ADS, AXP and JPM: The Bank Edge over Online Advertising and Payments Platforms

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There is a secular shift in advertising from generic brand advertising on broadcast channels to data-enabled direct marketing on digital channels. Our colleague, Paul Sagawa, reported on the shift in a research note of June 9th titled “The Revolution in Advertising will not be Televised” concluding that “trends favor online ad platforms over traditional media stocks”. We see banks as the ultimate winners.

Banks with closed-loop payment networks (with ADS being the go-to example, but AXP and ChaseNet also important) are better placed than online ad platforms to support merchants in the design and implementation of data-enabled direct marketing because: (i) they are more trusted with SKU-level[1] transaction data that improves the targeting/personalization of offers; and (ii) they can integrate rewards redemption into the payments stream reducing the barrier between sales and cart abandonment.

Indeed, ADS’s private-label business (accounting for ~70% of firm-wide earnings) is predicated on integrating SKU-level transaction data from merchant clients with a database sourced from third parties covering 220mm adults in the US across 400 fields of information (such as credit scores, court records, and magazine subscriptions). The promise to merchants of using these data to improve marketing efficiency has allowed ADS to grow its card balances by mid-teens in an industry where loan growth is otherwise flat. As CEO Ed Heffernan puts it:

  • We are asking the retailer to take $40mm out of the TV budget and move it over to the private label card business … There is a secular shift of hundreds of billions of dollars that was traditionally spent via Madison Avenue on brand marketing over to data-driven targeted marketing… and a massive increase in interest from retailers in our product allowing a closed-loop network to pull out not just who the person is but also the [purchase] information down to the category or SKU level which is really the gold standard in data these days”.

As commented in our November 4th note titled “US Payments: Winners and Losers in Mobile”, we believe ADS can continue its growth as the shift to mobile catalyzes further integration of payments and marketing; and there is additional upside through expanding relationships with MCX members such as Dunkin’ Donuts (which is both an MCX member and an ADS client). We have some concerns around how ADS presents credit risk and particularly the potential for the adverse selection typically associated with private-label card programs. However, these will not bite in the short-run because of the benign credit environment and, longer-run, may be mitigated by working with the MCX acceptance brand. We will provide details in a follow-up note.

AXP and JPM (following the creation of ChaseNet in February 2013) enjoy similar advantages to ADS in accessing SKU-data and integrating rewards redemption into the payments stream because, like ADS, they have closed-loop networks (i.e., represent both merchant and cardholder in many card transactions). Indeed, JPM’s “Chase Offers” program (enabled by ChaseNet) and AXP’s “Loyalty Edge” program provide similar marketing and customer-relationship management services to merchant clients as ADS, and do so without the acceptance-restrictions of ADS’ private-label cards. In the case of ChaseNet, this is because Chase has the extraordinary ability to process over its own payment network transactions that are initiated on cards carrying the Visa acceptance brand.

  • Our March 26th note, “AXP: Structurally Improving Business Model”, provides details on the improving economics at AXP which, because of its closed-loop, has a meaningful lead over V/MA in working with merchants on the design/implementation of data-enabled marketing.

ChaseNet’s ability to leverage the Visa acceptance brand as it builds out ChaseNet is likely a decisive advantage over online players who are struggling to extend their e-commerce payments franchises to point-of-sale. For example, PayPal’s arrangement with DFS (that its brand be accepted at merchants who accept Discover cards) requires the collaboration of third-party acquirers such as First Data and has disadvantaged terms versus card swipes: merchants must pay the higher “card-not-present” rates associated with e-commerce transactions and, under the Visa/MasterCard operating rules, bear responsibility for fraud risk (that is borne by issuers under “card-present” card swipes).

  • Chase can negotiate more flexible pricing arrangements with merchants and is not subject to Visa operating rules; in particular, albeit likely subject to tokenization, it can offer merchants relief from fraud risk when accepting a Chase mobile wallet.

Indeed, the risk to the online platforms may be less that they fail to extend their payments solutions to point-of-sale and more that they lose share of their e-commerce franchises to banks. Through Quick Checkout, for example, Chase will compete for e-commerce transactions with PayPal Express Checkout, Google Checkout, and pay-with-Amazon etc. The Chase product will be at least as consumer-friendly as checking out with PayPal (since users will use their Chase log-in information to initiate transactions rather than entering card information) and will leverage ChaseNet to deliver targeted “Chase Offers” (supported by SKU-level data to which Chase, and not the online platforms, has access). As Mike Pasilla, head of Chase Merchant Services comments[2]:

  • Consumers want an easy way to shop online – it can be a hassle now – and the mobile device just amplifies that problem… We think that Chase’s Quick Checkout payment option helps to do this by removing the barrier between sales and cart abandonment. And, through ChaseNet, we also have the ability to bring innovations to the marketplace like targeted offers and other demand-generation capabilities that will help merchants drive higher sales with Chase card customers”.

Please see our published research for the full note and tables.

[1] Stock-Keeping Unit data sometimes referred to as “in-basket” data because it includes details on the pricing and quantity of items in the shopper’s basket not simply the aggregate “ticket” for the basket as a whole.

[2] http://www.pymnts.com/exclusive-series/playmakers0/2014/inside-chase-merchant-services/#.U5ypgvldUz4

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