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Transaction Technology

Knowledge is Power!

The key role that transaction technology has in harnessing information and the idea that knowledge of consumer actions and intentions is what will separate the successful from the unsuccessful retailers in the 21st Century. Information management in the new world order means that retailers will have to implement well thought out strategies or be overtaken by competitors. Knowing your customers is not optional.

Electronic Profiles

The crucial value of electronic profiles of customers was expressed very succinctly by Brian Woolf in his book Customer Specific Marketing. "How long before the Data Base that a company owns on its customers represents more value than the products the company actually markets?"

His point is that the information collected by transaction technology can be used to construct information on consumer buying habits and lifestyle interests that offers retailers the opportunity for more specific, cost effective marketing. Payment and loyalty schemes have crucial roles to play in this environment which is why all retailers must give more attention to these aspects of their businesses.

Transaction Technology - Key Issues

The key questions are:

  • A consideration of EFT and its overall role in retail site functionality.
  • An overview of payment cards and their increasing importance in fuel retailing strategies.
  • An overview of customer loyalty schemes and their roles in this 'customer-centric' retail environment.

Technology Initiatives Impact

The driving forces for the growth in transaction technology are four developments that have allowed retailers the opportunity to capture information on consumers buying habits cost effectively:

  • Telemarketing
  • Plastic payment card growth
  • Customer database software
  • Network technology

These developments have unlocked the opportunity for cost effective communication between consumers and suppliers. They offer suppliers the opportunity to personalize in a mass-market culture the products and services for consumers in a way not seen since the days of small, independent shopkeepers.

A key question for fuel retailing will be to determine if this trend will be what separates winners from losers in the future and how relevant to fuel retailing will be the 'personalised dialogue' approach with customers that will be vital for business survival in some sectors.

Electronic Funds Transfer in Europe

Over the last 20 years the European payment environment has developed into a complex and integrated form of competition. Banks have led the development of payments activity but within individual markets, department store chains, oil companies, car manufacturers etc have all developed their own schemes.

EFTPOS is the term used to describe electronic funds transfer at the point of sale. It is a general term used to cover the automation of retail card transactions.

A typical service station forecourt will now have a front end Electronic point of sale, often linked to a back office site management system and tank inventory system. The technical platform for operating a modern s / stn has become much more complex and expensive to install and maintain over the last 25 years.

The technical choices for operators have also become more complicated and likely to be outdated by leap-frog technical developments. This is one of the most powerful reasons why the industry is seeking suppliers to agree common technical platforms and 'open' architecture. The alternative will be rapidly outdated legacy systems and an inability of the industry to maintain competitiveness with other retailers.

Payment cards: Europe as an Example

The European market remains highly fragmented and at differing stages of development. The market for payment cards is expected to grow at 10-15% for the foreseeable future, from a current base of 400 million bank and retailer issued cards. The fuels sector is estimated to retail more than 1 in 3 litres via payment cards. This will grow to 2 in 3 litres in the next few years.

Although cash remains the most frequently used means of retail payment in the EU, it is rapidly losing ground to cashless payments. Within the category of cashless payments, payment by cheque is in turn losing ground to cards, credit transfers and direct debits.

Chip card technology is being introduced to combat high levels of fraud. The main obstacle to growth of chip cards will be retailer resistance to invest in dual terminal infrastructure and with retailer terminals being replaced on a 5-7 year cycle, this is likely to remain a 'who pays, who gains' issue between Banks and retailers.

Approximately 69% of all payment cards are debit (pay now) and 31% are deferred debit/credit cards (pay later).

Issues which must be addressed in considering a development path for any payment system will be:

  • On-line vs Off-line
  • Control of fraud
  • PIN verification (Personal Identification Number)
  • Central vs Distributed data bases
  • Chip technology vs Magnetic stripe

Payment cards impact on Oil sector

Cards are increasingly being used within the overall marketing mix. Bank, Retailer and independent payment cards are being used with an increasing number of non-payment loyalty cards, Co-branded affinity cards and Alliance partnership cards. This is a rich mix of options, types of market and opportunity areas for oil retailers.

The increase in the usage of plastic payment is however putting a big inflationary factor into the cost of processing cards due to the percentage approach taken by card issuers with Merchant service fees. In the European retail fuels sector for example, the cost of merchant service fees is approaching $200 million p.a. Clearly discussions to improve the cost effectiveness of the card chain infrastructure and the level of third party MSC charges is a priority for all oil companies.

This technology is also being used in various marketing innovations to allow customers to 'pay at the pump' and therefore use 'fast track' lanes within service station forecourts.

Another factor is the growing number of non-oil company but fuel related retailers who are moving into providing retail orientated banking services. Their payment cards are increasingly going to feature on their forecourts with a view to "locking-in" customers.

