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Innovations in Payments and Decoupled Debit Reshape the Power of Merchant Loyalty Programs

Merchants want to provide customer convenience and choice while still controlling costs. Innovations in technology now allow them to achieve both goals with one program. Merchants can save money on payment processing fees by using new or existing merchant loyalty programs linked to customers’ preferred payment types to steer loyal customers toward Demand Deposit Account (DDA)-based payments, via a method known as decoupled debit.

Unprecedented competitive pressures and a slowing economy are driving merchants to look for innovative ways to reduce operating expenses and increase revenues. However, cost reductions have to be invisible to the customer, who shops with high expectations of good value for his money as well as superior service and convenience.

For this reason, merchants who want to attain and hold a competitive advantage will scrutinize every opportunity to improve the efficiencies and cost-effectiveness of their behind-the-scenes business processes.

At the same time, many merchants are using loyalty reward programs to increase customer lifetime value and drive incremental sales from repeat customers. Calling loyalty reward programs “a paramount competitive force,” the research and advisory firm Aite Group says such programs “shape the behaviors of a whopping 38 percent of the U.S. population.” 1 That’s close to 83 million adults—an astounding figure. With so many people showing a preference to patronize merchants who reward loyalty, it’s no longer a question of if, but when every merchant will have a loyalty rewards program to derive more revenue from long-term customer relationships.

Innovations in technology allow merchants to address both needs at once. It’s now possible to reduce operating expenses by enticing customers through loyalty programs to utilize lower cost-per-transaction payment types. Programs are emerging that allow new and existing merchant loyalty or membership cards to be linked to customers’ preferred payment types, such as DDAs, debit or credit accounts.

Merchants can save money on payment processing fees by steering loyal customers toward DDA payments, which are then processed as low-cost Automated Clearing House (ACH) payments.

Through decoupled debit, payment processors now have the means to “electronify” the processing of this non-check payment type through ACH, allowing merchants to reap the benefits of more payments from DDAs while providing convenience and choice to customers. When paired with a merchant’s own loyalty rewards program, the new payment process can reduce operating costs, increase customer spending and loyalty and provide a real competitive advantage to a merchant.

What’s unique about this approach is that it’s truly merchant-centric. Most forms of decoupled debit are intended to profit the financial institution but not necessarily the merchant. This new “payment plus loyalty” approach shifts the value proposition to the merchant by enabling it to own the customer relationship (and all the insightful information the relationship yields), improve the customer experience (which in turn deepens loyalty) and streamline and reduce the cost of many payment processes.