Friday Fun: Coffee and Banking (Redux)

starbuck_lyft_3
Email from Starbucks announcing Lyft promo (23 Sep 2013)

Given how many times “coffee” has appeared in my blog titles, you might think I’m obsessed (or addicted). You might be right. Nevertheless, I love the combination of these two important parts of my life, so I’m going to keep on posting. But unlike my last coffee post dealing with the branch experience, today’s subject returns back to my comfort zone, the digital world.

lyft-x-starbucks-logo

Starbucks recently opened their rewards platform so that third parties could issue Starbucks stars as a reward. The first major brand leveraging this massive platform is ride-sharing service Lyft (promo landing page). In an email today, they offered 125 stars for the first ride (through 9 Nov 2016) plus 5 stars per “morning commute” on an ongoing basis.

Given that 125 stars earns a free item at Starbucks, the Lyft program is essentially a free coffee for the first ride, then one free drink after every 25 morning commutes (e.g., about $0.20 value per ride). That’s probably a little stingy, but with rewards, even small numbers can be motivating. In addition, Starbucks is selling Lyft gift cards in its stores, offering an extra $5 Starbucks card for every $20 Lyft card back. That’s far more generous, but is likely a short-term promotion.

Bank opportunity

With the Durbin-induced death of debit-card rewards, combined with ultra-low interest rates, it’s difficult to find rewards that are affordable and meaningful. But the Starbucks Star has potential, though you have to dole out rewards judiciously.

Let’s assume you can buy stars in bulk for 2 cents each (for major partners, I’m guessing it’s less than that, probably closer to a penny per star). You could incent deposits at 1 star per $10 annually with a balance cap of $5,000 or $10,000. For a $5,000 savings account, the account holder would receive 40 stars per month, enough for a free cup of coffee (or better, a sandwich).

Transaction accounts could provide 5 stars for every debit transaction; 10 for credit card charges; 5 for mobile deposits; 100 for paperless; and so on. That could easily add up to a free drink every month, a meaningful incentive. Perhaps even enough to get a bit of viral lift (aka word-of-mouth).

Yes, it adds costs, but free caffeine is one of the best retention devices on the planet. You already provide free coffee in the branch, why not extend the same courtesy to your digital customers?

—–

Looking for more integrations? Don’t miss our upcoming techfest,
FinDEVr, in Santa Clara, 18/19 Oct 2016.
The Starbucks is on us!

FinDEVr-2016

 

 

 

Oscar Ties Health Insurance Premiums to Fitness Tracker

imageAs we speculate about the usefulness of wearables in payments and money management, an insurance startup has already launched a direct tie-in. Buzzy health insurance startup Oscar is paying customers $1 per day, up to $240 annually, when they hit their step- goal tracked on a Fitbit-like tracker from Misfit.

imageOscar has attracted $150 million in venture capital and is looking to bring modern ecommerce thinking to the massive health insurance market. The company is looking to be on the forefront of insurance tech trends, such as mobile help from physicians, easy access to records, digital communications, and transparent costs (see app here).image

How it works
Customers who buy health insurance through Oscar (available in NJ/NY only, but coming to California and Texas in 2015), are given a free Misfit step-tracker (retail value = $50, currently discounted 50%). The tracker syncs to Oscar’s mobile app (see inset) and credits customers $1 each day a step-goal is achieved. Goals start at a relatively easy 2,000 to 3,000 per day and ratchet up to the 8,000 to 10,000 per day recommended by fitness experts.

The bonuses are paid in Amazon gift certificates in increments of $20. The Amazon credit is likely bought at a discount to par value, reducing costs to Oscar (more details here).

Significance for FIs
Oscar can pay out $200 per year because it’s selling a big-ticket item, health insurance. And it stands to benefit from healthier customers who use less medical care. Unless you are in the health insurance business, you can’t copy this dollar for dollar. The important thing is making a game out of healthy habits by keeping score and delivering tangible rewards (previous post).

