As merchants try to connect with their customers at every touchpoint, the race is on to build brand loyalty and trust that keeps them coming back. Consumers gravitate to those that offer convenient payment and personalized rewards. While there are many options available to merchants looking to gain an edge in such a competitive landscape, one solution has often flown under the radar: private label debit (PLD).
“Private label debit programs pair payment devicewith the merchant’s loyalty program,” explained Sarah Grotta, director of Debit and Alternative Products Advisory Service at Mercator Advisory Group. “The merchant spends less on interchange fees and builds loyalty by putting their brand front and center at every purchase.”
Grotta recently authored a cobranded research brief with ZipLine titled “Driving Loyalty Through Private Label Debit Cards,” which provides an overview of how PLD combined with rewards can create a competitive, self-funded loyalty program.
What is a private label debit card?
Private label debit cards are similar to normal debit cards in that purchases are made with a plastic card or mobile phone and funded on a per-transaction basis through a checking account. However, unlike debit cards issued by financial institutions, PLD cards are issued by the merchants and can only be used within that merchant’s physical locations and digital sites. The cards bear the merchant’s branding and it is connected to the merchant’s loyalty program.
Unlike payment cards issued by financial institutions, PLD programs do not run on traditional card networks. Instead, the transactions go over the ACH rails. But since private label debit cards work on existing point-of-sale devices, merchants do not need to invest in new hardware, only in the requisite software.
PLD programs first came into existence 10 years ago with early adopters being convenient stores and gas stations, including Cumberland Farms, Speedway, and Shell. Since customers frequently and consistently shop at these locations, they earn rewards quickly, encouraging them to make more purchases.
Since PLD programs have proved successful for convenient stores and gas stations, other merchants have implemented their own programs, especially over the past two years. “We do see PLD programs being used by more merchants and more categories of merchants,” said Grotta. For example, the largest private label debit card program in the United States is Target’s debit REDcard which offers customers 5% cash-back. At present, 13% of all Target sales are conducted via this card, according to the report.
A major factor underlying the rise of PLD programs is the adoption of mobile payments. It is easier than ever for a consumer to use an app on their phone to transact, receive information from a merchant, and track rewards. By coupling the payment method with a communication channel, the merchant can better reach their customers.
Mercator Advisory Group estimates that the private label debit market had a process volume of $13.9 billion in the U.S. in 2018, totaling an estimated 279 million transactions. And with a compounding annual growth rate (CAGR) of over 10%, Mercator forecasts that this market will grow to $28 billion by 2025.
What are the benefits for the merchant?
PLD programs give merchants more control over how they’re paid, said Grotta. Bank issued credit cards and debit cards have various cost levels associated with them, but with PLD programs, a merchant can steer the customer toward the preferred payment method.
More importantly, however, is that private label debit cards link the payment mechanism to a loyalty program. “Rewards associated with private label debit programs increases a merchant’s customer base, increases the number of customer visits and increases overall per customer spend,” explained Grotta. Since almost all merchants are looking to increase sales, PLD programs are a great tool to accomplish this.
PLD programs also give merchants better control of the data. The amount of data shared with a merchant for a traditional payment transaction is limited by network rules and regulations. As a result, most merchants have to buy data services from a third-party provider in order to link cardholder data with transaction data. In contrast, most PLD programs were built with data collection and analysis in mind. This allows merchants to better market their products and create a customized experience for consumers.
Setting up a PLD program
Merchants interested in setting up a private label debit card program should reach out to a PLD provider, such as ZipLine. However, Grotta cautioned that merchants need to put a lot of thought and planning into creating such a program.
“Merchants should understand that offering a PLD program is not a project to be implemented and then ignored,” she said. Instead, a PLD program requires on-going attention. “Merchants should think about how much of the on-going promotional and maintenance activities they want to take on versus have a partner to help manage.”
She pointed out that the most successful programs are the ones where the private label debit product is not thought of just as a payment device. Merchants should view PLD programs as “a means of ongoing promotion, customer recognition and communication,” said Grotta.
If the PLD program is implemented correctly, then both consumers and merchants benefit. Merchants will see an uptick in sales and increased brand loyalty, while consumers will get better deals on the products they want and more rewards.
If you’d like to learn more about private label debit cards, the research brief can be viewed here.