ADS, AXP and JPM: The Bank Edge over Online Advertising and Payments Platforms
SEE LAST PAGE OF THIS REPORT Howard Mason
FOR IMPORTANT DISCLOSURES 203.901.1635
June 15th, 2014
ADS, AXP and JPM: The Bank Edge over Online Advertising and Payments Platforms
- 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 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:
- “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”.
The Advertising Opportunity for Payments Companies
“Marketing budgets are not growing but …. shifting from general brand spend via Madison Avenue into measurable, ROI-based, data-driven targeted programs…we are asking the retailer to take $40mm out of the TV budget and move it over to the private label card business” Ed Heffernan, CEO ADS, 2014Q1 report
Payments companies such as AXP, DFS, ADS, and ChaseNet which operate a closed-loop, and so control both the merchant and cardholder ends of a card transaction, are the beneficiaries of the secular shift in advertising from generic brand spending on broadcast channels such as TV and magazines to data-enabled, ROI-measurable, direct marketing on digital channels. Our colleague, Paul Sagawa, reported on the advertising shift from TV (in a research note of June 9th titled “The Revolution in Advertising will not be Televised”) and provided data, reproduced in Exhibit 1 below, on the changing media-mix for advertising spend. ADS, which includes direct marketing spend, sizes the market at $400bn for 2016 and estimates that over half has shifted to data-enabled direct marketing.
Exhibit 1: 2014 US Advertising Forecasts by Media
AXP and First Data have made similar observations about the size of the addressable advertising market, and opportunity for payments companies as it shifts to data-enabled marketing programs. For example, as early as 2011, AXP published the chart in Exhibit 2 comparing its estimate of market-size at $364bn for 2009 to a $144bn estimate of the revenue pool across the card issuing and acquiring businesses. Finally, last October at the Money2020 conference in Las Vegas, Ed Labry, Vice Chairman of First Data, suggested the addressable market was over $500bn.
Exhibit 2: The Advertising Opportunity for Payments Companies as Reported by AXP in 2011
The Data Advantage of Closed Loop Payments Networks
“There just seems to be a massive shift of interest from retailers for our product offerings which allow a closed loop network to pull out not just who the person is but also the [purchase] information down to the SKU level”. Ed Heffernan, CEO ADS, 2014Q1 report
“Consumer hate being mass-marketed to – generic offers and loyalty programs just create a lack of trust between merchant and consumer. So consumers want a streamlined and secure online [and mobile] shopping experience coupled with meaningful, relevant and targeted offers that reflect their buying behavior and habits [i.e. enabled by SKU-level transaction data]. This is what the ChaseNet program, coupled with Chase offers, allows merchants to do” Mike Pasilla, CEO of Chase Merchant Services, May 2013
Closed loop payments networks, including private-label card providers, control both the merchant and cardholder sides of a payment transaction; they have an “acquiring” relationship with the merchant (to process card payments coming off point-of-sale and/or e-commerce systems) and an “issuing” relationship with the cardholder (to maintain the cardholder account and provide authorizations for transactions). As a result, they know the identity of the cardholder (referred to in the industry as the personally identifying information or PII) and, provided the merchant agrees to share the data, they have purchase transaction information (at the basket level since they must authorize the amount). Furthermore, given the connection to merchant systems and with the merchant’s permission, they can access the more valuable in-basket or stock-keeping unit (SKU) level information.
Indeed, access to SKU-level information is the core of the private label business at ADS. The company combines this first-party information from its merchant clients with a third-party database of customer attributes (covering 220mm adults in the US with 400mm data items drawn from Court records and magazine subscriptions, for example) to finely segment the customer base by buying behavior and propensity, and then designs and implements targeted marketing campaigns based on this data-enabled segmentation. AXP is pursuing the same strategy through Loyalty Edge, announced in January 2010 and expanded overseas in part through the March 2011 acquisition of Loyalty Partner, a customer relationship management and marketing-services company with loyalty programs in Germany, Poland, and India. So, for example, ADS supports the “Thank You” rewards program of Citigroup (as well as the loyalty programs of BAC, WFC, and USB) while AXP enables the “My Fedex Rewards” program of FDX.
Merchant Distrust of Online Ad Platforms
Of course, the online ad platforms compete for the advertising dollars of merchants both against Madison-Ave style brand advertising and the payments-data-enabled, targeted direct marketing supported by closed-loop payment companies. However, the online ad platforms typically do not have access to SKU-level transaction data and must make do with “soft” intentional data from search activity or “social proof” effects from social media “likes”.