Oil Company Fuel Cards

The issue of Oil company fuel cards is adding to the range and variety of payment cards now accepted on forecourts.

The cards are an attempt to tie both business and non-business users into one or more alliance of petrol retailers. Fuel cards have also become an indispensable fleet management tool. Current projections are suggesting that the 16 million cards in use today will increase to over 18 million in the next 2/3 years, with Pan European cards set for even faster growth. This is partly reflecting the greater cross border traffic from the 'Euro-zone' and the wave of oil industry mergers/ alliances that are taking place.

A survey by Marketline Research in 1998 identified fuel volume discounts as the most important consideration in choice of card for users. This was closely followed by network coverage, low annual fees and security of the system.

Extension of the use of the cards into Ferry/ Toll payment, non-fuel shop purchases and added value services such as vehicle rescue and messaging is expected to feature in most schemes offered.

A good national coverage of the network is still a primary driver of choice for many fleet managers although this does depend on the size of the organisation.

Strategic levers in Retailing

Loyalty schemes are one of the classic sales promotion levers that are used by retailers to try and differentiate from competition.

In fuel retailing the importance of Location is crucial closely followed by price and/or promotion.

Product quality and Brand values have been an area of competitive marketing for oil companies but increasingly customer service and loyalty are receiving attention as a means to differentiate as markets become mature.

Increasingly as everyone is heading in the same direction developing any form of competitive edge becomes more of a problem.

The extension of convenience retailing via forecourt shop programmes has also attracted heavy investment in some markets but even here the ability to stay ahead of the pack is limited. Shop retailing has also proved a complex area for oil companies to develop the skill sets required to compete against the highly efficient grocery retailing multiples.

What is beginning to emerge as a priority for the oil retailers is the need to understand their customer better. The key benefit of loyalty schemes is not only the "repeat visit" by customers - it can also be the information you obtain about their buying habits.

Why Loyalty Matters

Not all customers have equal value to a retailer. The 80/20 rule of eighty percent of retailer's profits being generated by twenty percent of the customer base is generally well understood. The implication from this research being that some customers have a negative impact on profits. How do you identify the "good" from the "bad" in the absence of any data on either type?

We are all faced with informed, critical and ever more demanding customers. Customer satisfaction surveys suggest that we operate as suppliers in an increasingly 'transparent' customer environment.

Add the fact that media 'noise' (this is the vast increase in the amount of media advertising to which most consumers are now exposed on a daily basis) and it becomes more difficult for any supplier to get its message across.

Loyalty Schemes

Loyalty schemes are becoming very common in retailing.

310 million consumers are members of schemes in Europe, annual investment costs are estimated at 1.8 billion US dollars and the forecasts are for a threefold increase over the next 5 years.

Retailers that have High frequency customer transaction and High information availability via EFTPOS transaction systems have been the most obvious adopters of this form of marketing. This would include Grocery, Teleco, credit card, Airline and Travel related sectors.

In this matrix, the retail gasoline market ranks high on customer access but low on information availability although this picture is changing.

Globally, loyalty schemes are also being actively developed in USA, Canada, Australia and Far Eastern markets.

Oil sector Loyalty schemes in Europe

Promotional marketing is hardly a new concept in fuel retailing. Since the oil crisis recovery of the early 1970s, tactical promotion activity to pull in new customers and retain existing customers has been a common feature of oil company retail marketing. The schemes have evolved from simple 'free glass' with purchase offers through more sophisticated lottery and scratch card games into the current format of electronic loyalty.

The most frequent platform for electronic loyalty has been a simple magnetic card collection device, points being issued as 'currency' for repeat purchase behaviour and reward redemption for customers via on-site gifts or third party catalogue. Margin give away has typically averaged 1% of sales. In terms of Oil companies coverage in Europe with this form of marketing the most consistent applications are the Shell SMART and BP loyalty schemes.

The "Choice" of Loyalty Card

Non Personalised - No Specific Data Collected: Magnetic stripe cards are given away free, without customers having to identify themselves. The objective is usually to lower administrative expenses associated with fuel promotion schemes to the operator whilst increasing the benefit of the "give away" to the customer. The lack of a customer database is both a strength and weakness of the scheme: it is a relatively inexpensive approach to develop a customer loyalty scheme but you know virtually nothing about your customers and their habits.

Personalised - Specific Data Collected: The rationale for this type of scheme is to gain a picture of customer's behavior and develop a communication link to them, as well as rewarding them with loyalty points. A personalised chip/ magnetic stripe/ barcoded card is issued free, but only after a customer has provided personal details. It is more expensive than the non-personalized card, as call centre and data base management systems have to be set up if full advantage is to be taken by the retailing company. The advantage of the scheme that collects a data field on customers and matches this to their buying transactions is that the retailers start to build a profile on consumer buying habits. Cost effectively turning this knowledge into better customer service and bottom line sales is the economic rationale for adopting this scheme type.

