FIS, SYF – CurrentC and the Digitization of Trade-Spend

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SEE LAST PAGE OF THIS REPORT FOR IMPORTANT DISCLOSURES

Howard Mason

917.667.6535

hmason@ssrllc.com

October 8, 2015

FIS, SYF: CurrentC and the Digitization of Trade-Spend

While officially being piloted only in Ohio, CurrentC from the retailer payments consortium MCX is now live at Target stores nationwide (and can be linked with a bank checking account, a Target RED card, and various gift/loyalty cards including Cartwheel). The app will not win any UX prizes and is slow to load on 3G, but it incorporates a unique and ground-breaking innovation: the integration of payments with redemption of SKU-level coupons. This will transform retailing through improving the efficiency of trade-spend which, at $200bn annually in the US, dwarfs interchange of $60bn. It is no coincidence that the top-5 retailers by use of trade-spend are members of the MCX consortium and, with the exception of Meijer, do not accept Apple Pay at point-of-sale. We continue to expect CurrentC to gain a 20% tender-share at participating retailers over the next 5 years with winners being acquirers in the CurrentC-ecosystem including FIS in debit and SYF in credit (see Table below).

  • Trade-spend, where a consumer packaged goods (“CPG”) company and retailer collaborate to promote a particular item (e.g. through merchandising display, feature ads, and discounting) amounts to $200bn annually in the US and is the largest expense item, behind COGS, for CPGs representing 15-20% of sales. It is notoriously inefficient because, while CPGs can access POS-scans for promoted product, they cannot link these to the personally-identifying information or PII of customers and so assess whether the trade-spend generates an incremental sale or merely subsidizes a sale that would have occurred anyway.
  • Through its partnership announced in August with Inmar, which carries the highest inventory of trade-spend offers in the US, MCX is looking to improve trade-spend efficiency through marrying PII (captured when a customer enrolls in the wallet) with POS-scan data. CurrentC is the only mobile wallet that is integrated into the POS systems of multiple retailers and hence the only wallet that is capable of supporting SKU-level coupons for a CPG brand that shoppers can redeem at more than one retailer. The ultimate consumer appeal will depend on how many CPGs choose to participate and MCX has chosen not to announce details beyond saying “a number of top CPGs have already engaged with Inmar to provide MCX with offers spanning a variety of product categories”.
  • As retailers use CurrentC to improve trade-spend efficiency, there will be a transformation in the economics of the payments business and customer shopping rewards. As ammunition for retailers to outbid banks as distributors of payment cards, trade-spend in the US is more than 3x interchange-spend of ~$60bn and, while not all trade-spend will be digitized through CurrentC, the case for digital coupons is strong. Beyond the consumer-driven shift from paper to digital media, digital coupons have redemption rates that are 13-14x higher than traditional free-standing insert or FSI coupons distributed in flyers and newspapers.
  • Despite this, digital coupons accounted for only 0.3% of the ~320bn coupons[1] distributed in 2014; the bottleneck is in part because the redemption of digital coupons is not integrated into the main payments stream creating consumer inconvenience. Resolving this is a key objective for CurrentC with CEO Brian Mooney commenting “consumers are nog going to want to just replace the swipe but they’re looking for how to replace the swipe and get something else on top of it … like payment with loyalty and coupons, payment with offers etc.”
  • We expect more details of CPG participation in the next couple of months as CurrentC broadens its pilot from Ohio and continue to view the product as transformational to the retail and payments industries with winners, on the payments side, including FIS for debit processing and SYF for credit processing.

Overview

The CurrentC wallet, from the retailer payments consortium MCX, is now live nationally at Target stores and, for the first time, integrates payments with SKU-level couponing. This is a ground-breaking innovation which will have far-reaching consequences for the retail industry because of the importance of trade-spend. US spending on trade promotion, where a manufacturer and retailer collaborate to promote a specific product through price discounts, promotions, and displays runs at ~$200bn annually with $60-90bn[2] contributed by manufacturers (representing 15-20% of gross sales for most CPGs) and the balance from retailers. After cost-of-goods, trade spend is the second-highest expense-item for CPGs and there is widespread concern about efficacy; as Mir Aamir, COO of COUP comments “it’s quite inefficient … that $1.00 discount did not do anything to motivate the shopper as an incremental purchase; it just subsidizes a purchase that was already going to happen … there has been a lot of desire in the industry to be able to solve this.”

