Card Industry Overview
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    Card Industry Overview Card Industry Overview Presentation Transcript

    • Overview Of Card Industry Technology To Loyalty 1
    • A ThoughtCommerce has become atechnical issue. It is not onlyabout making a financialtransaction, it is about havinga relationship with theconsumer while they areexchanging currency for goodsand services. 2 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Insight•  Kim Resch –  Extensive Experience in Debit, Credit, and Smart Cards, Mobile Commerce, Loyalty and Incentives. –  Practical Experience in new product launches including Amex Blue and smart Visa. –  Specializes in project strategy, project management, implementations, and training in the emerging areas of commerce.•  Dave Carrithers –  20 years experience in semiconductor, chemicals, consumer products, incentives, stored-value & debit cards, etc. –  Marketing, IT, Sales, NBD, operations –  Focus on product, business & market development 3 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • A Little Laugh 4© 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Objectives Of Today•  History of the card industry•  Review the different types of cards and payment types available in the market•  Insight into how card products are processed & the players•  Review of the loyalty card industry•  How & where the money is made in the industry•  Review of the credit card & airline loyalty programs•  Review of the smart card•  Trends in the world of cards & payments•  Opportunities 5 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • History Of Payment Cards•  1914 - Western Union provided metal cards giving free, deferred- payment privileges to preferred customers. These cards came to be called "metal money.“•  1924 - General Petroleum Corporation issued the first metal money for gasoline and automotive services first to employees and select customers and later to the general public.•  Late 1930s - American Telephone and Telegraph (AT&T) introduced the "Bell System Credit Card." Soon, railroads and airlines introduced similar cards. Credit cards grew in popularity until the beginning of World War II when "Regulation W" restricted the use of such cards during the war and temporarily suppressed the growth of this new payment alternative. 6 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • History Of Payment Cards•  1946 - A New York banker developed a credit system called Charge-It. When customers charged local retail purchases, the merchant deposited the charges at Biggins Bank and the bank reimbursed the merchant for the sale. The bank later collected payment from the customer.•  1950 - Mr. McNamara created Diners Club charge card.•  1951 - Customers of New Yorks Franklin National Bank submitted an application for a loan and were screened for credit. Approved customers were given a card they could use to make retail purchases. The merchant copied the customer information from the card onto a sales slip, called the bank for approval of transactions over a certain amount. The bank would credit the merchant account for the loan minus a fee to cover the costs of providing the loan. 7 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • History Of Payment Cards•  1959 - Many banks were offering the option of revolving credit, which allowed customers to make regular payments on the balance owed rather than having to pay off the entire balance at one time.•  1965 - Bankcard associations began when Bank of America formed licensing agreements with other banks. This enabled them to issue BankAmericard and Interchange transactions among participating banks.•  1966 - Fourteen US banks formed Interlink, a new association with the ability to exchange information on credit card transactions. 8 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • History Of Payment Cards•  1967 - Four California banks formed the Western States Bankcard Association and introduced the MasterCharge program to compete with the BankAmericard program.•  1967 - Jürgen Dethloff invents the smart card computer.•  1969 - As the bankcard industry grew, banks interested in issuing cards became members of either BankAmericard or MasterCharge. Their members shared card program costs, making the bankcard program available to even small financial institutions.•  1970 - As credit card processing became more complicated, outside service companies began to sell processing services to VISA and MasterCard association members. This reduced the cost of programs for Issuing Banks and Acquirers and increased the size of the bankcard industry. 9 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • History Of Payment Cards•  1970 / 1971 - MasterCharge and BankAmericard developed rules and standardized procedures for handling the bankcard paper flow in order to reduce fraud and misuse of cards. The two associations also created international processing systems to handle the exchange of money and information and established an arbitration procedure to settle disputes between members.