Fis strategic insights vol 7 may 2012

VOLUME 7 • MAY 2012

Innovation or Disruption? IN THIS ISSUE

Six New Financial • Innovation or Disruption?

Instruments that Could Six New Financial
Instruments that Could
Change the Face of
Change the Face of Banking and Payments
• Engaging Customers
Banking and Payments through Loyalty Programs
• Large vs. Community
Bank Customer
By Fred Brothers Demographics and
Rewards Program
EXECUTIVE VICE PRESIDENT, STRATEGIC INNOVATION
Participation
™
This month I’m going to discuss a few financial • Walmart MoneyCenter –
instruments that didn’t exist a few years ago, some of Friend or Foe?
which are already changing the way people pay for
things. Several of these innovations could potentially
turn the current payment system on its side. I also want to discuss a fast-growing form of
lending, which could transform the historically symbiotic connection between a small business
and its local bank into a relationship between a small business and anyone in the world.
Here’s my list:

1. Mobile-assisted checkout 3. Merchant-funded rewards 5. Social media payments
2. Dual debit and credit cards 4. Square 6. Person-to-person (P2P) lending

1. Mobile-assisted Checkout
Watch for more pilots and rollouts of mobile solutions that speed the checkout process at retail. Mobile-empowered
retail payments are emerging faster than anticipated and in multiple forms. Several high-profile retailers such as Old
Navy®, Urban Outfitters and Nordstrom have followed Apple’s lead by “bringing the terminal to the shopper” to reduce
frustration in packed stores and to provide a more personalized customer experience even when stores aren’t jammed.

FIS STRATEGIC INSIGHTS • V 7 MAY 2012 © 2012 FIS and/or its subsidiaries. All Rights Reserved.

1

Last holiday season, one of my colleagues went gift shopping at Old Navy when the lines were long and shopping time
was short. While standing in line, she was approached by an Old Navy employee who asked her if she was paying with
a credit card. When she replied “yes,” the employee pulled out his iPod Touch®, scanned the tags, totaled the sale,
swiped her card, asked her to “sign” the screen with her finger and e-mailed her receipt to her.

Another version of facilitating the checkout process in “bricks and mortar” retail is exemplified by Jeni’s Splendid
Ice Cream – known to us locals as “Jeni’s.” Jeni’s has gained notoriety even outside of Columbus, Ohio because of
its unusual flavors such as goat cheese with cognac figs and Queen City cayenne. During warm weekends, a line of
customers wraps around Jeni’s as “lickers and tasters” sample several flavors before ordering. The long queue becomes
an obstacle to the optimal customer experience for those of us who: 1) know what we want, 2) don’t want to sample,
3) don’t want to talk with strangers for a half an hour, or 4) have limited time to engage with ice cream no matter how
splendid. To accommodate these customers, Jeni’s developed a mobile app for avoiding the line. Customers can now
order, pay and proceed to a separate pickup area and get their cones in less than a minute from entering the front door.

2. Dual Debit and Credit Cards
Dual debit and credit cards made a re-entry into the U.S. last summer via Fifth Third Bank’s Duo CardSM about the same
time that IDBI launched its debit/credit card – the Magic Card – in India. A year earlier, People’s Bank (POSB Bank of
Singapore) debuted its Multi-tude card in Singapore – a debit card with micro credit tied to it and targeted to youth.
While the reasons why banks are introducing these dual cards differ depending on country and target, the main message
to consumers is universal. The cards offer financial flexibility to people who need it.

Dual cards look like a win-win-win proposition.

• The dual cardholder gets access to a line of credit, automatic overdraft protection and perks associated with credit
cards, which are diminishing for debit cardholders.
• The U.S. retailer can (and will likely) steer the transaction toward debit, thereby reducing merchant service fees.
• The issuer makes money on monthly card fees for those who don’t meet minimum balance requirements and on the
double-digit interest rate attached to revolving credit – for Fifth Third’s Duo, after the introductory promotional period
with zero interest expires.

Credit cardholders who pay off their bills monthly are unlikely candidates for dual cards. The target for dual cards is the
traditional debit card user who needs a line of credit until payday. For banked consumers who are able to access a line of
credit, dual credit cards make a lot more sense and are more convenient than payday loans.

