SparkBase's Doug Hardman: Small Merchants Should Embrace the “Digital Wallet”

There are so many clichéd phrases that can be bandied about when discussing the gap between major chains and mom-and-pop chains. David's clash against Goliath is perhaps the most popular one, since it gets across the seemingly insurmountable and impossible competition that exists between the two factions, which, to carry this tortured metaphor a little further, would make SparkBase and its CEO Douglas Hardman the mighty slingshot.

Late last month, the Ohio-based company rolled out a new loyalty program aimed at small merchants called Paycloud. It does away with those annoying plastic keychains or cards that stores hand out to customers to incentivize them to return and instead puts it on something most everyone already has in their pocket: a smartphone. The program was pilot tested in Andersonville and Lincoln Park and has just gone national. I gave Hardman a call to talk about what's in it for small merchants to sign up, why they tested it in Chicago, and much more.

First off, can you get our readers up to speed on the program you've launched here in Chicago?

Douglas Hardman: SparkBase has been processing loyalty rewards electronic couponing gift-card transactions -- it's really called "closed loop" for people who are up to speed on what that process is. We've been processing that since 2004. Basically we piggyback onto the sales channel that sell these in MasterCard processing. So, the people that a small merchant like a store would buy credit-card processing from is the same people we sell our services to. What they do is they sell a package that would be a loyalty program to a small merchant. We're talking, about, tier three, tier four, or what your readers would call hyperlocal stores. The local coffee shop that isn't Starbucks, basically.

That's our target audience. Right now we probably have the largest segment of small merchants in the whole industry. What we noticed in the last year or so was that mobile phones were starting to be used for things outside of email and phone calls and whatnot. The concept of a digital wallet came to be over the last year that people are familiar with that. The example I use is saying that I have a three-year-old and a five-year-old who will probably never have a plastic credit card. It will be on a device or a chip or probably something like that.

When we looked at how we can affect this and make that situation important to a small merchant, we looked at our existing portfolio. We have thousands of merchants across the US. How can we help them use a mobile phone instead of having to use plastic gift cards or plastic loyalty cards. What we came up with was ended up being a Paycloud. A Paycloud is a mobile wallet that's used for your smartphone. It allows for a consumer to do instant enrollment in a particular loyalty program just by tapping "yes." The consumer doesn't have to fill out a form and the merchant doesn't have to give them a plastic card that they have to remember to bring with them. It's all done in the cloud and securely on their smartphone.

The first hyperlocal you're launching this in is Chicago?

Douglas Hardman: We did a pilot in the Lincoln Park-Andersonville area where we had about 25 merchants. What ended up happening was we [tested it] for a few weeks in July just to see if we could get merchants to interact with the program correctly, if we could get consumers to download the app and want to use it. We were expecting a few hundred downloads and maybe a few hundred transactions with this new system we created. We ended up getting about a thousand downloads and getting two or three thousand transactions. We moved about $30,000 worth of money through this system. So it was better than we expected but we learned a lot about it.

So we shut it down, worked on the app, made it interact with what the consumers' expectations. Now we're launching it in the Chicago area and also nationwide. We have a lot of our resellers that want to offer it to their local communities. Paycloud launches nationally on Oct. 27. We expect by the end of the year we could have 500 to 1,000 merchants across the US.

Why did you choose to do the pilot not only in Chicago, but specifically in those two neighborhoods?

Douglas Hardman: Well, a couple different reasons. There's a lot of foot traffic, there's a lot of merchants that have pay-at-the-merchants, and there's not a lot of chains in that area. At SparkBase we're deeply committed -- as I say this I'm cringing to myself, so you're welcome to cringe as well -- the things that we care about are small merchants. If you look at it, there's about 6 million merchants in the US, or stores, if you will. Two-hundred and fifty of them are chains like Best Buy and Target or Walmart. The rest of that is the small- to medium-sized mom-and-pop stores, and these guys need programs too. I look at them as the backbone of our economy and the way that people interact -- it's a very neat thing to be able to help a small merchant increase their sales. Even if it's by 20 or 30 percent? That's huge to them. We've always been committed to the small- and medium-sized merchants and giving them programs that rival the national chains through programs like this.