•  1976 - A pre-paid phone card was introduced by the Italian national phone company SIP. The introduction of the phone card was brought about by an extreme shortage of coins in the country which led to a rash of payphone thefts. The Italian phone card used a magnetic stripe, similar to those found on credit cards, and required the use of a payphone specially equipped with a magnetic card reader. 10 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • History Of Payment Cards•  1977 - BankAmericard became VISA.•  1979 - MasterCharge changed its name to MasterCard.•  1982 - Japans Nippon Telephone and Telegraph introduced the first Japanese pre-paid phone card to make calling more convenient for the tens of thousands of daily subway riders in Osaka and Tokyo. Like its European counterparts, the Japanese pre-paid cards relied on a magnetic strip and specially equipped telephones.•  1993/1994 - Experimental card operating system at the University of Karlsruhe. It was mainly intended to implement and compare a family of public key crypto protocols worked on at the European Institute of System Security. Hence the name of the card was "ICEcard" (Ic card for Cryptographic Experiments). 11 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • History Of Payment Cards•  1990 New Yorks RBOC, Nynex released the first pre-paid calling card that used PIN authorization instead of the magnetic stripe. Nynexs card permitted the cardholder to dial an 800 number and enter his PIN to make long distance phone calls.•  1993 – First bank debit card/ checking card issued.•  1994 - MAOSCO and Keycorp create programmable smart cards.•  1995 – Selective Use Debit Card Issued – Exclusively Yours Card.•  1995 – First Stored-Value card issued – Your Choice Card.•  1996 – Visa Cash Stored-Value Launched. 12 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Card Industry Landscape The Why! The Players!The Program Specifics! The How! 13 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Definition of Terms•  Card Associations: Both VISA and MasterCard are not for-profit organizations who both issue credit cards and set and maintain the rules for processing. They are both run by board members who are mostly high-level executives from their member banks.•  Issuing and Acquiring Banks: An issuing bank is the original bank that issues the card, such as a First USA Visa card. The acquiring bank is the bank set up by the merchant to accept transaction processing for cards accepted.•  Authorization Request and Response: An electronic request for authorization sent to an Issuer by a merchant or Acquirer. The response can approve, decline or route the transaction.•  Authentication: A cryptographic process that validates the identity and integrity of data used in smart cards.•  Smart Card/Chip Card: A plastic card embedded with an integrated circuit, or chip, that communicates information to a interface device. Chip cards offer increased functionality through the combination of significant computing power and data storage. Chip cards are capable of holding multiple applications and sometimes are referred to as Multi-Ap Cards. 14 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Definition of Terms•  Online Authorization: A method of requesting an authorization through a data communications network other than voice to an Issuer, an authorizing processor, or stand-in processing.•  Offline Authorization: A method of processing a transaction between the card and terminal at the point of transaction without sending the transaction online to the Issuer for authorization. Transactions are sent in batch format to the processing systems.•  Processor: A vendor acting as the agent to a bank that provides authorization, clearing, or settlement services for merchants and banks.•  Host Systems: A computer system used by an Issuer, Acquirer, Merchant, Client or Vendor to perform in-house processing.•  Interchange: The fees merchants pay to the card associations or companies on the transactions, usually a % of the sale price. 15 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Card Industry Landscape The Psychology of a card program Why! The Cardholder Banks Corporate Merchant Processor Players Issuing and Sponsor / POI Acquiring The Access Device Rewards Program CollateralPrograms (Card, Transponder, (Points, (Loyalty supplier, (setup, statements,Specifics Terminals ….) coupons…) database, rules) printed materials) The Technology How! (Systems, processing, hardware, firmware, Issuing) 16 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Transaction Breakdown Cash Check Card eCurrencies * In Store 60% 10% 30% 0% Web 0% 0% 95% 5% Catalog/ Phone 0% 30% 70% 0%* Represents e-coins/e payment services, direct deposit 17 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Card Facts•  2000 - MasterCards 20,000 member institutions had issued over 437 million branded cards world wide, 15.4 percent more than the previous year. The number of cards issued in the US reached 235.1 million in 2000, 16 percent above the 1999 level.