The solution, of course, is to combine the scan-data recording the purchase at point-of-sale (and triggering a trade-promotion payment to retailer from CPG) with the personally-identifying information or PII of the customer and then offer discounts to targeted customers based on price-sensitivity rather than to all customers via shelf-offers. CurrentC is an enabling catalyst for this personalized pricing because it provides a medium through which discounts can be pushed to customers, in the form of SKU-level digital coupons, and because it can be tied to PII. Indeed, in August, MCX announced[3] a partnership for its CurrentC wallet (which captures PII through the customer enrolment process) with Inmar which will be the promotions management and processing vendor for the wallet. Furthermore, just this July, Inmar purchased Scan Apps which is the leading provider of promotional services that use point-of-sale data to validate that a trade-promotion sale has taken place and hence qualify a retailer for CPG trade-spend for selling a promoted product to a consumer.

The retailer motivation for third-party validation is that it allows a more credible bid for an increased trade-spend budget from CPG suppliers, and it is no coincidence that the top-5 retailers by trade-spend are all MCX members (see Exhibit 1). The CPG motivation for third-party validation is that is allows a more efficient sizing and allocation of trade-spend budget based on measured performance. We view the bringing together of POS scan-data and PII as a foundational innovation in retailing, that will lead to a cascade of follow-on innovations in much the same way that continuous-aim firing did for naval gunnery[4]. The common ground is that both innovations generate feedback and hence guide a new trajectory of experimentation and improvement in targeting technology. There are likely to be winner-take-all dynamics in that retailers who are most effective at using customer data to target promotions will receive an increasing allocation of CPG trade-spend.

Exhibit 1: Top Retailers Using Trade Promotions (2011)

Source: Kantar Retail

The significance of this to the payments business is that the CurrentC wallet will be integrated with trade-promotion in ways that other mobile payments solutions cannot match. For example, TGT uses its Cartwheel app to feature a promoted product with validation of a trade-promotion sale by SKU-level and by customer occurring seamlessly (via Inmar) when the consumer registers Cartwheel into the CurrentC app and uses it to make payment. This cannot be achieved on bank-issued payment accounts (whether or not accessed via Apple Pay and Android Pay) because the data are split[5]: the bank, not the retailer, has the PII and the retailer, not the bank, has the SKU-level purchase data. As MCX notes “because CurrentC ties into the POS systems of each merchant, MCX can enable SKU-level offers – i.e., they can offer a discount on a specific brand of candy bars compared to just on a total shopping cart … CurrentC is the only mobile wallet that can do SKU level coupons across multiple merchants”.

The consequence is that CurrentC becomes a platform on which retailers can improve trade-spend efficiency thereby transforming the economics of the payments business and customer rewards. To give a sense of scale, annual trade-spend of $200bn in the US is more than 3x total interchange-spend of ~$60bn. Of course, not all trade-spend will be digitized through the CurrentC wallet. However, the case for digital coupons is strong. Beyond the consumer-driven shift from paper to digital media, digital coupons have redemption rates that are 13-14x higher than traditional free-standing insert or FSI coupons distributed in flyers and newspapers but yet account for only 0.3% of the ~320bn coupons[6] that were distributed in 2014; the distribution bottleneck is in part because the redemption of digital coupons (sometimes also called load-to-card or L2C coupons because they are loaded to a consumer loyalty card) is not integrated into the main payments stream creating customer inconvenience. This integration is a key element of the consumer value proposition for CurrentC. As CEO Brian Mooney puts it “consumers are nog going to want to just replace the swipe but they’re looking for how to replace the swipe and get something else on top of it … like payment with loyalty and coupons, payment with offers etc.”

©2015, SSR LLC, 1055 Washington Blvd, Stamford, CT 06901. All rights reserved. The information contained in this report has been obtained from sources believed to be reliable, and its accuracy and completeness is not guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein.  The views and other information provided are subject to change without notice.  This report is issued without regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is not construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. The analyst principally responsible for the preparation of this research or a member of the analyst’s household holds a long equity position in the following stocks: JPM, C, BAC, WFC, and GS.

  1. https://www.inmar.com/Communications/Documents/Inmar%202015%20Promotion%20Industry%20Analysis.pdf
  2. https://www.inmar.com/blogs/promotions/archive/2015/07/30/elevating-trade-promotions-within-the-marketing-mix.aspx
  3. https://www.inmar.com/Pages/InmarArticle/Press-Release-08262015.aspx
  4. http://denninginstitute.com/pjd/TT/Sims/Sims.pdf
  5. There are exceptions where the bank and retailer agree to pool PII and SKU-level data as in the case of ADS.
  6. https://www.inmar.com/Communications/Documents/Inmar%202015%20Promotion%20Industry%20Analysis.pdf
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