different rewards ranging from movie passes to family attractions, CDs and DVDs, electronic merchandise, sports, recreation, travel and more. • More than 72% of Canadian households are actively collecting.

  31. Examples of Merchant Coalition Programs • Garanti Bank • The Turkish credit card loyalty program has over 4 million active users. Launched in April 2000 by Garanti Bank.At the time of the card's launch, there were 25 partner stores in Turkey. By the end of 2002, that number had increased to 750, with over 18,000 outlets where cardholders could redeem their bonus points. • It now has retail partners almost in every product and service sector, including supermarkets, petrol forecourts, clothing, home improvements and furnishing, healthcare and travel (including brands such as Tansas supermarket, Shell, Chicco, Little Ceasar's Pizza, Bosch, YKM department store, and the Florence Nightingale Hospital. • Rainbow Rewards • Rainbow Rewards enables members, who are signed up through their credit card company or by visiting www.rainbowrewards.com to receive a percentage of cash back from every transaction, as well as give to local charities in their community. • Rainbow Reward is headquartered in Denver, Colorado and was founded by CEO Ed Manners in 2003.

  32. Examples of Merchant Coalition Programs • Nectar • The Nectar program was launched in the UK in 2002. The program has rapidly become the largest customer reward program in the UK. The program enables customers to earn points from everyday purchases which can be redeemed at a wide range of high street stores. • Approximately 50% of all UK households participate in the program. Nectar has given back over £800m worth of rewards to collectors. There are around 6,000 retail outlets where the card can be used to earn points. Nineteen Nectar cards are swiped every second of the day.

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