While ADS has demonstrated that merchants will share SKU-level data with payments providers, and trusts them not to use that data to support competitors (so that ADS supports loyalty programs for clients in the same industry including GM and F in auto; BAC, C, USB and WFC in banking; and Restoration Hardware, Pottery Barn, and Crate & Barrel in furniture retailing), there is no evidence that merchants will extend this trust to online ad platforms. Indeed, quite the contrary: there are intense concerns among merchants around whether mobile wallets from the online ad platforms, such as Google Wallet, will compromise merchant control and ownership of strategic transaction data and this has been a motivating force behind the formation of the merchants payments consortium, MCX. For example:
- Kate Jaspon in the Treasury Department of Dunkin’ Donuts (an ADS client and MCX member) commented in January 2013 of its decision to join MCX: “We wanted to protect and control our own customer data. We wantd to be certain that what were customers was doing is not shared with our competitors”.
- John Manna in the Controller Department at Lowe’s (another MCX member) added: “What would those other [non-MCX] wallets be doing with that [payments] data if they were the ones collecting it? Would they be using it or selling it? Would they use it to steer consumers to competing stores? The control and ownership of the data is really important to us retailers”.
Beyond the formation of MCX, the drive for control and ownership of payments data is helping to shape the structure of the payments industry. For example, a key motivation for the Starbucks card and mobile app (with the app, which may be white-labelled to other retailers, now accounting for 14% of tender at Starbucks) is to wall off, ticket-level transaction data from the payments system; all the card companies see is the periodic funding transactions as consumers load money onto their Starbucks cards or apps.
Walling off data, including transaction and rewards flows, also drove the structure of Chase’s deal with Visa over ChaseNet announced last February. As Chase commented at the time: “By licensing a private version of VisaNet, Chase will be able to work directly with merchants to negotiate pricing and certain operating rules. Chase plans to offer merchants more flexible pricing and simplified operating rules. Additionally, Chase and the merchants will be able to offer Chase Visa cardholders special offers at these merchants.” ChaseNet puts Chase in a similar “closed-loop” position as ADS (particularly for ADS’ cobrand cards such as those with Virgin but also for its private label cards); Chase has an acquiring relationship with the merchant accepting the card (since that it’s a condition for ChaseNet) and an issuing relationship with the cardholder on Chase-Visa cards. Furthermore, the fact that transactions are flowing over a private, Chase-controlled infrastructure provides increased assurance to merchants that the data will not leak to the broader payments system and so increases the chance that Chase can win permission to access SKU-level information to design data-enabled marketing programs for the Chase cardholder customers it shares with merchants.
Integrating Rewards Redemption into the Payments Stream
Beyond greater potential to access SKU-level data, payments companies enjoy a second advantage in data-enabled direct marketing over the online ad players: that they can more easily integrate the redemption of marketing offers into the payments stream. Online players can do this for in-app and certain online payments, but the attempt to extend online payment franchises to point-of-sale faces the enormous challenge of building an acceptance infrastructure with a price-disadvantaged product. Our June 10th note, entitled “Apple vs. Banks in Mobile Payments”, discusses the price disadvantage which arises from Visa’s treatment of the mobile apps sponsored by online payment companies as extensions of the desktop screen (and so subject to high “card not present” rates) while the mobile apps sponsored by banks are treated as “emulators” of a plastic card (and so subject to more attractive “card present” rates).
In this light, ChaseNet is profoundly significant since it provides Chase with the opportunity to build-out its closed-loop network, integrating Chase offers into the payments stream over private ChaseNet infrastructure, while leveraging the Visa acceptance brand. In other words, Chase-Visa cards are “mutable” in the sense that acquired transactions can be processed over ChaseNet where Chase has reached a deal with merchants for network services and over VisaNet where it has not. No other company has this advantage: PayPal has a deal with DFS where its brand will be accepted at merchants who accept the Discover brand but this is subject to agreement with the third-party acquiring processors that connect many merchants to the Discover network (and to card-not-present pricing or worse where the PayPal account is funded with a Visa card or MasterCard); and ADS cards are private-label and so are merchant-specific rather than having the general-purpose utility of a Visa card.
Given the inability to leverage the acceptance of the Visa acceptance infrastructure at point-of-sale, the risk to the online ad platforms is less than that they fail to extend their payments solutions to point-of-sale but that they lose share of their e-commerce franchises to banks. Through Quick Checkout, for example, Chase will compete directly with the online digital players (PayPal’s Express Checkout, Google Checkout, pay-with-Amazon) for e-commerce transactions. The product will be at least as convenient as checking out with PayPal credentials (users will use their Chase log-in information) and will leverage ChaseNet to deliver targeted offers. As Mike Pasilla, head of Chase Merchant Services comments: “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”. Furthermore, as tokenization is implemented, Chase can offer online merchants card-present pricing and relief from fraud risk while the wallets from online players are stuck with higher card-not-present pricing and, under Visa/MasterCard rules, responsibility for fraud risk.
- 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.
- Because, in the case of MasterCard, of the Staged Digital-Wallet Operator Fee or SDWOF