Thoughts on Perkstreet’s Demise

image If you follow U.S. virtual banking (see note 1), you have likely heard that one of the biggest, at least in terms of venture funding ($15 mil), is closing its doors. Boston-based Perkstreet Financial is shutting down Sep 26 and will not be able to pay out the accumulated rewards balances held by its customers (rumored to be about $1 million, see note 2).

While I thought the startup had a great team (ex Capital One), I did not follow it as closely as Simple/Moven because it was not really a technology innovator. It was all about the rewards, which seemed like a good plan, especially since the money was paid out on merchant gift cards, presumably acquired below face (see our post on its launch). I never saw their business plan or heard their investor pitch, so this is all speculation.

I tweeted that they were done in by low interest rates, which made all those high balances (it took $5,000 on deposit to earn the top rewards tier) practically worthless. But they were founded in 2008 with $5 mil of VC funding in 2009 and $9 million in 2011. That was all done in the midst of the ultra low-rate environment, so clearly the low-rate deposit environment was no surprise to the bank and it’s investors. They were banking on rates going up, but like traders who place big bets on corn, oil or currency futures, commodity trading is a high-risk business.

Falling debit interchange rates didn’t help, but they were Durbin exempt, so that wasn’t as dramatic of a revenue hit as it was at the big banks. In fact, CEO Dan O’Malley told the NY Times last year that their interchange had remained unchanged.

My guess is they were done in by the problem that every financial startup faces: It’s really, really, really hard to get customers to send money to a web-based startup, especially when there is no immediate short-term gain. Their acquisition costs, especially in a low-rate environment, must have been unsustainable.  ING Direct (which wasn’t really a startup) was able to attract billions of deposits, but that was because customers were transferring in $30,000+ balances in order to immediately gain $500+ in annual interest (back in the 5% APY days 10 years ago).

Also, while Perkstreet had a great consumer-advocacy positioning, “use debit, avoid credit,” that was a bit of a mis-match for the customers they were targeting, big-spending rewards junkies which could afford to park $5,000 at the startup. Most existing big spenders are fond of using credit card programs with similar rewards, so changing their behavior was a continual challenge.

Winners:

  • Traditional banks: They have one less aggressive online competitor to worry about. It also could put a damper on VCs future bets in this area.
  • Perkstreet customers who cashed out their VC-subsidized rewards prior to the Aug 12 shutdown.
  • NY Times personal finance columnist Ron Lieber who was was skeptical in mid-2010 about the long-term viability of Perkstreet’s then-2% rewards rate.

Losers:

  • Perkstreet customers who had yet to cash out a significant chunk of their rewards balances.
  • Other virtual (aka neo) banks (Moven, Simple) may face increased skepticism from investors and prospective customers. However, their business plans are much different (no rewards for one thing), so this is probably a temporary setback.
  • The personal finance gurus who recommended Perkstreet (see Dave Ramsey ironic “companies we trust” screenshot below), especially those that pulled in affiliate dollars from the startup.

Bottom line: Perkstreet was a $15 million interest-rate bet that didn’t pan out (note 3). While I feel for their team, they are sharp and connected and knew they were in a high-risk business. For the most part, they will move on to next challenge with new-found insights. Had rates gone back to 3% or higher, Perkstreet would have likely been in good shape, enjoying its position of being highly recommended by Dave Ramsey and the other personal finance sites.