3. Merchant-funded Rewards
Groupon™ launched at the end of 2008 and LivingSocialSM morphed into a daily deal company the following year. The
American public was in the grips of a deep recession and daily deals on restaurant fare, no doubt, kept some small
businesses afloat while providing consumers a rationalization for dining out. Flaws in these types of merchant-funded
rewards (MFRs) have included: 1) until an individual displays a pattern of response to MFRs, offers are scattershot, and
2) the deals have to be so compelling to motivate consumers that merchants operating on thin margins sometimes even
lose money. The only way these merchants can justify participation is through turning trial into repeat business.

Fast forward to post-Durbin when MFRs become an attractive substitute for debit card points. Financial institutions –
especially those with customer loyalty programs in place – have a competitive advantage in the MFR arena. They have
the ability to leverage marketing analytics to target customers with relevant offers. And, they have direct ties to local
merchants to develop programs that benefit these small businesses.


2

4. Square
I was in a cab the other day and had to pay with a $100 bill for the ride because the driver’s credit swipe system was
down. I asked the driver why he doesn’t use Square™ and he told me that his taxi company wouldn’t let him use it,
because they want to charge him 10 percent of the fare for using their system instead. Square only charges 2.75 percent
per swipe.

Regardless of my recent anecdotal experience with taxis and Square, Square is making friends with New York City Taxi
Commission and is testing in-taxi devices with a simpler and cooler-looking setup – a combination of the Square credit
card acceptance app with an iPad® secured in a black metal case. Riders swipe, sign with their fingers and receive
receipts via e-mail or mobile text.

5. Social Media Payments
My nephew plays FarmVille™ and pays for his equipment and livestock in Facebook Credits™. I’m floored by the
number of channels that exist for buying and earning Facebook Credits. For example, leading retailers such as Target™,
Walmart™ and Best Buy™ sell Facebook Credits gift cards. Through ifeelgoods™, a promotional company for Facebook
Credits, online retailers such as 1-800flowers.com™ and CPG companies such as Coca-Cola™ offer Facebook Credits as
promotional incentives – which are more interesting to my nephew than coupons.

According to Facebook’s S-1 filing, 15 percent of its $3.7 billion in 2011 revenue came from payments. That’s a ton of
10-cent Facebook Credits and 30 percent interchange on games. As Facebook receives money transmitter licenses across
states – 15 as of February according to Bank Technology News – speculation about what Facebook will do with its licenses
ranges from arming itself for potential run-ins with state regulators to expanding its payments business to P2P transfers.1

6. Peer-to-peer Lending
Peer-to-peer (P2P) lending in its current form emerged around 2006 – 2007 with the founding of Prosper and Lending
Club™ – the largest players in the U.S. Despite halting operations at the height of the financial crisis when the SEC shut
down Prosper, both companies were able to resume business in 2009 after complying with SEC rules. Neither Prosper
nor Lending Club represents a pure P2P model because they are intermediaries in the transaction – charging fees to
facilitate the transaction and using WebBank for funding the transaction.

Gartner has forecasted that P2P lending will grow to $5 billion in outstanding loans by 2013.2 Growth in P2P lending is
being fueled by factors associated with the current economic climate and the current P2P models:

• Loans have been hard to get and expensive for entrepreneurs, especially those without sterling credit histories.
Because P2P lending cuts out additional expenses associated with traditional financial intermediaries, loans are often
made at lower-than-market rates.
• Investors are looking for opportunities that provide higher rates of return and diversification of their portfolios.
• The act of staking a struggling small business owner can provide “feel good” benefits to an investor. Prosper
encourages social networking among borrowers and lenders to foster a sense of community.

All of these new financial instruments are not just interesting, but potentially game-changing for financial institutions. In
future articles, I’ll delve deeper into some of these topics and other innovations that are reshaping our industry. In the
meantime, we’ll continue monitoring, analyzing and strategizing these opportunities and threats so FIS™ can help you to
better serve your customers and compete more effectively. As always, I welcome your insights.
1
Sean Sposito, “Facebook Fast-Tracks Its Payments Business.” Bank Technology News 21 February 2012
2
Gartner, “Gartner Says 50 Percent of Banks Will Still Lack an Innovation Programme and Budget by 2013,” 5 January 2010


3

Engaging Customers through
Loyalty Programs
Interview with Bob Legters
SENIOR VICE PRESIDENT, LOYALTY SERVICES

Background
Today’s marketplace is crowded with loyalty programs and “deals.” Loyalty programs are so
common in some industries they have become “cost of entry” in attracting and retaining the most
desirable customers. However, growth in loyalty programs overall is slowing as the market becomes
saturated. The average U.S. household is enrolled in more than 18 loyalty programs, though only
active in 8.4 of them according to Colloquy. During the 2008 – 2010 period, growth in financial
services loyalty programs declined precipitously from previously robust growth to a meager 1.6
percent due to cutbacks in credit card offers from financial institutions and credit card charges by
consumers.1 Today, a resurgence of credit card loyalty programs is occurring as large financial institutions, in particular, migrate
loyalty program participation from debit to credit and as consumers regain their appetites for using credit cards.

