Loyalty Truth

EMV cards have been in the spotlight this year, with JP Morgan Chase, U.S. Bank, and Wells Fargo making announcements of portfolio migration from magnetic stripe cards to plastic that carries both mag stripe and a “chip”.

Market leading loyalty researchers, Colloquy, featured chip cards in the U.S. in their most recent issue, interviewing Randy Vanderhoof, the long time leader of the Smart Card Alliance, for insight into the wave of change hitting American shores.

Emerging from the smart card discussion, there are two key topics for debate.

1. Over what time period will U.S. migration to EMV take place and at what cost?

2. Will the widespread adoption of EMV cards by U.S. issuers represent a launching pad for loyalty program innovation?

Funny thing how history repeats itself:

• In 1996, Geno Pandolfi, a brilliant creator of payment and loyalty solutions who operated well ahead of his time, developed a smart card interface for his loyalty software, Cobrasys. The solution became part of the many smart card pilots trialed by Visa in Latin America during the late 90’s, and was the operating platform for the Bonus coalition loyalty program in Peru.
• During a 5-6 year stretch between 1998 – 2004, I attended the annual Smart Card Forum which brought together vendors and solutions providers focusing on bringing innovation to the payments business. Randy Vanderhoof was a prominent part of those discussions – most of which were addressing the same questions I have noted above. During those events, I tried on George Jettson-like Java-enabled rings that could be passed before chip enabled readers at POS and bought sodas at the conference events with my smart card loaded with a prepaid purse.
• During my years with Frequency Marketing through 2005, Jim Kuschill, the “godfather” of loyalty processing software technology (in my book at least) invested countless hours to understand what marketers could deliver to consumers in the way of loyalty via Chip that couldn’t be done with a mag stripe. The answer – not much.

Now, it seems, we’ve gone “back to the future” and are opening a similar debate once again. If you’re interested in a “Loyalty Lifehack”, I’ve got one for you:

• EMV cards are being introduced in the U.S. because the case to reduce fraud is so overwhelming that card issuers have no choice
• Trying to create buzz about EMV from a loyalty standpoint is peripheral to the discussion as the real debate is about cardholder protection and payment card utility.

You see, as the U.S. is the last significant nation in the world to adopt the EMV standard, the fraudsters have come to our shores to take advantage of the easiest mark on the globe. Add to that Americans traveling abroad are increasingly targets of fraud as they have only mag stripes cards to use, and the utility issue comes center stage.

Richard Sanders sounded this alarm in 2006 at the last Smart Card Forum which I attended. Richard is a globally recognized payments and loyalty expert, having run the credit card centre of excellence at Visa EU, launching the first “chip and pin” card program in the UK with Abbey (now part of Santander) and now sharing his wisdom with clients of ACI Worldwide, where he serves as a Solution Consultant. ACI recently published a comprehensive loyalty survey based on the retail field which garnered much attention in the press.

During a talk about loyalty and chip cards, Richard told a packed room that “whether they liked it or not” chip cards would come to the U.S. sooner than later. Richard predicted the timing of the introduction would correspond with the migration of other nations to the EMV standard, leaving the U.S. alone as the world’s “fraud magnet”. Some delegates listening scoffed at the idea, responding that our low-cost, always-on communication systems negated any benefits from EMV.

It took a few years for the prediction to come true, but Sir Richard was right. EMV is coming soon, and with the current legislative pressure on swipe fees, we may well see a Chip and PIN model taking hold just as it did in European markets. Whether the eventual form factor is based on contact or contactless acceptance at POS is another subject for debate.

To the question of whether EMV will spell differentiation for loyalty marketers, please don’t bet the farm on it just yet. One reasonably successful example that I have seen is BBVA Bancomer’s migration of its Puntos Bancomer program to Vida Bancomer circa 2006. That program used its new EMV capable cards to carry a purse of loyalty points which could be redeemed with merchants as part of a purchase transaction.

The success of that program was largely made possible through the fact that Bancomer not only was one of the largest issuers in Mexico but also a leading card acquiring organization. With the entire processing, authorization, and settlement lifecycle under its roof, Bancomer was able to recruit merchants to participate, and added some zip to a program originally motivated by the EMV migration.

What’s ahead? Maybe you should have Richard Sanders on speed-dial as he has been living with EMV and Loyalty for the past 10 years.

My guess is this:

For Payments: Count on the mag stripe co-existing with chip for the next 3-5 years and then gradually phasing-out. The speed at which terminal conversation can take place and the determination of “fallback” policies will dictate the horizon.

For Loyalty: Some loyalty programs will use available real-estate on the chip to facilitate instant redemption and other “in the moment” rewards, but look for more powerful innovation through mobile, social, and location enabled paths.

Feeling “chippy” about the subject? It’s a complex subject, so drop a comment and spark the debate!