•  MasterCard association generated $857 billion in gross dollar volume (GDV), which includes both purchase activity and cash transactions, representing a 21.5 percent increase on 1999. In the fourth quarter of 2000, GDV rose 19 percent to $231 billion. In the US, full year GDV registered its highest growth rate in six years having risen 20.2 percent to $423 billion.•  MasterCard has 21 million acceptance locations worldwide, a 12.7 percent increase on 2000.•  1998 - Visa had issued 655 million cards, generating sales volume of $ 1,4 trillion and was accessible at 488,585 ATMs. 18 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Card FactsAffinity Cards•  MBNA Corp. The Wilmington, Delaware-based issuer issues cards for 4,000 groups, ranging from virtually every college and university in the US to the International Bridge Club. The companys 2000 annual report says its average account balance was USD $3,519, compared with the industry average of USD $2,311. The average transaction value for MBNA customers was USD $129, compared with the industrys USD $99.•  First USA has more than 2,000 partnership programs, including relationships with America Online Inc., Microsoft Corp., and Yahoo! Inc.•  According to association estimates, about 40 to 50 percent of cards issued worldwide are multibranded (either a co- branded, affinity, or loyalty card), a level that some say is the saturation point for the market. 19 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Card FactsAffinity Cards•  MasterCard has more than 12,000 co-branded and affinity programs worldwide. Visa has about 9,000 multibranded programs worldwide. About 20 percent of its US card base is co- branded or affinity.•  Auto and airlines cards each account for 23 percent of the co- brand card market, followed by retail cards at 19 percent, according to Visa and MasterCard figures. 20 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • How Money Is Made•  MasterCard & Visa are not-for-profit associations, which support member banks, which share a common network•  American Express & Discover Card are, for-profit companies and own their own networks•  All card associations and companies charge an interchange fee to the merchants that offer their cards Ranges: –  MasterCard & Visa 1.2% to 3% –  AMEX 2.5% to 5% –  Discover Card 1.2% to 4%•  MC & Visa issuing banks get a cut of the interchange (between . 03% and 1% based on size of issuing volume)•  Acquiring Banks get a cut of the interchange fee, plus sometimes a processing fee (between .002% and 1%) 21 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • How Money Is Made•  Processors charge a fee to handle transaction bundling and data reporting, etc. Range between 1 cent to 25 cents per transaction•  Card issuers charge consumers a fee to have a card, ranging from $25 a year to $300 a year•  Purchase cards charge yearly fees on reporting and filtering support (range from $50,000 to $200,000 a year)•  Cost per card, by card manufactures range from 10 cents to $5 dollars based on the type of card (i.e. smart card)•  Breakage & float 22 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Cards•  Charge Cards –  American Express –  Retail Store/Private Label•  Credit Cards –  Visa/ MasterCard•  Secured Credit Cards•  Purchase/ Procurement Cards•  Debit/ Check Cards•  Stored-Value Cards –  Gift Cards –  Phone Cards•  Membership & Other Cards•  Smart Cards 23 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Card - Charge•  Charge Cards –  American Express –  Retail Store & Gas Cards•  Interesting Points –  No line of credit – must be paid off each month –  Heavy penalties for late payment –  In the past most retail stores offered one –  Profitable for the stores –  Single retailer version limited use –  Service & extended warranty sales opportunities 24 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Card – Credit Cards•  Credit Cards –  Visa/ MasterCard –  Affinity Cards –  Airline Cards•  Interesting Points –  Limited in what can be done –  Payment pretty straight forward –  Requires credit check & approval –  Market seems to be at saturation point –  Operates on an open platform 25 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Card - Secured•  Secured Credit Cards –  Target market is credit consumers –  Requires a deposit of between $500 and $2,000 –  Monthly payment is required otherwise draw down on deposit and high penalty –  Requires high maintenance and yearly fees –  Operates on an open platform with some level of authorizations 26 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Credit/Debit Online Transaction Processing -Merchant’s bank initiates transaction -Routes to locations determined by card ids for approval-Merchant accepts card and processing -Consumer’s bank approves-Validates card by -Collects card ID/number, Merchant transaction, sends back tosignature check or PIN ID, Amount. merchant-Processes transaction -Settlement will post to statement. Request Request Auth Auth Settlement Settlement Processor Visa or MC systems Legacy Hosts 27 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Card - Purchase•  Purchase/ Procurement Cards –  Allows for filtering/selective use via SIC codes (i.e. hotels, fuel, etc.) –  Spending