Primary research conducted by FIS (see this issue’s article by Paul McAdam) found that participation in loyalty programs is
higher among profitable customers, but lags significantly among community bank customers. We recently talked with Bob
Legters, senior vice president of Loyalty Services, about how smaller financial institutions can leverage loyalty programs to
differentiate themselves and improve the quality of their customer bases.

Time to Evaluate Loyalty
Why is it critical right now to re-evaluate your current loyalty program or establish a loyalty program if you don’t
offer one?
Bob Legters: Much has been included in the marketing communications and offer space people call a loyalty program. At FIS,
we define a loyalty program as one that drives customer engagement and keeps customers connected to your products. The
three key components of any rewards programs are:

1. The earnings ratio – how many points per transaction;
2. The content of the redemption offer – cash back, merchandise, travel or something unique such as gifts to
charities; and
3. Engagement in the marketing engine – the way the program is messaged and marketed to drive desired behavior.

In both financial and retail industries, loyalty programs are table stakes for the vast majority of companies. A steady stream
of deals and rewards has trained consumers to expect added-value benefits. Only low-cost leaders – selling an everyday low
price value proposition instead of an engagement proposition – can afford not to offer a loyalty program. Unless you can
be the low-cost leader in your industry, you’re going to have a competitive disadvantage without some type of incentive or
rewards program.

Logic tells you that if you have someone’s primary checking account but not their primary credit card, a competitor has it. And
that competitor is likely to pursue their checking account. The points-based rewards card is a staple in the marketplace. And if
you don’t offer rewards, you are at risk of losing the banking relationship because someone else is talking to your customer at
least 12 times a year through their credit card statements and other communications.


4

How do we know that loyalty programs
Figure 1: FIS loyalty value
are worth the investment? How much
participation does a bank need to make a
loyalty program worthwhile? Rewards vs. Non Rewards Comparison (+/-)
Bob Legters: To gauge the performance of loyalty
programs, we measure acquisition, activation, usage Percent of Active Accounts 4.22%

and retention. We measure number of transactions Sales Volumn/Active/Year $2,359
per month, dollar amount per transaction per month Average Ticket $6.00
and percentage of active accounts (Figure 1). Our Transactions/Active/Month 2.13
loyalty programs have rarely failed to increase the Finance Charge Income/Active/Year $20
transactions, the dollar amount per transaction and Interchange Income/Active/Year $37
the percentage of active accounts. Average Outstandings/Active/Year $684

There are additional benefits that financial Source: FIS
institutions gain through loyalty programs, but we
don’t count those in our performance statistics. For
example, if the financial institution meets certain
requirements, it can get incentive-based points from MasterCard™ or Visa™. It’s also generally the case that engaged customers
buy additional products from you. But we steer clear of taking credit for everything the cardholder does to ensure we don’t
overstate the value of the loyalty program.

You need to have a program that has sufficient scale. We used to say that 500 or 1,000 cards were a minimum to offer an
affordable loyalty product, but we have clients with as few as 50 loyalty cards. Those small programs are part of an overall
value proposition to exclusive customers because the cost of losing those customers exceeds the back-end expense of
the program. That being said, our experience says that 500 − 1,000 cards is usually a barebones number to make a loyalty
program worthwhile. At that level, the loyalty program is keeping the financial institution competitive, but not generating
significant revenue. While the direct revenue a financial institution generates through these smaller loyalty programs may not
be significant, the program increases the level of customer engagement and greatly reduces the odds a competitor will steal
the credit card relationship.

Total Relationship Banking
FIS research has shown that when a customer has their primary credit card with their primary checking account
provider, their overall deposit and loan balances and the profitability of that customer is significantly higher. How do
you build that total relationship?
Bob Legters: The biggest challenge for total relationship rewards programs is breaking down the silos among departments
within financial institutions. Typically someone is in charge of loans, another person is in charge of deposits and a third person
may be in charge of payment mechanisms. Often, there isn’t an overarching strategy that connects the products.

A powerful tactic for building a successful relationship rewards program is householding all the points into one pool. Once you
can offer that, you are in the consumer’s consideration set for any financial decision. Your customer will consider what you can
do for them before looking at other options because the rewards points just keep pouring into their pool.