What we did in Andersonville and Lincoln Park was we had a bunch of small merchants, coffee shops that aren't chains... there's a yarn store, there's a chocolatier, there are little childrens' clothing stores. These are the types of things that area really cool for us to be able to help out because it makes a big difference. There's a phenomenal impact we can make by helping small to medium merchants.

We already have a phenomenal distribution system. If you look at the resellers we have in the US, they have a combined portfolio of about 3 million merchants that they do credit-card processing for. So, I've got access to about 3 million small merchants that can use this program through the people that helped to build it. So, I don't have to re-explain the relationship. It's a very easy sale for our resellers to talk to our merchants and show them a very neat way to do a mobile wallet that helps increase their business.

Well, I didn't cringe at all hearing any of that.

Douglas Hardman: [Laughs.] Good!

It's clear what customers are getting out of this, but what do merchants get out of a program like this?

Douglas Hardman: Typically when a merchant builds a loyalty program, if they want a card-based program, they get the software installed on their credit-card terminal. That's easy. That doesn't change with what we've got. What does change is what happens from there. A normal card-based program they go and design loyalty cards, and then they have to get the loyalty cards produced. The loyalty cards themselves are about 50 cents to 70 cents apiece. So, if they want to buy 1,000 cards, they're looking at $600 or $700. As consumers come in and sign up for their loyalty program, the consumer has to fill out a form, hand it to the merchant, the merchant types it into a computer somewhere, hands them a plastic card, and then the consumer has to remember to bring that card with them the next time. It's a sloppy process.

What we do is cut all of that out. Not to mention the six weeks for the card production. Sometimes it's eight weeks before they can hand it out to the consumers. I can do an instant enrollment just off of the phone. They find the place they like, they find Swirlz Cupcakes, they tap "yes I want to enroll at in their program," and they're instantly enrolled. So, when I walk into the store, I boot up the app, it knows that I'm standing in Swirlz, and it loads up the Swirlz card. So when I get to the front of the line, I hit a button and we use a secure transaction method to get it from the phone to the terminal, and the transaction happens. The merchant has my name, my phone number, my address, my mobile number, my email address -- they get all that without having to type anything in. The consumer doesn't have to carry plastic around or remember the plastic when they do carry it around; the merchant has now data on the people who are shopping there. They're going to see how often they shop there. They're going to see how much money they've spent. They can see what their average ticket is. They can see if this people wants to be contacted by email. They can see if they've listed their birthday, so the week before they can send out an automatic gift to that particular customer: "Hey, here's $5 at our store for the 96 hours around your birthday." We can give the merchants all those programs that they desperately want. Consumers want to be incentivized to go there, and we can do all that through a program like this.

What's the cost people can expect to sign up? Is it a tiered system, or just one fee?

Douglas Hardman: We don't contract directly with the merchants. That's the other thing. [Laughs.] We're supporting two different economies here. The merchants get the benefit from that. They have to call their credit-card processor to be able to accept Paycloud. They would call them or whoever and say, "I want to have Paycloud in my store." There's a very good chance that it's available. We work with most of the major pay networks. It should cost about $50, $60 to get set up. They'll probably pay somewhere south of $50 a month for the service. Again, I don't set the pricing, but I would imagine it's about $50. It's definitely less than $70 and $80. But that includes unlimited enrollments, so, as many people as they can get to sign up for their program, there's no extra cost to that.

Have you mapped out anything as far as milestones to hit after launch or goals for 2012?

Douglas Hardman: We have our internal milestones and we keep those kind of close to our chest. We learned last time when we said we expected a couple hundred downloads and we got a thousand we went, "Oh, that was neat!" But I don't ever expect success like that time after time. We know we're coming into this in a hot season, but what's nice about a program like this is we can get a merchant up and running in under 48 hours. You're not waiting. So that's the kinda stuff that we like to be able to effect. I would say we have some really neat things we've got planned for the next year.

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