Early in the fourth quarter we used the opportunity created by investor concerns over pandemic related pressure on footfall trends and supply chains to add to our position in Cardlytics (CDLX). Cardlytics is a financial technology advertising business with a closed loop purchase intelligence platform that solves the fundamental problems that all marketers face; lack of insight into customer purchasing behavior, lack of insight into non-customer purchasing behavior, and an inability to measure the performance of marketing campaigns. After spending the last 13 years partnering with more than 2000 financial institutions and stitching together a closed loop platform, Cardlytics has effectively consolidated the market for purchasing intelligence. Within the Cardlytics ecosystem, network effects reinforce symbiotic benefits to all three parties: financial institutions, bank customers, and advertisers. Financial institutions benefit from advertiser funding turning their rewards programs from cost centers into profit centers. The funded rewards center lowers customer acquisition costs and creates higher lifetime value customers who are more digitally engaged, attrite less, and spend more on their credit and debit cards. Bank customers benefit from rewards and incentives to save money on their purchases. Advertisers receive attractive returns on marketing campaigns driven by their ability to accurately forecast customer purchasing behavior and by their ability to track the real time change in customer purchasing. With the 13-year long phase of building and integrating the core technology platform now complete, the hard work has been done. The next stage involves layering advertising spend on top of the scalable infrastructure that supports Cardlytics’s 161.6 million monthly active users. We see six steps in the path to shareholder value creation.
First, Cardlytics is evolving to become an always on self-service offering. Currently, Cardlytics’s go to market strategy utilizes a high touch sales process to sell advertisers on 45-day marketing campaigns. The customized white glove sales strategy was by design. In creating a new market of purchasing intelligence driven rewards, Cardlytics had to first establish standardized guidelines for its 2000 financial institution partners to follow. The recent integration of JP Morgan Chase and Wells Fargo as partners provided the requisite scale for Cardlytics to fully standardize industry guidelines and move away from individual approval of marketing campaigns. In automating the self-service offering, Cardlytics clears the way to scale the platform to unlock new demand opportunities. New demand opportunities will accrue from advertising agencies after the first quarter 2021 launch, and small and medium sized businesses in 2022. Advertising agencies are currently beta testing the self-service offering, and Cardlytics is building customized analytics functionalities that cater to agency specific requirements. With agencies accounting for half of the $129 billion US digital advertising spend market, enabling agency use represents a meaningful revenue growth opportunity. Small and medium sized businesses will contribute to revenue growth in 2022. Cardlytics has a de facto sales team of 2000 financial institution partners with teams of relationship bankers that call on small and medium sized businesses daily for their banking needs. An always on, self-service, fully automated platform where small and medium sized businesses can promote their businesses is an easy, low friction cross sale for relationship bankers to make and benefits all parties in the ecosystem.
Second, Cardlytics is expanding into new industry verticals. The evolution of Cardlytics’s advertiser base follows the evolution of the data feeds that until recently consisted mainly of debit card purchasing intelligence. Cardlytics capitalized on the opportunity provided by the Durbin Amendment of the Dodd Frank Act in 2010 to sign partnerships with banks that were left without payment network debit interchange fees to fund their rewards programs. By offering to bring customer rewards based on how bank customers spend with advertisers funding the rewards programs that payment networks no longer were, Cardlytics was able to consolidate the market for debit card purchasing intelligence. With the recent integration of JP Morgan Chase, Cardlytics added the largest credit card portfolio in the United States onto its platform. The expansion of credit card reach opens Cardlytics to new verticals where credit card usage accounts for much of the purchasing mix including travel, entertainment, direct to consumer, e-commerce, and luxury goods. Coinciding with the industry verticalization targeting enhanced credit card purchasing intelligence data, a specialization of the sales force is replacing the previous method of generalists calling on advertisers, creating a more effective on ramp to layer industry specific advertising spending on top of the platforms’ scalable infrastructure.
