Full-Service Payments: Does Loyalty Trump Ubiquity?

Point of sale systems have long been native to brick-and-mortar stores, but full-service payment offerings are now disrupting how they operate. The advantages of a full-fledged Payments as a Service system are being considered by merchants now tethered to more traditional POS systems built only for processing payments.

Retailers acknowledge that POS systems must flex to accommodate loyalty tracking, analyzing payments data and enabling mobile capabilities – and those requirements have many merchants looking to upgrade their old systems. PaaS solutions, which enable a full suite of “payments-plus” solutions will allow merchants to accommodate new features and functions without having to worry about staying current with emerging mobile and other connected commerce opportunities.

“We’ve had a history of isolated, standalone POS terminals that were out there just to handle payments,” said Mark Horwedel, CEO of the Merchant Advisory Group, a resource and advocacy group that represents more than 100 of the country’s largest retailers. “I think those systems will be replaced.”As merchants transition to full-service payment systems, several big brands like Dunkin’ Donuts and Starbucks are moving onto using PaaS-based systems that utilize their own homegrown payments solution, which not only save them processing fees, but also allow them to collect a wealth of consumer data.

As merchants transition to full-service payment systems, several big brands like Dunkin’ Donuts and Starbucks are moving onto using PaaS-based systems that utilize their own homegrown payments solution, which not only save them processing fees, but also allow them to collect a wealth of consumer data.

One such example, Horwedel pointed out, is Cumberland Farms. The convenience and gas chain’s SmartPay mobile app comes with the capability to connect to a customer’s checking account and lets them redeem discounts, rewards and other promotions.

The app, which was created by ZipLine, a payment solutions provider, utilizes ACH technology to allow customers to make payments directly from their checking account, saving the processing cost of card-based transactions.

“With products such as SmartPay, there’s a direct connection with the consumer and an opportunity for the merchants to learn about the consumer,” said Stephen Goodrich, president and CEO of ZipLine. “The greatest value of this product to merchants is the direct connection that it creates with the consumer and the loyalty it builds.”

Serving, and saving, the merchant’s bottom line

The development of SmartPay was inspired, in part, by Target’s Red Card loyalty program, which focused on helping to save payment processing fees, Goodrich said.

Major retailers, like Walmart, can spend up to $3 billion a year on interchange fees, according to Goodrich, but merchants with solutions like SmartPay or RedCard can instead keep that slice of revenue.

“Cumberland Farms, and other merchants like them, are not paying a fee to process these transactions,” he said. “Our initial strategy was that this would be an appealing option for merchants because it costs a lot less than the traditional card brands.”

This fee-saving aspect, when put together with ACH technology, is a lucrative combination that could tantalize many merchants in the space.

“I think you’re going to see more aggressive attempts by merchants to incorporate lower cost payment types,” Horwedel said. “When you look at something Like Cumberland Farms, they use ACH, and I see other merchants utilizing ACH as a less costly means of payment.”

Building relationships with rewards

Unlike most major credit or debit cards, full-service payment solutions allow merchants to get a better understanding of each of their consumers, Goodrich noted.

Systems like SmartPay allow retailers to track user behavior and consumer likes and dislikes, allowing them to build relationships with their customers and improve their in-store shopping experiences.

Horwedel agreed, saying that the data collection surrounding payments was especially important. He foresees data collection and analysis systems to be critical features as POS platforms evolve in the near future.

This collected data is a gold mine for retailers looking to build a comprehensive loyalty program that analyzes frequent purchases to deliver rewards. Those rewards also have an even lower cost for merchants than typical promotions, as they are often at least partly funded by savings on credit card processing fees.

A well-rounded rewards program, Goodrich stressed, is the key to not just retaining customers, but also building brand loyalty.

“The consumer that ends up enrolling on this platform typically stops shopping around and shopping with competitors, and only shops at one merchant,” he said.

These rewards go a long way in powering customer retention for brands — a strategy adopted by Cumberland Farms. The grocery chain gives SmartPay users a 10-cent-per-gallon discount on gasoline purchased through the app.

While the savings from decreased credit card processing fees cannot fund the entire reward, Goodrich said, the difference is more than accounted for by the increased sales brought in from loyal returning customers.

“I think merchants recognize the value of establishing that connection,” Goodrich said. “If I’m contributing to the reward as a merchant, that consumer is so much more likely to come back to my store.”

The value of that connection is evident in the bottom line of companies who embrace loyalty and other full-service payments features, Goodrich said. Merchants who have rolled out a ZipLine system similar to SmartPay have seen revenue grow by as much as 5 or 6 percent.

Ubiquity ain’t what it used to be

Many experts have long believed that wider acceptance is an essential facet of any successful full-service payment platform, but that’s a belief that Goodrich says is more than likely misguided. Despite the industry’s volatility, he expects the current trend toward specific payment apps for different merchants and retailers would continue in the future.

“People believed that for payments to be successful, it had to be ubiquitous, like Visa, that consumers were unwilling to carry additional cards or load additional apps,” Goodrich said. “That’s clearly not true.”

The success in adoption of loyalty and payment apps like Starbucks and Cumberland Farms are a sharp contrast to widely accepted mobile wallets such as Apple Pay, MCX and Mozido, which are commonly known to be struggling today, he said.

And this is why, “there will be more and more merchant-centric payment options,” he predicted, citing the recent news surrounding Walmart Pay and CVS Pay. “These make sense to me.”

Horwedel agreed, calling Cumberland Farms and Starbucks, along with fellow caffeine-cultivator Dunkin’ Donuts, leaders in the brick-and-mortar space.

“I think it will be much more merchant-centric than network-centric,” Horwedel said. “I think many merchants have already illustrated that a merchant can be quite successful with its own wallet.”For merchants, it seems that an in-house Payments as a Service system may just be the way of the future.

For merchants, it seems that an in-house Payments as a Service system may just be the way of the future.

To download the August edition of the Payments as a Service Tracker™, click the button below.

About the Tracker

The PYMNTS.com Payments as a Service Tracker™, in collaboration with Cayan, is designed to give an overview of the trends and activities of merchant platforms that not only enable payment processing of new and old technologies, but also integrate with other features to improve the merchant’s experience, including customer engagement, security, omnichannel retail experience, analytics, inventory management, software and hardware management, and more.