How do you strike the right balance between offering rewards that help retain and strengthen relationships with
customers and overwhelming them with so many messages that they stop responding to key selling messages?
Bob Legters: There are a lot of people trying to determine the answer to that question especially with the advent
of merchant-funded rewards (MFR). The MFR model is one of the few models in the market that is win-win-win. The
merchant gets an incremental transaction, the financial institution gets a self-funded rewards offering and the consumer
gets to earn more.


5

Our MFR strategy was predicated on rolling out a merchant-funded destination site to offer additional engagement
opportunities for the consumer. We didn’t want consumers to feel as if they were being spammed or their privacy was being
invaded. You want:

1. The MFR to be easy to find;
2. The message to be tailored; and
3. The message to be conveyed at tolerable intervals.

We do caution clients that MFRs have the potential to drive consumers’ loyalty to the coupon rather than the financial
institution. You don’t want to turn customers into deal-seekers because when the financial institution across the street offers a
better short-term deal such as a teaser rate, you could lose the customer.

Differentiation from the Large Banks
With the big financial institutions refining their loyalty programs, where should smaller financial institutions direct their
attention to get the best return on their investment and how can they differentiate their programs?
Bob Legters: The financial institutions with more than $10 billion in assets are using very aggressive offers to migrate the
revenue opportunity they lost on debit to the credit side of the business. If I ran a small- to mid-tier financial institution,
I would: 1) have a competitive credit card program because it’s very profitable and without one, I’m vulnerable to
competition, and 2) leverage the advantage I still have in debit to offer a program that’s richer and more enhanced
than what the large financial institutions can offer. A good, competitive client might say, “I see what the large financial
institutions are doing in debit and while they’re backing down, I’m going to step it up and steal business.” On the credit
side, the playing field is very level, which means you must be competitive to retain market share. The best thing you can
do to differentiate your loyalty program is to incorporate it into your overall strategy.

Next Generation Loyalty
What’s on the horizon? What does the next generation of retail financial services loyalty offerings look like?
Bob Legters: I believe that mobile and GPS-oriented space for the deal is the next “big thing.” Instead of being targeted
when they are on their banking site, consumers will receive messages when they are engaging in shopping activities and
considering payment choices.

There may be some new currencies for rewards, but consumers respond well to cash back and points so I don’t anticipate a
sea change in that arena. The points programs work today because they are relevant.

The future includes social media for deal shopping as well as rewards earning. As we move forward, social media currency
could provide an earning opportunity for consumers who spend a lot of time in the social media space. Social networking
could drive comparison shopping – including shopping for financial produces – to new levels. That’s another reason why it’s so
critical right now to re-evaluate or establish customer loyalty programs.
1
Colloquy, “The Billion Member March: The 2011 COLLOQUY Loyalty Census: Growth and Trends in Loyalty Program Membership and Activity.”
April 2011


6

Large vs. Community Bank
Customer Demographics and
Rewards Program Participation
By Paul McAdam
SENIOR VICE PRESIDENT, RESEARCH AND THOUGHT LEADERSHIP

In my past two articles I’ve discussed challenges and opportunities associated with community
banks and credit unions that are driven by the characteristics of their retail customer bases.
Although community bank customers and credit union members are more loyal to the financial
institutions where they have their primary checking account relationships, they are not as
profitable to their institutions as the average bank customer. The affluence gap between
community bank customers and the average bank customer limits opportunities. In contrast, the
level of affluence of the credit union member base is consistent with the average bank customer,
but credit unions capture a smaller share of the financial wallet from their members.

This month’s article analyzes the characteristics of the U.S. “large bank” customer base. Our analysis defines large banks
as the 12 institutions that have more than 1,000 branches. In particular, I’ll talk about differences between community
bank and large bank customers, differences in reward program participation, and how these factors drive variations in
consumers’ financial behaviors.

Analyses cited in this article are generated from primary research conducted with a sample of 3,345 adults with checking
accounts conducted by FIS in August 2011. Large bank customers account for 52 percent of the representative sample.
And, because they are such a large percentage of the bank customer population, their characteristics are often similar to
the norm.

