Damon Kitney, 29 December 2015

The new chief executive of Virgin Australia’s frequent-flyer business has declared that the loyalty program will increase its share of the credit card market over the next year, despite tough reforms proposed by the Reserve Bank, and has flagged “something very big’’ in its partnership with oil giant BP.

Karl Schuster, an Irishman who was the former Asia-Pacific president of marketing and loyalty analytics company Aimia before starting at Virgin’s Velocity business in October, said Velocity was poised to roll out a number of “disruptive’’ technologies that would boost market share.

“You will see creative, innovative and frictionless ways of doing things that the market has not seen before,’’ he toldThe Australian in his first media interview since taking the role.

“A lot of the big program operators in Australia have turned consumers into a transaction.

“They have forgotten that at the end of the day, it is about the consumer and their behaviour and their emotions, and the fact they are in it to get a reward.’’

Last year, Velocity launched a partnership with BP that allows members of the loyalty scheme to earn points when buying petrol and other goods at 1400 service stations around the country.

Since it went live in April, the alliance is said to be making a ­material impact on BP’s market share in its stations. Velocity has been reportedly growing at between 40,000 and 50,000 members a week as a result of the alliance.

Mr Schuster said there were plans to take it to a new level next year. “Watch this space — something very big is going to happen with BP next year, that’s all I can say,’’ he said.

His comments come in the wake of a big shake-up of the credit card rewards market in Australia, which could see credit card companies cut the number of points earned by cardholders.

Under the changes, the RBA and Australian Competition & Consumer Commission will force companies to recover only their costs when they impose surcharges for the use of credit cards.

The so-called interchange fees will only be able to be imposed as a percentage of a transaction’s value, as opposed to the flat fees now levied by Virgin and Qantas.

Credit cards generally deliver 50 per cent of the revenue to the loyalty businesses of airlines.

Before the latest RBA reforms, more than 35 per cent of all credit card transactions in Australia had been made on cards that earn Qantas frequent-flyer points.

The Qantas loyalty scheme is the biggest in the nation, with more than 10.7 million members.

“The size of that market, as a ­result of interchange regulation, is going to contract slightly, but the direct-earn model is going to break. The whole market is going to open up, and we think we are going to get a bigger share of a slightly contracted market,’’ Mr Schuster said.

While Qantas has cards with each of the big four banks, its chief executive, Alan Joyce, has said he is confident credit card companies will not cut the number of points that can be earned by ­cardholders because the points are paid out of the entire profitability of the card rather than from the interchange fees.

Velocity has a co-branded companion card with National Australia Bank.

Woolworths also recently reworked its Everyday Rewards program with Qantas, allowing shoppers the option to swap their Woolworths Dollars with Qantas frequent-flyer points.

It remains to be seen if Virgin strikes an alliance with Woolworths rival Coles.

Mr Schuster declined to comment on the prospect. But he did reaffirm Virgin’s target of growing its Velocity membership base to seven million members by 2017. It now stands at more than 5.5 million, after adding a million members in the past 12 months.

Virgin sold a 35 per cent stake in its Velocity program to private equity group Affinity Equity Partners for $336 million in 2014.

The business now has a separate board and has never separately reported its results.

Virgin chief executive John Borghetti last month said he was confident that Velocity would meet its earnings before interest and tax growth target of more than 15 per cent over 2016 and 2017.

“Affinity brings … a laser-like focus to the strategy,’’ Mr Schuster said, noting he spoke to the Affinity representatives on the Velocity board at least twice a week. “Having a private quiet investor also means there is a constant focus on the medium to longer-term horizon … The firepower is there. The focus is there. The accountability is there.’’

Earlier this year, Virgin purchased data analytics company Torque Solutions, which has been integrated into the Velocity business but retains its own identity.

“They are helping us implement some new tools that are very much next generation that will allow us to manage communications across all channels and media types in a fully integrated, always-on, real-time manner,’’ Mr Schuster said.

Qantas has also purchased analytics and actuarial consulting firm Taylor Fry and created a new digital marketing business called Red Planet to bolster its loyalty program’s revenue from adjacent businesses.

Red Planet provides corporate clients with intelligence from the Qantas loyalty membership base to help them target marketing and advertising spending, while maintaining members’ privacy.

But while Torque will offer data analytics, campaign automation and consultancy services to third parties, Mr Schuster emphasised it would not be “exploiting data’’.

“I don’t like the word exploiting data — that is not in our language,” he said. “We will be very careful to take a very conservative position on how we use data. Because you fail once in that area and it can crater your business.

“I won’t be scraping data from the Velocity base and merging it, and then selling it on to media owners to make a new revenue stream because I can’t grow my program any more. We want to focus on really building out the member relationship.’’

Extracted in full from The Australian.

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