As Offline Purchase Data Comes Online, Changes in Store for Local Marketing

In late 2011, Seth Priebatsch, the 22-year-old founder of LevelUp, outlined a potentially jarring scenario for the payments industry: the interchange fee, a long-held profit center for payment processors, would go to zero. His argument centered on the concept that money was information, and the Internet naturally undercuts industries which took fees for moving information (like media).

As of early 2014, Priebatsch’s vision hasn’t panned out — at least not yet. Industry interchange rates are not zero, but increasing competition in mobile payments paired with a tighter federal oversight has put a downward pressure on fees. In turn, companies have looked to package payments with other ancillary services, using the data as a resource to fuel other applications. The payments industry is shifting slowly from a logistics industry, focused on storing and moving money, to an analytics industry that generates services around its unique and complex dataset.

If exchange is the purpose of a marketplace, transaction data — information about who bought what from whom, and for how much — is its pulse. With 90% of transactions occurring offline, the growth of connected payments, and the subsequent ability for businesses and consumers to understand who’s buying what in the real-world, has deep implications not only for the local marketplace, but for the wider digital economy as well.

Same money, new problems
The bulk of payments in the U.S. are already electronic. According to Javelin research, debit and credit cards accounted for two-thirds of all point-of-sale transactions in 2012 — a figure that’s expected to jump to nearly three quarters by 2017. The challenge facing is the industry today is not digitalizing payments — it’s creating the necessary frameworks through which that data can be made available to developers and other third-parties in a safe, secure, and efficient manner.

Until recently, this data served a single purpose: informing the various components in the payment industry — from the card issuer down to the payment processor — that a transaction was occurring. Consequently, the infrastructure was built for speed and efficiency, with a closed loop that intentionally blocks third-parties from participating.

But over the past few years, companies like Square, Paypal, LevelUp and others have begun to offer new payment systems — built for a business model that centers around data analytics not logistics. Although Square has become synonymous with the dongles that allow small businesses to process credit cards through a smartphone, the future of the company rests in its network: the combination of consumer-facing mobile payment application and the back-end software already used by merchants to process payments.

That’s what makes transactional data unique. While information about consumer behavior or business offerings focus on a single market participant, data about exchange measures an interaction between buyer and seller. Therefore, the process of building, managing, and growing a local transactional dataset faces many of the same constraints that faces two-side marketplaces like eBay — namely, the need to build two interdependent businesses simultaneously.

Performance marketing and the other 90%
One of the more important trends in business over the past decade has been the shift from a qualitative to a quantitative decision-making process. From finance to agriculture, executives are turning to algorithms to guide where they invest, who they hire, and even where and what they plant next. And nowhere is that shift more apparent than in the digital marketing industry.

Today, performance marketing, which the IAB defines as campaigns that intent to drive a consumer action rather than raise awareness, accounts for the majority of digital spending. In the first half of 2013, 65% of digital advertising revenues were priced on a performance basis. But that’s starting to level off, according to the same IAB report.

A drop of in performance marketing should concern the digital marketing industry. On a per capita basis, digital advertising offers marketers two key advantages over legacy media: dynamic targeting and measurement. Slowed growth in performance marketing indicates that marketers are not taking advantage of the web’s interactivity. In terms of pure “awareness,” impressions on the web really cannot compete with the deeper focus of a television audience.

Part of the problem is that performance marketers, who typically measure success by a transaction, can only see one out of ten dollars spent in retail today — those that occur online. The rest of the transactions, many of which may be related to a given ad, are made in stores, offline, and invisible to the advertisers. Bringing that transactional data online will dramatically expand the pool of data from which marketers can not only measure success, but target messaging as well.

Today, a number of data companies are working to help advertisers connect the dots between their digital advertising efforts and the transactional data many already can access. Datalogix, the veteran data firm, for instance, recently raised $25 million in funding to expand its work with Facebook and Twitter to measure the value of their emerging ad formats. The company works directly with stores, anonymizing the purchase information collected by rewards and other loyalty programs. Then it allows a marketer to target ads to these individuals and measure whether they spend more or less with the brand in the following months.

Marrying offline transaction information to local marketing could well cause a large shift in the way we understand advertising ROI, generally, as well as the relative value of locally targeted media impressions.

Steven Jacobs is Street Fight’s deputy editor.

Find out more about how big data can be used in local context at Street Fight’s Local Data Summit, taking place on February 25th, in Denver. Learn from and network with some of the top local data experts in the country. Reserve your ticket today!