Third, the always on self-service platform and strengthened industry verticals combine with offer presentation optimization to increase user engagement of the 161.6 million monthly active users. The current user interface consists of simple corporate logos and short form text yet generates a return on advertising spend more than ten times greater than other digital advertising options. Cardlytics has a long tail of opportunities in the way of animated graphics, short format videos, location and time-based offer alerts, and improvements in the presentation hierarchy to optimize offer presentation and improve the customer experience. As the closed loop data stream of pre campaign and post campaign purchasing intelligence grows, the precision with which Cardlytics’ machine learning algorithms can target advertising to improve user engagement and increase an already best in class return on advertising spend only grows.
Fourth, Cardlytics has a meaningful opportunity to tap latent pricing power to grow average revenue per user. Currently, all advertisers are charged in the same way, without reference to their willingness to pay. This means that businesses with customer acquisition strategies driven by customer lifetime value (Airbnb) are charged the same way as businesses seeking to drive traffic in a low margin, frequent use manner (McDonalds). As Cardlytics advertiser base grows and incentive presentation quality improves, the scale benefits of more data from the increased velocity of offers and redemptions enable more precise optimization of customer targeting, and growing advertiser pricing based on the value provided to the advertiser. In time, Cardlytics will scale an average revenue per user temporarily depressed by recent bank onboarding towards upwards of a low double-digit mature run rate.
Fifth, as industry vertical and advertiser penetration grow, user engagement and average revenue per user growth are layered on top of a low fixed cost business with high incremental margins and significant operating leverage. Current margins do not reflect the earnings power of the business because they reflect the upfront costs inherent in the multiyear bank onboarding and integration process. Investments in sales and marketing, research and development, and implementation and support are largely onetime costs as new advertising volume requires minimal incremental costs. As the number of advertisers increase, engagement and ARPU growth drive meaningful margin expansion on a business infrastructure built for over 200 million monthly active users.
Sixth, Cardlytics offers optionality inherent in ancillary product initiatives. This opportunity exists in three main avenues. One, Cardlytics’ purchasing intelligence data lends itself to a subscription offering for bank customers. Amid the Covid-19 pandemic when short cycle advertisers decreased their spending, Cardlytics used data analysis to help advertisers understand when and where spend was returning. While this data analysis is currently offered for free to provide a funnel for acquiring customer spending, a subscription offering to cover the nominal fixed costs and to help support campaign purchasing frequency, while the usage-based model drives marketing campaigns is a strategy that benefits all members of the ecosystem. Two, Cardlytics is likely to acquire and establish partnerships with businesses that will combine Cardlytics’s scaled transaction level data with SKU level data. With these new media and data ingestion capabilities, Cardlytics provides a stronger value proposition for when they call on the consumer brands that represent half of the advertising market. Three, Cardlytics is making inroads into a meaningful opportunity to provide the backbone powering a shift to Open Banking. Under Open Banking, consumers own their transaction data, and with a simple click enabled permission grant, APIs can access transaction data. As Open Banking spreads across the UK, Australia and Japan, Cardlytics has a natural on ramp to go to institutions with large customer bases (grocery, retailers, telecommunications firms, airlines) and onboard the Cardlytics platform. Cardlytics then can do what it does best: process transaction data, clean it, make it usable, and help partners monetize their data to drive sales. These three avenues of ancillary product initiatives all provide longer tail shareholder value creation opportunities.
In Cardlytics, we have a first mover that has consolidated the market for financial institution customer purchasing intelligence data to stitch together a fragmented banking system into a single portal for advertisers to reach customers at scale. Ecosystem partners including financial institutions, bank customers, and advertisers all individually drive the flywheel of new advertisers, increased incentives for bank customers, increased engagement, more financial institutions and increased purchasing intelligence scale to create a more valuable platform for all. In Cardlytics, we see a strengthening moat around a scalable business model with high incremental margins in the early innings of compounding shareholder value.