Demographic Differences Figure 1: Relative to community bank customers, large bank
customers are concentrated in mid- to large-sized markets
One big difference between large bank and
community bank customers is their place of Concentration of large bank and community by market
residence (Figure 1). Large bank customers are (national average = 100)
less than half as likely to live in a small town or 331
a rural area while community bank customers
are concentrated in small towns, rural areas
and small metropolitan markets. Large bank
customers tend to reside in mid-size or large
138
metro areas – areas where growth tends to be 116
National
faster, job opportunities more plentiful and 81 Average
53
incomes higher. 42 = 100

Small town/rural Small metro Mid-size/large metro
Large bank Community bank

* Read as: Within rural and small towns, consumers are less than half as likely to bank
with a large bank (index = 42).
Source: FIS primary consumer research, August 2011; n = 3,345


7

Another significant demographic difference Figure 2: Large bank customers skew younger than national norms
between large bank and community bank while community bank customers are older
customers is lifestage (Figure 2). On average, large
bank customers are younger than community bank Composition of large bank and community bank customers by generation
(national average = 100)
customers. Lifestages of large bank customers tilt 143
toward Gen Y (20- and early 30-somethings) and,
117 114
to a lesser extent, Gen X (mid-30s to late-40s) 113*
105 National
while community bank customers are older and 91 93 93 Average
84 = 100
particularly concentrated in the Mature lifestage,
which is composed of consumers who are more 62

than 65 years old. Differences in lifestage drive
a large part of financial behavior as younger
lifestages are nest-building and accumulating and
older lifestages are clearing out their nests and
Gen Y Gen X Younger Boomers Older Boomers Mature
preparing for retirement, if not already retired.
* Read as: Large bank customers are 13% more likely than the national norm to be members
The geographical and age differences between of Generation Y (index score = 113).
large bank and community bank customers Source: FIS primary consumer research, August 2011; n = 3,345
influence other demographics, which affects
financial behaviors. Large bank customers are:
Figure 3: Large banks capture higher deposit, investment, loan and
• A little more likely than the national average to credit card balances on average
be employed while community bank customers
Average balances consumers hold with primary checking account provider
are much more likely to be retired;
• Seven percent more likely than the national $35,861*
average and 28 percent more likely than $31,029
$32,240
$30,306
community bank customers to be college
graduates; $24,016

• About as likely as the national average but
$16,539 $16,273
15 percent less likely than community bank $13,389
customers to be married/living with a partner;
• Above the national household income average
by about five percent, but well above (18
percent higher) the average household income Large bank Regional bank Community bank Credit union
for community bank customers. Deposits and investments Loans and credit card debt

* Read as: Consumers who identified a large bank as their primary checking account
The favorable demographics of large bank provider hold an average of $35,861 in deposit and investment balances with the bank.
customers help these financial institutions capture
higher deposit and investment balances as
well as higher loan and credit card balances on
average (Figure 3). Among customers who have their primary checking account relationships with large banks, they hold
an average of nearly $36,000 in deposits and investments and about $31,000 in loans and credit card debt with their
institutions. Community banks are able to capture about $32,200 in deposits and investments but, at about $16,300, fall
well short of the amount of loans and credit card debt that large bank customers have with their institutions.

Because older customers tend to hold higher deposit balances, the older community bank customer base’s deposit
balances are relatively high given their earning power. Older demographics are a double-edged sword, however,
because they also dampen the need for loans. The biggest difference between large bank and community bank
customers in lending behaviors is found in the category of first mortgages on the primary residence. We see significantly
greater dollar amounts in first mortgages held by large bank customers with their primary financial institutions, which is
reflective of their younger, more accumulative lifestages as well as higher real estate costs in the more urban areas where
these customers tend to reside.

8

Figure 4: Large banks have higher percentages of profitable customers Demographic differences between the two
but significantly lower percentages of loyal ones customer bases contribute to large bank
customers’ greater likelihood of being profitable
Percentages of Customers Who Are Profitable and Loyal to their Primary
compared with community bank customers
Checking Account Provider
(Figure 4). An estimated 41 percent of the
60% 60%
54% 55% primary checking account relationships of large
50% 47% 50% bank customers are profitable compared with
39%
only 34 percent of community bank customers.

