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April 9, 2021

Credit cards face further threat as retailers focus on tailored rewards schemes

By GlobalData Financial

Over the past year, the pandemic has seen the US market shake up its supermarket strategy, with retailer Walmart and leading pharmacist Walgreens announcing plans to enter the FS space. Previously, we have seen poor decisions made by big supermarkets who have tried to enter the FS space on their own.

Globally, according to the GlobalData 2020 Banking and Payments Survey, supermarkets/retailers are the least preferred financial services providers among respondents. Walgreens, however, has some strong elements to its model: partnerships, digital strategy, and a niche target audience focused on wellbeing.

In the UK market, we have seen supermarkets such as Tesco and Sainsbury’s miscalculating the difficulties in entering the financial services sector by underestimating the scale and strengths of other incumbents in the space and the evident inability to keep up with digital adoption and innovation.

Lending has been problematic for supermarkets; “difficult market conditions” over the past few years have meant that Tesco, for example, sold its mortgage book to Lloyds in 2019 to stop new lending, suggesting that supermarkets in the past have focused on becoming incumbent bank replicas.

Most recently, Walgreens announced plans to launch bank accounts available through a partnership with MetaBank, while using payments technology company InComm Payments’ Banking-as-a-Service platform and with Mastercard issuing debit cards for the accounts as part of its “alternative profit strategy.”

The new Mastercard will serve Walgreens’ shoppers both in-store and online and allow them to earn myWalgreens Cash rewards on all purchases. It is part of the new myWalgreens customer loyalty programme, launched in November 2020, whereby customers can use the app to manage rewards and spending.

As part of the strategy, the card issued should be embedded within the app, while also offering the option to own a physical card as well. This would create a much smoother and manageable customer journey for those who are sceptical around entering a new FS space as a consumer.

Focus on health and wellbeing 

The Walgreens proposition is a good beta venture strategy and can target customers by default around health and wellbeing, which has likely become a greater priority to many during the pandemic.

Unlike the British retailers discussed, Walgreens’ proposition is tailored and digital-focused. These are the two key elements that bigger supermarkets have previously been unable to adapt to in line with market changes.

Entering the FS space at a time when the market is overcrowded is a difficult move. In our view, it is potentially the right time to enter with a business model that now serves the needs of consumers both digitally and on the wellbeing aspect, rather than entering the market with a full suite of products and subsequently lowering the barriers to entry.

Another strong element of the business model is the partnerships with MetaBank and InComm. One of the key errors made by retailers in the UK market is that they tend not to engage in partnerships and essentially aim to create their own systems, which has proved to be difficult given a lack of digital innovation over the years. Walgreens’ partnerships allow it to focus on the customer journey and create a strong proposition.

Globally, the threat of Buy Now, Pay Later (BNPL) to banks – amid its surging popularity – has increased. Banks are now concerned about the impact of BNPL providers, but Walgreens’ entrance into the market could see many more retailers follow suit with much more customised reward programs in the future, while incumbent banks simultaneously cut back on their own loyalty programs due to the pandemic.

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