————————————-

DaveRamsey.com homepage (29 July 2013)

image

————————————–
Notes:
1. Our term for third-parties that function similarly to banks, but don’t hold the deposits, instead passing them through to FDIC-insured banks. We covered Perkstreet’s launch in 2009 here. We took an in-depth look at truly virtual banks (Personal Capital, Bank Simple, and PerkStreet) in our Oct 2011 Online Banking Report.
2. The $1 mil number was mentioned on Twitter from an unconfirmed source, so no claim to its accuracy. The company said previously it had paid out $4 mil in rewards. All deposits are held in FDIC-insured banks, Bancorp Bank or Provident Bank, and are safe and available to all Perkstreet customers. In better times, someone might have stepped in to honor the rewards and buy the company at a fire-sale. But paying $1 mil+ for a group low-margin customers was obviously a tough sell.
3. I’m sure the failure was a combination of hundreds of things and is way more complicated than I’ll ever know. I’m just addressing the big headwinds facing financial institutions, especially startups. 

Card-Linked Offers in the Wild: Bank of America, Capital One and Fifth Third

We are starting to see more card-linked offers (aka merchant-funded rewards) in the wild:

  • imageBank of America: Consultant and former bank exec Tom Noyes showed off his BofA offers, BankAmeriDeals powered by Cardlytics, on his FinVentures blog earlier this week.
  • Capital One: For the past four weeks, I’ve been receiving FreeMonee offers from Capital One (see screenshot below).
  • Fifth Third Bank: I don’t know how long it’s been there (the service was announced in late Feb), but today I noticed that Fifth Third has a link up on its homepage to Prewards, the edo Interactive-powered rewards programs.

Bottom line: Card-linked rewards are great for consumers and banks, and hopefully they will prove to be equally valuable for the merchants who pay for the whole thing. If so, it could usher in a whole new era of ad-supported banking (note 1). In the meantime, it makes for awesome Finovate demos (note 2).

—————————————–

Fifth Third homepage features Prewards under "Personal | Bank" navigation (8 June 2012)

image

Prewards landing page (link)

image

Capital One weekly email with five new offers (1 June 2012)
Note: Offers are typically good for 2 weeks after email received.

image

—————————————-

Notes:
1. We wrote about merchant-funded rewards in our Online Banking Report (Feb. 2011, subscription).
2. We covered the the best new products at FinovateSpring 2012 in our most recent Online Banking Report (May 2012, subscription).

Two Card-Linked Offers/Rewards Startups Launch at TechCrunch Disrupt

image While I’ve read TechCrunch since its beginning, I’ve only been able to make it to their semi-annual event, Disrupt, once before. It’s usually just too close to our own Finovate. But this year I made the trek to Pier 94 in Manhattan to see what was going on in tech in general and to meet with the fintech startups in the Startup Alley or Battlefield launch competition.

There were six fintech companies in total. Three offered variations on card-linked offers, one has developed an alternative payment system, one was a newer payments gateway, and surprisingly there was just a single crowdfunding platform.  

Startup Battlefield competitors from fintech: TechCrunch selected thirty companies in advance. All have agreed to launch their companies on stage at the event. 

  • imageCardify: Card-linked loyalty/offers geared toward local merchants. Sean Rad is CEO and of the West Hollywood company which has raised $750,000.
  • imageMirth: Same as above. Jeremy Philip Galen is Founder. The NYC-based company is bootstrapped. 

Startup Alley participants from fintech: These are companies less than two years old that qualify for a table in the networking hall. Each day one of the Alley companies is voted to the stage to imagecompete in the Battlefield.

  • LocalBonus: A card-linked offers platform focusing on the local market
  • imagePayintele: An alt-payments company using barcodes to pass info between merchant and payee (I’ll do a whole post on them shortly)image
  • PayLeap: A payments gateway from two previous Authorize.net execs
  • The Crowd Funds: A crowdfunding startup from former image E*Trade CTO, Joshua Levine

Observations: It was interesting to see three new card-linked rewards companies all going after the local market. But if you look at what Groupon’s done with local merchants and where Square is headed, you can see there are huge opportunities here.

And the payment APIs available from Cardspring (which both Mirth and Cardify use) are making it relatively easy for startups to tap into a merchant’s card transaction streams to make offers, tally rewards, identify frequent customers, and communicate with them.