Loyal
40% 40%
Our research took several factors into account
Profitable

30% 30%
in computing estimated profitability including
fees, interest income and payment and channel
20% 41%* 20% usage. Other factors that contribute to the higher
37% 34% 36%

10% 10%
profitability of large bank customers are higher
fees charged by large banks and usage of lower-
0% 0% cost channels by their customers.
Large bank Regional bank Community bank Credit union

* Read as: 41% of consumers who hold their primary DDA relationship with a large bank
are profitable
The Loyalty Advantage
Although large bank customers are more likely
to be profitable, community banks hold the
edge on the issue of customer loyalty. Only 39
Figure 5: Large banks’ customers are much more likely to participate percent of large bank customers exhibit some
in a rewards program
degree of loyalty, but 54 percent of community
Percent of consumers who participate in each type of loyalty program with bank customers are loyal. Our research scored
their primary checking account provider customers’ loyalty to their primary checking
account providers based on several factors,
31%
including: trust in their institutions and
26%
23%* willingness to recommend; willingness to make
a repeat purchase and consolidate funds; and
13%
identification with the institutions’ brand values.
10% 10%
The gaps between customer profitability and
loyalty highlight the key challenges faced by both
Checking account rewards Debit card rewards Credit card rewards large and community banks.
• Large banks have a higher portion of
* Read as: 23% of consumers who hold their primary DDA relationship with a large bank primary checking account relationships
participate in a checking account rewards program with the bank. that are profitable, but could perform even
better if they increased the portion of
loyal customers.
• Community banks generate strong loyalty, but capture lower profitability due to customer demographics and lower
cross-sell of loans to existing checking account relationships (particularly first mortgages and credit cards).

Our research also reveals significant differences in rewards program usage among customers of large and community
banks and suggests how these programs can provide remedies for both types of institutions.

When comparing the customer bases of large and community banks, a much higher portion of large bank customers
participate in their providers’ loyalty programs (Figure 5). Twenty-three percent of large bank customers participate in
their primary checking providers’ checking account rewards programs, 31 percent participate in their providers’ debit
card rewards programs, and 26 percent participate in the rewards programs of the credit cards offered by their primary
checking account providers. Participation rates in these same rewards programs by customers of community banks are
significantly lower (ranging from 10 − 13 percent).

9

These rewards program participation rates contribute Community banks face a different challenge. While it’s true
significantly to the customer profitability differential that some community banks do not place a high degree
between large and community bank customers because: of strategic emphasis on retail credit card programs and
residential mortgage lending, there is evidence that
1. Banking customers who participate in any of these card-based and relationship rewards programs can boost
three rewards programs (regardless of the size of the profitability. Recall from Figure 4 that although community
institutions’ offering the programs) are 100 percent banks have a large loyalty advantage relative to large
more profitable than customers who do not. Large banks, this doesn’t necessarily lead to wallet share and
banks realize rewards program participation rates 2 − customer profitability advantages. As this article points
3 times higher than community banks. out, customer demographics certainly influence this,
2. Among all primary checking account customers who but there’s no reason to believe that community banks
participate in any of these three varieties of rewards cannot also use rewards programs to their advantage
programs, large banks generate higher levels of to significantly increase wallet share and profitability.
profitability than community banks. Community banks excel at a model of providing high
service levels through local presence and decision making.
Drilling deeper into this second point on the profitability Driving customer rewards program participation beyond
gap between large and community banks, our data the current levels of 10 to 13 percent of primary checking
reveals the following: account relationships can fortify the community banking
business model and help attract younger customers.
• Among large and community bank customers who
participate in their primary providers’ checking account I’d be interested in your perspectives and experiences
rewards programs (the 23 percent and 13 percent in on the impacts that customer rewards programs have
Figure 5), large banks generate average customer had at your institution. Feel free to contact me at
profitability 48 percent higher than the profitability paul.mcadam@fisglobal.com with your comments
attained by community banks. or questions.
• For debit card rewards programs, the average
profitability differential between the participating
customers of large and community banks expands to
199 percent − three times the profitability.
• Among large and community bank customers who
participate in the credit card rewards programs offered
by their primary checking providers the average
customer profitability gap narrows to a four percent
difference in favor of large banks.

So clearly the large banks have a rock solid business case
for driving customer utilization of rewards programs. In
addition, there’s strong evidence that rewards programs
are the secret sauce that encourages some large bank
customers to consolidate balances and keep the bank’s
payment card top-of-wallet. In other words, while these
consumers may not feel a particularly strong sense of
“loyalty” toward the large bank, they value receiving
competitive products and the benefits associated with
rewards programs. Thus in the expansive, mass-market
distribution networks of the large banks − where achieving
high levels of sales and service consistency will always be a
challenge − rewards programs are the glue that encourages
some customers to expand and maintain their relationships.


