“Closed loop measurement is considered the gold standard of measurement in advertising and media. It is very hard to do and few players can do it, but it is the single best way to measure the efficacy of advertising and promotion." - Former President at Cardlytics
Cardlytics (CDLX) is a platform that connects advertisers, financial institutions, and consumers through cash-back rewards inside a banking app. This is possible because the company has direct integrations with banks to get real-time access to customer purchase activity. The potential to leverage purchasing data for personalised offers at specific times and locations piqued our interest in the company.
Cardlytics allows marketers to reach specific customers and precisely measure the return on ad spend (ROAS). We interviewed a Former President of Cardlytics, who ran the advertiser side of the business, to better understand the opportunity for CDLX.
In the long run, we believe the majority of marketing will be personalised and there is no better way to target customers than by knowing their spending habits. Cardlytics offers marketers access to the anonymised purchase data of ~170m banking customers. Advertisers can target customers with cash-back offers within the banking app in a safe, fraud and bot-free advertising channel. Because CDLX has a real-time purchase data feed from their financial institution (FI) partners, CDLX can measure the return on the cash-back offer with actual sales data of the customer. This enables Cardlytics to use the ‘closed-loop measurement’ method:
"Think about the gold standard of efficacy in the pharmaceutical world. When a new drug is being tested, they use a double-blind test giving the drug to a group of people. Another group of people get a placebo, and nobody knows who is getting what, other than the people running the test. They compare the results between the two and, in essence, closed loop measurement does something similar to that. Cardlytics would typically run a campaign and 10 million people would see the offer, but several hundred thousand people – that were just like the people who saw the offer – were not served the offer. Over the course of the campaign, you can look at how the purchase behavior differs between these two groups."
Closed loop measurement is certainly the most precise advertising model but if it’s the ‘gold standard’, why did Cardlytics only generate $300m in billings last year? This is a very small number relative to ~$450bn digital marketing spend estimated for 2021.
There are a few potential reasons why advertisers are not adopting the platform as quickly as expected. Interestingly, the major barrier to adoption is the one of the perceived advantages of CDLX: the attribution model.
"One of the issues Cardlytics has, even with their closed loop measurement, is that if they offer a three to one return on ad spend, how does that compare to the other activities? They do not have closed loop measurement for all the other activities, so there is no simple way to do a direct apples-to-apples comparison of all the activities."
Advertisers cannot compare the ROAS on CDLX with other attribution models they use across Facebook and Google. The different measurement models make it hard for agencies and marketers to understand the relative ROAS. This is a barrier to adoption. Advertisers will not move dollars from FB or Google to CDLX unless there is an apples-to-apples comparison that proves CDLX superior return.
So how can CDLX help advertisers compare returns across platforms? Partnering with Nielsen or ComScore is an obvious solution to verify ROAS with an independent third-party. But the risk-averse banks may not be willing to share data that makes the comparison possible:
"Comparison will always be a challenge until Cardlytics allow individual personal level data outside their platform. Banks are uncomfortable with them sharing that data, even when anonymized and no PII is involved. Without doing that, it will stay where it is today."
The willingness of banks to share customer data could change with Open Banking as more data is available outside of their firewall. However, if CDLX ROAS is truly superior to alternatives, we believe logic will prevail and both management and advertisers will find a way to provide a true comparison to other attribution models.
"Traditionally, Cardlytics had three different groups who bought the service. One would be the team who run CRM loyalty programs. A second group would be performance marketing, and a third group would be traditional advertising, including digital and media. The largest group Cardlytics worked with when I was there, was the CRM loyalty group. Having been a CMO and served many other CMOs, those groups do not have gigantic budgets. The challenge Cardlytics always faced was to get clients to use the platform across all the different targeting opportunities, at scale and all year long. The amount of money to be spent was way in excess of what these groups typically had."
In short, CDLX has only focused on the CRM / loyalty budget directly with marketers. This doesn’t include the paid and brand advertising budgets at advertisers or the ad dollars managed by agencies. The areas CDLX has not focused on are the majority of the ad market and the company is working on many initiatives to address this opportunity.
For example, last quarter, CDLX launched a self-serve platform which is the first step for agencies to run their budgets for all clients in one app. The new platform has an upgraded UI with better imagery and more room for engaging copy to encourage customers to activate the offer. US Bank, a new CDLX customer, has adopted the upgraded platform and CDLX reported ~50% increase in engagement relative to previous campaigns. Looking further out, the potential evolution of CDLX ad inventory highlights the opportunity for adopting agencies and SMB advertisers:
Cardlytics will evolve from having small rectangular tiles that say 10% cashback at Starbucks or some other merchant, towards display ads or maybe even video ads. They will still have embedded offers but those will start to look more like brand advertising. As that happens, it becomes important to serve agencies who are working on behalf of marketers, who will want to build and integrate campaigns on Cardlytics in combination with other things they are doing for their client.
All of these new initiatives are interesting but the major question to answer comes back to the original hurdle of providing an independent way for advertisers to attribute the spend on CDLX relative to other platforms. From our perspective, this seems to be the most important question to the CDLX thesis. Advertiser inertia and risk-averse banks owning the customer makes it a complex problem. However, with CDLX trading at an enterprise of $3bn, it's a problem that sets up an interesting opportunity. One could argue CDLX is a natural monopoly at scale: banks don’t have enough users to start their own ad network, the direct integration with CDLX makes another competing ad network less attractive to banks, and CDLX has aggregated the most advertisers on the demand side. Also, CDLX pays 50% of net billings (billings excluding consumer incentives) to the banks. This FI share is effectively the cost of using the banking app real estate. Although this reduces the underlying margin for CDLX, it also acts as a barrier to entry to competitors. CDLX’s scale means a smaller ad network wouldn’t be able to pay a similar FI share dollar amount to attract the banks.
Although the FI share is only a fraction of the increase in retention and LTV banks receive from users activating offers, it highlights the bargaining power of banks:
"The banks are Cardlytics' biggest advantage because of the scale they have with all the banks and it is a two-sided network. The more banks, the more audience you have and the more attractive you are to marketers. But they are also the biggest disadvantage to Cardlytics and that is one of the reasons you see them acquire other cashback offers programs. That provides them more flexibility about where they could go longer term if they do not make progress with the bank partners they need to."