limits (daily, weekly, monthly, by category) –  Intense reporting & tracking –  Main target B2B & corporate travel –  Operate on an open platform, with some level of tabling/filtering 28 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Purchase/Procurement Card Transaction Processing-Merchant accepts card -Merchant;s bank initiates-Validates card by -Processes transaction transactionsignature check or PIN -Approves or Declines -Processes against SIC filter-Processes transaction transaction -Routes to appropriate locations -Posts to statements on settlement Request Request Auth Auth Settlement Settlement Processor Visa or MC systems SIC Filtering 29 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Card – Debit/Check•  Debit/ Check Cards –  Started out as ATM only card –  Requires a pin –  Access to a bank/ checking account (continual deposits) –  No credit line (instead an overdraft line) –  Concern by retailers on fees –  Runs on bank transaction networks (Interlink and Maestro) –  Networks originally designed for banks to share information –  Operates on an open and/or closed platform with security –  Filtered (selective use) and open available 30 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Debit Offline Transaction Processing-Merchant accepts card -Collects batch data and formats -Processes transaction-Validates card with PIN clearing transaction -Posts to statements-Processes transaction -Approves or Declines transaction -Routes to appropriate locations Batch Request Request Auth and Settlement Auth and Settlement Settlement Settlement Processor Visa or MC systems Legacy Hosts 31 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Card – Stored Value•  Stored-Value Cards –  Gift Cards –  Phone Cards –  Mall Cards –  Gas Cards•  Interesting Points –  Open and Filtered (selective use) from one store, to a chain, to a mall –  Funds are pre-loaded on the card – most once spent are disposable –  Most are anonymous –  Most operate on a closed platform 32 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Stored Value Transaction Processing-Cards are preloaded with -Transaction processes like -Processes transactionpoints. Debit -Posts to statements-Merchant requests -Card is validated againsttransaction stored value hosts or filtering-Verifies Card Request Request Auth Auth Settlement Settlement Processor Visa or MC systems Legacy Hosts/ filters 33 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Card - Other•  Membership & Other Cards –  Most likely no payment involved –  Account &/or membership ID / number –  Discounts / punch cards –  Special access/ areas –  Purchase or activity tracking –  Magnetic strip &/or bar code –  More about belonging to a club/group –  Operates on a closed platform –  Loyalty & frequency tracking 34 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Membership Card Transaction Processing-Card is accepted-Checked against internaldatabase-Can be routed to third-partydatabase through processor. Example: Blockbuster Internal Database rd 3 party Database Example: Processor Dining Ala Carte 35 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types Of Card – Smart•  Smart Cards –  Multi functional (debit, stored-value, credit) –  Simple cards to very complex (based on chip type) –  High security & fraud protection –  Requires special reader –  Contact & contactless technologies –  Operates on closed and open platforms –  Can have multiple currencies (i.e. cash, points, etc.) 36 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Smart Card Transaction Processing-Card and Terminals authenticated withcryptograms -Validates card and-Obtain PIN, if needed transaction data-Verifies static data on chip -Routes to hosts-Processes static programs offline systems-Sends transaction online -Processes settlement-Routes to any internal legacies -Formats the crypto authentication -Posts to statements-Verifies risk parameters on card request -Routes and initiate online transactions. Online Request Online Request Auth Auth Settlement Settlement Processor Visa or MC systems Legacy Hosts 37 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Smart Card Overview Voucher Replacement Automated Lodging Mobile Commerce Processes Logical & Physical Access • Smart Card: 101 Electronic Ticketing & Automated Air Travel Processes • The Market • Smart Cards in Loyalty POS / Merchants • Lessons Learned Automated Car Rental ProcessesCorporate Security Target Marketing and Expandable to other Locations Enhanced Customer Special Offers and E-Purse Loyalty Programs Information 38 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • History of Smart Cards•  Smart Cards have been around since the early 70’s. The patentwas registered in 1974.•  Commercialization started in the early 1980’s with phone cards.•  In 1993, there were 300 million Smart Cards issued in the world.(80% were phone cards)•  In 1998, Amex Blue was introduced in US.•  In 2000, vendors shipped 1.6 billion chip cards worldwide, of which541 million were cards with microprocessor chips, up 36% from theyear before.