10

Walmart MoneyCenter – Friend or Foe?
By Mandy Putnam
DIRECTOR, RESEARCH AND THOUGHT LEADERSHIP

My friend Dan’s niece is in need of a cash infusion routinely, but doesn’t have a checking account.
Before Dan became the hapless benefactor to his niece, he was a member of the small part of
the population that never shops at Walmart. Now he’s on a first-name basis with the woman who
handles wire transfers at the Walmart MoneyCenter. Walmart MoneyCenter brings together a
number of services – credit cards, prepaid cards, money transfers, bill pay, money orders, check
cashing, etc. – under its umbrella and makes it possible, as well as convenient, for people such
as Dan’s niece to have access to financial services. Even if she becomes solvent enough to have
a bank account, I’m not sure she’ll become banked. Like many members of her generation, she’s
embraced alternative ways of navigating the financial waters.

We recently completed a consumer survey, which focuses on trends in payment methods. One of the survey questions
asked how many transactions consumers made in the past 30 days at the Walmart MoneyCenter. Of our 3,205 respondents,
five percent had made at least one transaction there. MoneyCenter users in our survey averaged 2.2 transactions per
month. That’s about as many trips that banked consumers make to their financial institutions (not counting ATM-only trips).

One of the outputs of our payments survey is a
Figure 1: Walmart MoneyCenter users are most likely to be cash users
payment typology. We segmented adult consumers
into five categories based on the payment methods
they favor:
45%*
Cash users (27%)
1. Cash users typically pay with cash, prepaid 26%
cards or gift cards and represent 27 percent of 25%
Debit carders (34%)
the sample. 34%
2. Debit carders are the biggest segment, at
16%
34 percent. Innovators (2%)
2%
3. Innovators – a very small two percent of the
sample – are generally young folks who make 7%
Paper check writers (11%)
11% Walmart MoneyCenter Users
a relatively high percentage of their payments
via mobile and/or contactless devices. Credit carders (26%)
7%
27% Non-users
4. The dwindling Paper Check Writers currently
account for 11 percent.
5. Credit Carders represent 26 percent.
* Read as: 45% of Walmart MoneyCenter Users are in the Cash user segment.
Source: FIS Payment Survey, February 2012; n = 3,205
Walmart MoneyCenter customers are
concentrated in the Cash User segment though
a disproportionately high (16 percent) number of
them are Innovators (Figure 1). Both segments also exhibit higher-than-average usage of prepaid cards, but similarities
between the two segments end there. Demographically, the two groups differ dramatically. Cash Users are very similar in
age and income to Debit Carders while Innovators are much younger and more affluent.


11

The Cash User segment also is well-known at Figure 2: Indices of Walmart MoneyCenter users show concentration in
point-of-sale (POS) in Walmart, not just at the Fiscal Fledglings and Working Class USA P$YCLE segments
Walmart MoneyCenter. Mike Cook – a vice
president at Walmart who’s described as “the Younger Years Family Life Mature Years
most powerful man in payments” – is working 267*
on systems to make cash payments easier and
faster for Walmart to accept at POS because many 177
138
customers pay in cash. Credit cards only account 114
for 15 percent of Walmart’s transactions.1
55 69 68
41 33
Walmart has yet to exhibit much enthusiasm 28
8
for existing mobile payment technology, which
could incentivize Innovators – a segment that will
expand with technology diffusion – to engage in
significant shopping beyond the MoneyCenter if
its members don’t already. Recently, the mother-
* Read as: Walmart MoneyCenter Users are more than two-and-a-half times as likely than
of-all-retail-giants has joined forces with other non-users to be in the Fiscal Fledglings P$YCLE segment
retail giants to explore a merchant-led mobile Source: Nielsen and FIS Payment Survey, February 2012; n = 3,205
wallet solution, which, no doubt, will be focused
on lowering transaction costs either directly
or indirectly. (Slicing one second off average
Figure 3: Walmart MoneyCenter users are less likely to have
transaction time saves Walmart $12 million checking accounts
annually in cashier wages, according to Walmart’s
CFO Charles Holey).1 37%*
National Bank
46%
We also looked at the relationship between 17%
Regional Bank
MoneyCenter customers and Nielsen P$YCLE 16%
lifestage groups (Figure 2). Indices point to two 14%
Credit Union
segments – Fiscal Fledglings and Working Class 20%

USA – with well-above-average percentages of Community Bank
9%
MoneyCenter customers. Both segments have 11%

limited discretionary funds for investment though Other
4%
3%
Working Class USA members often have home
mortgage loans. Do not have checking account
4%
Non-users
Demographic comparisons between MoneyCenter
users and non-users reveal that users are likely to * Read as: 37% of Walmart MoneyCenter Users have their primary checking account with a
national bank.
be members of the “working poor.” Compared Source: FIS Payment Survey, February 2012; n = 3,205
with non-users, they are more likely to be:

• Young – 30 percent are members of Gen Y (18 – 32 years old) and 30 percent Gen X (33 – 48 years old)
• Employed full-time for someone else (48 percent)
• Renters (52 percent)
• Single (46 percent)
• Not college graduates (70 percent)
• Low income (38 percent with annual household incomes less than $30k)

Walmart MoneyCenter users are less likely to have checking accounts than non-users (Figure 3). One-fifth doesn’t have
checking accounts, but the flip side of that is 80 percent do have checking accounts. Among those with checking accounts,
a higher-than-expected percentage is composed of regional bank customers.


