Paycloud Brings Merchant Loyalty Cards to Your Phone

Sparkbase, which is one of the largest processors of branded loyalty cards, has traditionally functioned as a white-label software provider that enables businesses to  offer card-based rewards. But in recent years, the company has also been inching towards the consumer end of the rewards equation.

Earlier this month, the company launched its new mobile rewards application Paycloud, which allows small and medium-sized merchants to offer and track mobile loyalty programs to customers in the vicinity of their shop. Plenty of companies have been working on consumer rewards products in this space, but Paycloud is beating many of them to the market by using existing mobile technology that doesn’t require merchants to purchase NFC-enabled chips or antennae.

Street Fight caught up with the company’s founder and CEO Doug Hardman recently to talk about Sparkbase’s approach to scaling local merchant acquisition and why the company’s recent move into the mobile wallet space may have a year or two headstart on the competition.

There are a lot of companies who are trying to break into the mobile rewards space.  What makes Sparkbase’s Paycloud different?
We’ve been doing loyalty rewards and gift card programs for about seven years, so we have a good understanding of what merchants want. We have a high focus on what the merchant needs, what the merchant is asking for, and we do a lot of testing and measuring to make sure our programs are effective in that space.

So, what do merchants want?
Merchants want to offer loyalty programs, but putting them on a card is expensive. We had put together these programs that had one universal piece of plastic, but the adoption was poor because there wasn’t any identity behind that for the merchant. The merchant didn’t have any incentive to offer that program because it didn’t help promote their brand. The whole point of a rewards card is to have a little billboard in your pocket saying, “Annie’s bagels is my favorite bagel shop.”

Building relationships with small and medium-sized merchant is expensive and can be difficult to scale. What is Sparkbase’s solution?
If you’re a small merchant you cannot go to Visa directly to get processing.  In the 1980s, Visa and Mastercard put together a sales channel of Independent Sales Organizations (ISO) to take their product to market. We have relationships with about 130 of these ISO’s — the people who sell Visa and Mastercard processing — that are already private-labeling Sparkbase’s product as their own. These 130 ISO’s have a total of 27,000 agents that are actively selling a product that at the end of the line is Sparkbase’s product.  So, eighty percent of the terminal market in the U.S. already is compatible with a program we already run and have an installation base for. For those 2.5 million U.S. merchants who buy from our ISOs, if they want to take a reward program, the first person they are going to call is their credit card processor to see if they can get it compatible with their terminal and most of those have us as their rewards partner.

The whole point of a rewards card is to have a little billboard in your pocket saying, “Annie’s bagels is my favorite bagel shop.”

As a white-label service that dealt exclusively with businesses, what has been the biggest challenge moving into the consumer space?
It’s building a new brand that didn’t exist 90 days ago.  I believe that will be the challenge, but startups are doing this every day. We just happen to have a lot of cash in the bank and an existing distribution network; so we are not having to hit consumers, resellers, and merchants at the same time — only consumers. We have found that they if there is value in it for the consumer and the application is easy to use, application tend to stick. Once you get the app on the phone, it is a lot easier for them to take these deals and want to see more. Going forward, it will become an education to our resellers on here’s what this product is and here’s how to sell it.

Recently, some big companies — like Google, say — have announced substantial investment into the mobile wallet space. Can Paycloud compete?
Google Wallet is highly dependent on NFC.  By their own admission, it will not be until the end of 2012 or early 2013 before there is substantial adoption of NFC by not only the consumer but also more importantly, by the merchant.  The hardware for merchants to be able to get setup for NFC is expensive: for a merchant to pay 300-500 bucks for a reader that plugs into a terminal, which they have already paid a lot of money for, is a lot to ask. If Visa dumped all of their resources in retrofitting all of the terminals with NFC capability, they still cannot reach the 50 to 60 million phones out there right now without an NFC chip built-in. I believe that we have at least two years of runway — particularly with the brick-and-mortar crowd — because we are selling to the people that are selling to them.  The merchant-acquiring business is not going to go quietly and anyone who thinks otherwise is surely mistaken. These are billion-dollar companies that have plenty of resources and relationships with merchants that these big companies want.

This interview has been edited for length and clarity.