• In 2005, vendors will ship an estimated 2.4 billion of the higher-endmicroprocessor cards, half of which will be subscriber identitymodule cards for mobile phones 39 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • What is a Smart Card?•  A smart card resembles a credit card in size and shape, but inside it is completely different•  A silicon chip beneath a contact plate•  The silicon chip is a small computer with 8-64bit microprocessor•  It has the same processing speeds as old computers, such as Tandy 40 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Smart Card at a Glance! Contact Plate ApplicationsEMV Loyalty Wallet Misc. Appl. Operating System (MULTOS, JAVA, Windows) Silicon 1234 5678 9012 3456 Joe Smith 41 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Why Smart Cards?•  Security and fraud reduction•  Interactive•  Storage Capacity•  Dynamic downloading•  Side Note: Outside the U.S., Smart Card use has aggressively taken place because of two major factors: 1.  Telecommunications is very poor & costly 2.  Majority of transactions are offline 42 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Types of Smart Cards•  Memory Card: No processing capability•  Contact•  Contactless (Proximity): Using Radio Frequency•  Combi-Card•  Transponders or Key Fob Operating Systems • Java Card • Multos • Microsoft Windows for Smart Cards 43 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Fraud and Security•  Magnetic stripe technology remains in wide use in the U.S. However, the data on the stripe can easily be read, written, deleted or changed with off-the-shelf equipment.•  To protect the consumer, businesses in the U.S. have invested in extensive online mainframe-based computer networks for verification and processing.•  The microprocessor on the smart card is there for security. The host computer and card reader actually "talk" to the microprocessor. The microprocessor enforces access to the data on the card. 44 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Fraud and Security•  Smart cards are protected with a public/private key infrastructure: –  Digital Signatures –  Cryptography to perform: •  Data Integrity •  Authentication •  Non-repudiation •  Confidentiality 45 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Why are Smart Cards Safer?•  Built in interactive capabilities•  Personalized cryptography•  Tamper resistant, cannot be reproduced•  Creates card present environment•  Individual risk parametersNote: Security directly contributes to price. 46 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Standardization•  EMV (Europay, MasterCard and Visa) –  Card specifications –  Terminal specificities –  Application specifications•  Cross-border concerns•  How are they doing so far? 47 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Common Uses of Smart CardsThe most common smart card applications are:•  Credit cards•  Electronic cash•  Computer security systems•  Wireless communication•  Loyalty systems, like frequent flyer points•  Banking•  Satellite TV•  Government identification 48 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Common Applications•  Loyalty: Multiple programs, tickets, points, coupons, one-to-one.•  Network Access: secure email, secure sign-on, web access.•  Payment: Secure transactions, multiple accounts.•  Travel: reusable tickets, virtual ticketing, links to payment applications and software, Automated check-in, reduced fraud. 49 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Smart Cards In Other Countries•  Smart cards are much more popular in Europe than in the U.S.•  In Europe the health insurance and banking industries use smart cards extensively. Every German citizen has a smart card for health insurance.•  Even though smart cards have been around in their modern form for at least a decade, they are just starting to take off in the U.S. 50 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Where The Smart Card Market Is Headed!•  Card issuers want chip card to reduce fraud.•  Anticipates multi-aps will attract cardholders and transactions.•  Chip Manufacturer and Hardware Suppliers are showing losses•  Readers are not being adopted….even when free.•  Keyboards are progressing.•  Merchant migration is happening.•  Gimmicks are more successful than functions (i.e.. Blue, Clear)•  Internet transactions are “seeming” more secure. 51 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • The Current State of the Market American Expresso  Launched “Blue” September of 1999. Now with over 2million cards.o  Applications: Secure Access, Wallet, Reader, BlueLooto  Rolling out to multiple countries, Business, Student.o  Decommissioned Walleto  Focusing on palm computing and mobile. 52 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • The Current State of the Market Visa USAo  Visa USA Launched “smart Visa” September 2000o  Over 3 million cards with Providian, First USA and Fleet.o  Applications: Payment, Access, Loyalty, Reader.o  Launched Target POS (Providian made first transaction).o  Hypercom, Vital and National City teaming up for POSo  Pushing Loyalty as driver for merchant 53 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • The Current State of the Market MasterCardo  Citibank planned September 2001 launch of 4mcardso  Applications: e-cash, loyalty, e-ticketingo  Strong alliances, yet Multos-based. 