12

Walmart MoneyCenter customers are heavy Figure 4: Walmart MoneyCenter users exhibit high usage of
users of alternative financial services, including alternative financial services
those offered through MoneyCenter (Figure 4).
Purchases of prepaid cards (42 percent in the past
Used prepaid card in the past 30 days 42%*
30 days) and money transfers (40 percent in the to make in-person payments 11%
past 30 days) are especially high. More than one Used a service to transfer money 40%
in five MoneyCenter customers have used a walk- oversease or domestically 3%
up, short-term loan service and just about as many 35%
Used a check-cashing service
have used an Internet short-term loan service in 4%

the past 30 days though the MoneyCenter does Used a walk-up bill paying service 34%
7%
not currently offer payday loans. (Walmart does
Used a walk-up short-term 23%
offer small cash advances via its credit card to loan/payday lending service 2%
customers who make purchases.)
Used an Internet short-term 21% Walmart MoneyCenter Users
loan/payday lending service 2%
Non-users
We also asked our survey respondents to
rate the importance of a variety of attributes
* Read as: 42% of Walmart MoneyCenter Users used a prepaid card in the past 30 days to
associated with various payment methods. make payments
Of the list of attributes, three rise to the top Source: FIS Payment Survey, February 2012; n = 3,205
in importance among Walmart MoneyCenter
users (Figure 5).
Figure 5: Walmart MoneyCenter users are more likely to choose
• Two-thirds (65 percent) of MoneyCenter users payment methods that help them control their spending and timing
want a payment method that helps them of payments
maintain spending within their means. Cash fills
that bill for many of them. 65%*
Helps me to not spend beyond
• Six out of 10 need payment methods that allow my means
50%
them to control the timing of when funds are
deducted from their accounts. This reflects a
Allows control over the timing
“living from paycheck-to-paycheck” lifestyle of when funds are taken out of
60%

and jibes with heavy usage of short-term loans. my account 52%
• Nearly half (46 percent) want payment methods
which allow them to pay for goods or services
Allows me to pay for 46%
over time. Walmart MoneyCenter customers goods/services over time
generally have credit cards – 75 percent have
Non-users
some type of credit card, most often a Visa
or MasterCard – but the penetration of credit * Read as: 65% of Walmart MoneyCenter Users believe that “helps me to not spend beyond
cards among MoneyCenter users falls short of my means” is very or extremely important when making any kind of payment in person for
goods or services.
credit card penetration among non-users, at Source: FIS Payment Survey, February 2012; n = 3,205
82 percent.

So is Walmart a friend or foe to banks? One side of the debate could argue that although recent users (i.e., past 30 days)
of Walmart’s MoneyCenter represent potential customers, most of them are people with limited profit potential and
from whom financial institutions are willing to walk – or run – away. The other side of the argument could point out that,
according to Walmart, 85 percent of the U.S. population shops at Walmart at least once a year. Much of that population
is exposed to MoneyCenter’s offers, which compete with at least some services potentially provided by their primary
financial institutions.

I’d like to hear your opinions about whether you perceive Walmart MoneyCenter, and other alternative financial service
providers, as allies or competitors. Please contact me at: mandy.putnam@fisglobal.com. Respond and we’ll share your
comments, with your permission or anonymously, in future newsletters.
1
Jessica Leber, “The Most Powerful Man in Payments” Technology Review published by MIT 29 March 2012


13

Strategic Insights is a newsletter that provides research, thought leadership and strategic commentary on recent events in
banking and payments. The newsletter is produced by the Global Marketing and Communications team at FIS. FIS is one
of the world’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries,
FIS delivers the most comprehensive range of solutions for the broadest range of ﬁnancial markets, all with a singular focus:
helping you succeed.

If you have questions or comments regarding Strategic Insights, please contact Paul McAdam, SVP, Research & Thought
Leadership at 708.449.7743 or paul.mcadam@ﬁsglobal.com.


14

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