As a side note, Cardify has a gorgeous UI. It’s very hip and high-end looking like something you’d see at more well-funded companies such as Square, Simple or Mint (screenshot below). Kudos to the design folk there.

———

Cardify homepage (24 May 2012)

cardify app as seen on its homepage

—————————-

Notes:
1. While not a fintech company, as an auction junkie, I was intrigued by Outbid’s social mobile/online auction platform. The company said it’s talking to four banks looking to host live auctions on their site to use for promotions and social gaming. I think it’s a promising idea, one I’ve explored a few times over the years. But with Facebook Connect you can actually get a critical mass of customers involved very quickly. The company had the cheesiest demo I’ve ever seen (and that’s saying something), but that shouldn’t impact your decision.

Capital One Add Rewards to Mobile App, Includes Ability to Redeem for PREVIOUS Travel

Capital One mobile rewards main page Although it was one of the last major banks to launch an iPhone app, Capital One is now positioning itself to be a leader in mobile. Its April 5 iPhone app update included a new rewards function that’s the best I’ve seen.

Rewards point totals are clearly shown on an old-school “flip number” display (see screenshot right). But the novel part, and this may be an industry first, is the ability to redeem rewards in real-time, for travel purchases you’ve ALREADY MADE. (You can also redeem for cash or gift cards.)

I thought this was some kind of typo when I first saw it in the marketing material. So I tested it myself this morning. And sure enough it does exactly what it says.

Previous travel purchases made on the Capital One card are displayed in the app. Users select the one(s) they want to redeem for mileage points and Capital One provides a statement credit to refund the user for the purchase. Brilliant!

———————-

Capital One’s mobile reward redemption for previous travel (20 April 2012)
Note: Select a transaction (below left), confirm (below right).

Capital One mobile rewards screen      Capital One mobile rewards redemption confirm      

 

imageI also like Capital One’s new app “home page.” Instead of forcing a login before users can do anything, the bank offers several non-secure content areas:

  • Browse our products
  • Find branch/ATM
  • Mobile banking FAQ
  • Contact us

These are useful for customers who can’t or don’t want to log in. And of course, for prospects kicking the “mobile tires” at the bank.

Merchant-Funded Rewards Summary with Infographic

image This guest post was written by David Brebner, a financial services product and program manager with more than 20 years’ experience in the United States, Europe and Australia. He is a principal consultant with Mindful Insights LLC.

image————————————–

Financial Institutions are always in search of new, innovative products for their customers. But finding an idea that passes the business case test is no small feat. Ideas must enhance the customer experience, provide new revenue streams or cut costs, and play nicely with the standing IT strategy.

A well-crafted Merchant Funded Rewards (MFR) program may be one of the ideas that passes all the hurdles. For the FI, the right MFR program drives new, incremental, net income.

For the merchant (remember, the one ‘funding’ the rewards program), they have the potential to gain access to highly targeted customers for a pre-determined cost. Plus, by teaming with an FI, merchants can avoid devaluing their brand with widespread coupons or discounts. Instead, the offers are positioned as “rewards” giving a lift to the brands of both the FI and merchant. 
______________________________________________________

Market size
______________________________________________________

Working with vendors and FIs, we’ve locked onto some interesting stats including:

  • Rewards can run to $100 to $200 annually per consumer, all funded by the merchant community
  • An active base of over 250,000 retailers already integrated with one or more MFR providers
  • More than $100 billion in transaction volume estimated by 2015
  • 1 in 3 consumers participating turn into repeat customers for the merchant
  • Average merchant transaction size increases by as much as 10%

_________________________________________________________

The rewards ecosystem
_________________________________________________________

We’ve crafted a view of the MFR ecosystem and the interactions among the players. This ecosystem makes a complicated delivery mechanism as simple as possible for FIs.