54 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Loyalty and Smart Cards•  Multi-ap functions are prime for loyalty, yet difficult to please the whole market.•  Closed environments are good examples and ripe for loyalty.•  Will supply more security.•  Market will not advance without merchant.•  Have not proved usable functions are more superior than mag stripe.•  What the industry is looking for is a “gift card on steroids.” 55 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Opportunities for Loyalty•  Relationship management on the card•  Multiple earning and redeeming•  Individualized information and preferences•  Points and programs held locally on card•  Info storage capacity•  Links to databases 56 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Obstacles In Adoption•  Infrastructure•  Ease and convenience with Mag. Stripe•  Cost of card and conversion•  Retailer ROI•  Cardholder confidentiality•  Standardization 57 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Lessons Learned•  Version and program control•  Application segregation•  Transaction processing changes•  Card/program expiration dates•  Replacement cards•  Branding•  Servicing•  Information management / multiple databases 58 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • A Quick ReviewFrequent Flyer & Card Programs 59 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Frequent Flyer & Card Programs•  Prior to 1980, FFPs Not Possible –  Airline Industry Regulation –  Lack of Infrastructure•  Dominated by Unsophisticated Offerings –  Merchandise & Coupon Based –  S&H Greenstamps –  Raleigh Cigarette Coupons•  1981 Regulatory & Market Changes Give Birth To FFP –  American invents frequent flyer miles –  Loyalty Becomes Impossible Without A Planned Program –  Hertz joins and subsequently drops, citing the high costs. Later rejoins after dramatically losing market share without a FFP. Today Hertz belongs to 20 FFPs –  After in-house Frequent-Stay Programs, hotels conclude that the greatest marketing benefits still come from the FFPs 60 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Frequent Flyer & Card Programs•  "We didnt want an FFP. But it came to my attention that FFPs were siphoning business travel away from us. We did it defensively, and I think if we had not done that we would have been terribly disadvantaged." - Herb Kelleher, President, Southwest Airlines•  First 20 Years Of FFP 9.77 Trillion Miles Accumulated - Source: InsideFlyer Magazine 2001•  1985 - Banks Team Up With Airlines•  Co-branded Cards Wildly Successful –  Average spend up to 10x higher –  Active account rate up to 80 percent or higher –  Attrition and acquisition costs decline•  150,000 members in 1981 to 200,000,000 members in 2001 61 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Frequent Flyer & Card Programs•  By 1991: All major airlines and banks established exclusive relationships and Hundreds of credit card issuers locked out•  1994: “Virtual Airline” is Born – Generic Mile Programs•  Miles by a different name: –  Single Branded Miles vs. Co-branded Miles –  Generic vs. Branded Points –  Non-Restrictive Points – Any Airline In The World•  How Generic Points Work: –  Sold to Over 125 of the largest US Banks –  Consumer Acceptance: fees $25 to $75 –  Spend Ranges: $8,000 to $22,500 a year –  Officially Sponsored by MasterCard –  Amex plays “Follow the Leader” –  $200 Billion + Spent on Enrolled Cards –  No need to Co-brand with an airline partner 62 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Top Banks With Unrestricted Programs:•  Capital One •  First USA•  GE Capital •  Fleet•  Travelers Bank •  Morgan Stanley Dean•  Direct Merchants Witter•  Bank One •  Chase Bank•  Wells Fargo •  Charter One•  Household Bank •  MBNA•  Town North •  HSBC•  Citibank •  Comerica•  Household Credit •  Merrill Lynch 63 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Loyalty Learning’s•  71% of consumers if FFP said they wouldn’t trade their frequent flyer benefits for lower airfares. Source: Frequent Flier Magazine•  The proven addition of miles can drive repeat purchases and maximize customer lifetime value. Source: Hambrecht & Quist•  Consumers charge about $3,200 a year on a typical credit card – add miles and they spend more than $18,000 a year. Source: Bank Rate Monitor 64 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Universal Mile + Network + Card The Network as a Catalyst for Increased Spend and Activation Purchases on XYZ BANK PLUS all othercard at partner $1,325 $ card purchasesretail locations outside the partner network Miles Earned Through Partners: 2,125 Miles from Card: 1,325 + Total Earning that Month: 3,450 + 300 Miles 100 Miles 250 Miles 300 Miles 800 Miles 375 Miles $ 300 $ 100 $250 $ 300 $ 300 $ 75 + + + + + 65 Grocery © Retail Gas & Oil Electronics 2001-2004 BusinessHive & Creative Commerce Group. Trip TeleCom (online & offline) All rights reserved.