Which Loyalty Card Strategy?

Basically two types of cards are issued to customers. Payment cards and Reward/ Loyalty cards. Generally the payment cards charge a fee to the customer whilst reward cards are offered free although exceptions to either case can be found in the market. As a research study on European retailer loyalty schemes conducted by Templeton College, Oxford University in 1998 observed: "any card that exists between the retailer and customer has a potential impact on loyalty, it is therefore important to consider the view of the retailer and the customer."

Customers view loyalty cards as providing them with benefits that would not otherwise be gained. They are increasingly aware of the 'trade-off' in terms of the amount of information they provide to the retailer for benefits offered. Research also supports the view that they satisfy a psychological 'need to belong' urge similar to the following of sporting clubs. The consumer therefore has to decide if this commercial arrangement is attractive.

From the retailer perspective a strategic choice has to be made to operate the card alone or with another organisation. The retailer is able to decide on both scopes of use and card benefits. The retailer is making the reverse economic assessment of the investment in the scheme to facilitate greater knowledge of consumer spending habits versus the expense of offering the scheme on the bottom line profits.

Understand customer economics

Can loyalty schemes really build relationships when markets become crowded with carbon copy schemes? In the UK market it is estimated that over 200 retailer schemes now operate. Almost every sector has schemes, which effectively cancel each other out in terms of competitive advantage. Loyalty is therefore cited as a zero sum game. We should however consider that traditional mass advertising is also undertaken by most leading brands, and this form of marketing is less often criticised as being an ineffectual position to hold. The evaluation of market maturity matters since 'first mover' advantage seems to apply in relatively immature markets.

Strong evidence from studies undertaken in the last few years also supports the assertion that retained customers are more valuable than continual expansion of the customer base. What is not evident from these studies is any suggestion that the most loyal customers are the most profitable. In fact, some research proposes the opposite.

Effective measurement of loyalty schemes impact is difficult without a neutral control group of customers. In practise however this is difficult for national programmes.

What have customers liked?

Review of loyalty schemes launched to date suggests that strong branding from major retailer group is the most favoured approach with some second tier retailers willing to subordinate their branding under a larger player 'umbrella' scheme. Margin give-a-way averages 1% with some programmes offering as much as 4%. Data base development to facilitate 'relationship marketing' is being pursued by most schemes launched in the last few years. Currency in the form of reward points is being exchanged for information from customers at transaction, lifestyle and social-demographic levels.

Most programmes are prescriptive with marketers driving the process; actual customer dialogue with retailers is still relatively rare.

The schemes are generally not discriminatory and reward low value customers at the same reward rate as high value customers. This suggests that there is much scope for improvement when dealing with selected high value, loyal customers. It is also relatively rare for existing schemes to incorporate frequent 'tactical' offers that are designed to refresh customer interest and focus attention on scheme benefits. After 12 months even the best designed scheme will become an undifferentiated habit. Schemes that reward customer frequency, recency and spend make more sense economically and in terms of customer benefit. It is still rare, however, outside of the airline frequent flyer schemes, to find a multiple level reward scheme that does increase the customer benefits in line with their frequency of spend.

Transaction Technology Future

Polarisation of consumers is creating high-income 'super consumers' and low income 'underclass'. This divergence of the customer base will force loyalty schemes to become more selective in their target audience.

The pressures of 'time famine' on the over worked 'high income' group will make time the currency of the 21st century.

The fastest growing retail sectors in many markets are now leisure and care related. Since growth implies healthy margins and increasing competition as more and more companies try to capitalise on this trend expect to see more loyalty schemes being generated that are specific to these markets.

The mobile telephone market is going to transform our way of using both data and speech transmission and this will impact very quickly in the loyalty field.

We are seeing lower processing costs and more powerful computer systems are entering the market. These are bringing down the effective costs for handling large amounts of customer data.

The impact of the Internet and Interactive media channels is also being felt in customer loyalty programmes, since it offers very low cost communication channels to customers.

Consumers seek less effort to understand and more benefits that solve real lifetime pressures. Expect to see convenience and more tangible benefits in future successful loyalty schemes.


  • The average service station forecourt environment is becoming more complex technically as transaction technologies merge.
  • Payment Cards - credit and debit. Essential customer service but needs to be cost justified. Keep to card brand leaders.
  • Oil Company Cards - growing market for fleet managers and opportunity to add value.
  • Relationship/ Loyalty Cards - growing sector which is at least as essential a customer base data tool as a customer reward scheme.

Peter G Wray

The author is managing director of pgw Ltd. This article was first presented to the College of Petroleum Studies, Oxford in September 1999.

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