Rewards vendors offer a myriad of choices such as:

  • The location of the stored transaction information (in-house or third-party managed)
  • A choice of automatically enrolling customers or requiring an opt-in process
  • A choice of presenting offers via the online banking channel or a rewards portal
  • A wide range of analytics about purchase behavior that can be used for future programs

The FIs don’t have to go at this opportunity alone as the providers have worked to make their solutions feature-rich, while affording FIs the flexibility to deploy the solution to their unique needs.

There’s upside and value for the FI and its customers. There is a range of strong providers vying for the FI’s business. Now may be the time to review where your program is and get it moving.

—————————–

 

image 

———————————-

Note:
1. For more info, see our Feb. 2011 Online Banking Report, also authored by Mindful Insights.

Launching: SmarterBank, a Virtual Bank Aimed at Student Loan Holders

image Startups are advised to find pain-points, then build businesses to profitably solve them. Despite the current wave of very bad publicity around banks, especially the big ones, everyday banking isn’t a huge pain-point for the 80% of households currently served by existing players.

Sure, I’d like to have more security options, fewer unintelligible messages, and a Cash Tank. But most of these are feature/function improvements, not “must-have” issues that need to be solved.

What are the acute pain points in banking and personal finance?

  • Debt management, especially credit card and student loans
  • Home financing
  • Small business financing
  • Insurance
  • Retirement planning/saving

Three of these five have to do with the debt side of the consumer’s balance sheet. Yet, much of the talk about online/mobile banking innovations centers around spending management, payments, checking and savings accounts, and account access technology.

So I get pretty excited about innovations on the debt front. And last week, there was an interesting launch on the student-loan-management front, SmarterBank from Finovate alum, SimpleTuition. Its tagline says it all:

Smarterbank is "the bank that helps you pay down your student loans"

It’s a truly free, full-featured checking account, with debit card, paper checks and all the usual (but no branches, of course). And it’s powered by The Bancorp Bank, which has its hands in many of the new direct banking initiates we are seeing, including (bank) Simple.

But the special sauce is a built-in rewards program tied directly into student loan payback.

___________________________________________________________

How it works
___________________________________________________________

It’s actually two separate accounts, rewards and checking. You don’t need to buy the checking account to participate in the rewards program. But you must be in the rewards program before you can get a SmarterBank checking account.

  • SmarterBucks: rewards piece (see first two screenshots below)
  • SmarterBank: the checking account

Users accumulate cash to accelerate student-loan payback in three ways:

  • Deals/offers (note 2)
  • Banking rewards (from linked SmarterBank checking account)
  • Direct contributions from family and friends

SmarterBucks dashboard (8 April 2012)
Note: (1) Link to SmarterBank in upper right
(2)The deals piece is marked “coming soon”

SmarterBuck dashboard with link to SmarterBank from SimpleTuition

SmarterBucks reward activity
SmarterBucks rewards activity screen from SimpleTuition

_________________________________________________________

Sign-up process
_________________________________________________________

1. Sign up for SmarterBucks, which as a non-financial account requires only name and email address

2. Add a student loan that SmarterBucks rewards are credited to

3. (Optional) Add a SmarterBank account so that non-PIN debit purchases earn SmarterBucks rewards

4. (Optional) Invite family to contribute money directly to the SmarterBucks account

SmarterBank application hosted by The Bancorp Bank (link)

Smarterbank application powered by The Bancorp Bank

______________________________________________________________

Analysis
________________________________________________________________

Marrying rewards, checking/debit, P2P family contributions, and student loan repayment is brilliant. It not only provides a tangible benefit for the 37 million Americans with student loan debt (see note 1), but also is a great customer-acquisition tool for a very important segment, recent college grads. Financial institutions looking for more twenty-something customers should consider building similar capabilities or partnering with SimpleTuition.

———-

Notes:
1. Figures are from the company. It also said that 10 million students owe more than $50,000, and 2 million owe more than $100,000.
2. Friends and family will also be able to link their own SmarterBucks account to the student’s.
3. We covered family/student banking nine months ago in our Online Banking Report (here).