    • Universal Mile + Network + Card Incremental monthly revenue volume increases 400%+ & revenues increase $100 Million + a year.Increase in Monthly Charge Volume (in $Millions) $500 Sample Card Issuer with 200,000 cards $400 EXAMPLE* Monthly Annual Revenue Revenue Increase Increase Increased $ 4.0 M $ 48.0 M $300 Spend Incremental monthly Increased $ 2.7 M $ 32.8 M charge volume goes Activation from $72M to $314.2M $200 —an increase of Increased $ 1.9 M $22.3 M 430% Acquisition $100 TOTAL $ 8.6M $ 103.1M $0 $0 00 00 00 00 00 00 00 00 00 00 00 00 $2 $4 $6 $8 ,0 ,2 ,4 ,6 ,8 ,0 ,2 ,4 $1 $1 $1 $1 $1 $2 $2 $2 Average Monthly Spend 66 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved. * Revenue figure based on 2.9% of gross charge volume in interchange and miscellaneous fees, plus 60% revolving balances at 13.9% annual interest.
    • Card & Mile Issues To Keep In Mind•  Attainability Of The Program Member: Limited Earnings Capability = Short-Term Loyalty & Interest•  Single Partner, Stand Alone Programs: Even Top Customers Can’t Make For A Successful Program – It Requires A Network•  Just Because They Carry Your Card Doesn’t Mean You’ve Captured Their Heart: "The research shows clearly that the existence of a loyalty card scheme is not associated with a degree of loyalty in shopping habits." -Source: Customer Loyalty Today 67 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Trends – Relationship ConvergenceWireless Data Availability Security Loyalty 68 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Thank You For Your Time Kim Resch, Founder and President Decision making around technical issues is expensive. Think-tank atmospheres are vital, yet difficult and expensive to implement in corporate America. Efficient implementation is the key to success. It is not an environment for a learning ground. Let us help with:www.CreativeCommerceGroup.com • Resources for the Emerging Commerce Industry Creative Commerce Group, Inc. • Smart Card and Magnetic Stripe Solutions is dedicated to the support of their • Hardware Equipment and Implementation client’s needs and solutions. Each client offers unique and • Stored Value Card Applications special challenges, whether in technology, in concept • Loyalty Strategy Specialist development, in speed to market • Project Management Formula “Methodlogically” or hardware to make it happen. But through disciplined project management, we have helped clients launch new products 636-861-9850 or Kim@ccg-i.net successfully, time-and-time again. 69 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.
    • Thank You For Your TimeDavid Carrithers, Chief Bee KeeperProviding consulting services for business individuals looking for honestand straightforward counseling, coaching & implementation of businesssolutions that improve profit performance and loyalty with employees,channels and customers. www.BusinessHive.com Generating Results Through: Targeted Individualized Coaching Program • Improved Customer & Employee Loyalty • Enhanced Product, Market & Business Development Results •  Profitable Brainstorming & Product Creation • Faster & More Accurate Product & Business Launch Management • Unbiased Incentive Program Assessment & Support • Dynamic Organizational Development 707-484-3620 or e-mail David@BusinessHive.com 70 © 2001-2004 BusinessHive & Creative Commerce Group. All rights reserved.