The banks' billion-dollar idea

July 8, 2011: 5:15 PM ET
Banks could make nearly $2 billion by 2015 from selling your shopping data.

Banks could make nearly $2 billion by 2015 from using your shopping data.

NEW YORK (CNNMoney) -- Banks have found a new revenue stream -- and this time, it doesn't involve hitting you up with a new fee.

Many of the nation's leading banks are using information about their customers' shopping habits -- how much they spend, where they shop, what they buy -- to make money.

Based on that data, retailers are offering targeted discounts via the banks through text messages, email and online bank statements.

The banks don't actually hand over your data to retailers. Instead, retailers describe what type of customer they'd like to target and the bank then sends the deal to customers who fit the profile. When the customer cashes in on the deal, the bank gets paid a commission.

At a time when government regulation is forcing banks to hike fees and eliminate consumers perks, this is not only an easy way to generate a decent chunk of revenue but also to drum up some much-needed customer loyalty.

Aite Group, an independent Boston-based research firm specializing in financial services, forecasts that these merchant-funded incentives will drive $1.7 billion in annual revenue for card issuers by 2015.

Many of the nation's largest banks and card issuers have rolled out these incentive programs. Among them: Wells Fargo (WFC, Fortune 500), Citi (C, Fortune 500) and Discover (DFS, Fortune 500).

Merchants pay banks an average fee of 10% to 15% of the purchase price of a product each time a customer uses a discount that's generated from the bank's data, according to Cardlytics, an intermediary that works with both banks and retailers.

Typically, the bank takes a 25% cut of that fee and pays the rest to an intermediary, like Cardlytics. So if a customer buys a $1,000 couch, the merchant pays a fee of up to $150 to the bank and the bank walks away with $37.50.

Some card issuers, like Discover, are using their commissions to boost loyalty, by giving the money back to customers in the form of cash back rewards.

'Better than Groupon'?

While the new incentive programs may have been created to benefit the banks, the targeted deals could actually end up benefiting consumers as well, said Madeline Aufseeser, senior analyst at Aite Group.

"It's better than Groupon and LivingSocial," said Aufseeser. "Consumers are now going to see offers they're actually interested in because they'll be based on spending behavior."

Here's how it works: Say you use your debit card to go shopping at Nordstrom. A competitor like Macy's may ask your bank to send coupons to customers who typically spend more than $200 a month at Nordstrom. As a result, you then receive a 20% discount to Macy's from your bank.

To redeem the coupon, you must respond by text, e-mail or by checking off a box next to the offer on your online bank statement. Once you go into Macy's to buy the shoes, the bank will retroactively credit your account for the 20% discount. Some banks, however, only let you cash in your discounts via their online portals.

Sounds easy enough, but shoppers should keep in mind that the market for merchant-funded rewards programs is still young. And, like any new program, there are still plenty of kinks to work out.

Take, for example, the retroactively applied credit these programs issue. Merchants could decide to add fine print to their offers that exclude certain brands or add purchase conditions so that consumers think they'll be getting a discount but discover the credit was never applied, explained Odysseas Papadimitriou, CEO of CardHub.com.

"There's a risk that you might not get what you're hoping to get -- you're leaving the store and you don't know how much you were actually charged for something," he said. "Then if you don't see it on your credit card statement, what do you do? Call your bank? Call the intermediary company? Or call the merchant? If they start using fine print, the whole thing's just going to be a big mess."

The privacy question

And, of course, there's also the issue of privacy. Aite Group estimates that more than 460 million cardholders will be enrolled in the programs by 2015. (In most of cases, consumers are automatically enrolled in the merchant incentive programs, but they do have the right to opt out -- as required by bank regulations.)

The banks and intermediary companies -- such as Cardlytics and Cartera Commerce -- claim that personally identifying information like your name, bank account number and Social Security number are never disclosed to the merchant.

Instead, banks can only access an anonymous numeric code assigned to each customer. Because the merchants and intermediary companies don't have access to a customer's online account login credentials, the system is just as secure as your online bank account, said Aufseeser.

Merchants don't see your individual shopping information either, the banks and intermediary companies say.

Stores go to an intermediary and describe the kind of customer they want to target (for example, someone who spends more than $300 a month on clothing at Nordstrom). The intermediary then finds a customer meeting that criteria, passes the match along to the bank using the customer's code and the bank then alerts the customer of the personalized offer.

So far, consumers seem to be taking to the deals. Cardlytics said that 58% of customers who receive the offers they generate redeem at least one. And only 2% of customers have chosen to opt out.

You can expect more deals to be coming to your online statements or inbox soon: Visa (V, Fortune 500) is working with more than 14 major card issuers -- including U.S. Bank (USB, Fortune 500), Barclays (BCS), PNC (PNC, Fortune 500) and TD Bank (TD) -- to launch a similar program in the fall.

And, according to Cartera CEO Tom Beecher, several other major banks are planning to roll out similar programs in the upcoming year.

Editor's Note: After this story was first published, we made a few clarifications. First, we adjusted the headline, which initially read, "Banks' billion-dollar idea: Sell your shopping data." And we added additional language to explain how banks are using their customers' data. We also removed some references to Citi because they weren't an accurate depiction of Citi's business.  To top of page

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