Looking Forward to Ad-Supported Banking

Last week, Christophe Langlois @Visible-Banking tweeted a question about the value of in-statement rewards programs: 

image

And my answer:

image

My response was partly 140-character hyperbole. It’s Twitter after all. But after sleeping on it, I think what I said might actually be true. 

What’s the biggest problem facing online/mobile banking?

The cost to the bank. Always has been and always will be. And it’s not going to get less expensive anytime soon (note 1). Every time we write about the next must-have online bell or mobile whistle, it just gives bank CFOs another gray hair.

Up until recently there were only three ways to pay for these extra expenses:

  • Charge direct fees for the channel, which customers hate
  • Cross sell, which is hard to attribute solely to the online channel
  • Cover the costs with other revenue streams

The vast majority of banks, and every one in the United States, took the last approach. Unfortunately, this can lead to unwise pricing decisions such as the one that gave rise to the “$35  cup of coffee.”

But thanks to Cardlytics, who recently took home Best of Show honors at Finovate Europe, and others, we are entering into a new era of advertising-supported banking. And that could finally make direct banking a revenue generator on its own. Not enough to pay all its costs, but enough to alter the game.

Let’s assume banking customers redeem 2 offers per month and the average commission to the bank is $1 each (note 2). That’s $2/mo in new revenues, almost entirely attributable to the online/mobile channel (note 3).

A bank with 25,000 online banking customers would earn about $600,000 annually. That will buy a several bells and a decent whistle.

———————-

Notes:
1. It can be argued that in the long-term support costs per banking customer will fall dramatically as branches and human customer support are downsized.
2. Using Aite’s forecasted $1.7 billion in-statement commissions in 2015 and dividing by 70 million online banking household (link).
3. You have to have the debit or credit card too, so the revenue might need to be shared with the card P&L.
4. We published a report on in-statement rewards in 2011 in our Online Banking Report.

Intuit Offers eBay Bucks Incentives for Mint, TurboTax Trial

image While I don’t use eBay for entertainment much any more, I still pick up the occasional used item now and then. And I love the rewards program which began about two years ago. It works like it should, with no qualification hoops to jump through or byzantine rules to discourage redemption (note 1).

Users accrue a 2% cash-back bonus, called eBay Bucks, for three months. Then they have 30 days to spend it on the site. When paying for a subsequent purchase, the eBay Bucks are automatically used first, with any remainder shunted off to PayPal for authorization.

It’s all well integrated and transparent. eBay even emails you multiple times as the spending deadline approaches.

They company also provides ways to earn extra eBay bucks. Today, for example, they offered an extra fiver if you bought something worth $100 or more.

In addition, outside brands can make offers on the rewards-summary page as well. The current featured offers (for me anyway) are from Intuit’s Mint.com and TurboTax units. Users receive one eBay Buck for signing up for Mint and two for using TurboTax. There are 36 offers altogether, paying up to 15 eBay dollars (People Magazine). All offers are powered by TrialPay. Two others are financial:

  • FreeCreditReport.com (Experian): 10 bucks
  • Credit Karma: 1 buck

Side note: The eBay rewards implementation is a good example to simulate when designing your own in-statement rewards program.

————————————–

Mint.com offer displayed in eBay rewards program area (16 Feb 2012)

Mint.com offer displayed in eBay rewards program area

Close-up of Intuit offers

Close-up of Intuit offers on eBay rewards page

Landing page powered by TrialPay (link)

Mint.com offer fulfillment page powered by TrialPay

———————–

Notes:
1. I did fail to redeem my cash-back horde the first time, because I didn’t realize there was a 30-day redemption deadline. But not before eBay sent multiple messages reminding me of the pending deadline. 
2. For more on in-statement rewards programs for banks, check out our Online Banking Report on the subject (published Feb. 2011).