Electronic Coupon Clearing - White Paper By ScanAps

NEW DIRECTION IS NEEDED FOR

ELECTRONIC COUPON CLEARING

A White Paper from ScanAps

www.scanaps.com

Profitable, Efficient and Convenient Way to

Redeem, Clear and Deliver Coupons

April 2007

ABSTRACT:

The good news: the coupon business is booming with several billions or even trillions of dollars worth of coupons dropped by ALL businesses annually in the U.S. alone. It is estimated that consumer packaged goods (CPG) manufacturers alone drop $4,600 worth of coupons per household annually. There is no mechanism to track all coupons dropped by all businesses in the country.

This white paper primarily addresses the CPG manufacturers’ coupons with a UPC (Uniform Product Barcode). These coupons account for about a $7.5 billion industry today, which includes coupon distribution, redemption and clearing.

The bad news: coupon h andling and clearing techniques are outdated and not in sync with today’s fast-paced business environment.

Unlike the traditional bar codes on coupons, “extended coupon codes” will be able to provide clearing houses with more information such as population segmentation and the locations of dropped coupons. Present technology is unable to read them and the POS (Point Of Sale) systems are limited to reading the family codes, manufacturer’s codes, value codes and expiration codes. And, these codes still cannot reach the customer level.

A better system is one that can truly match every coupon to the shopper who redeemed it and the product purchased with the coupon. This is accomplished prior to redemption by validating the customer’s name (or ID number), the product purchased, the cash receipt number, the date, the time, and the store location so there can be no doubt as to the validity of a coupon redemption. In many cases today, even the chain where the coupon was redeemed is unknown, especially if the coupon is coming from a major wholesaler.

This lack of information and lack of “proof of purchase” has led to tremendous amounts of coupon fraud and mis-redemption costing manufacturers and retailers an estimated $300 to $500 million per year.

Coupons are the only cash instruments that are still counted, processed, settled and cleared manually. From the time a consumer submits a coupon to a cashier in the store, an average of eight pairs of hands physically touch every coupon before it is finally shredded and the retailer is reimbursed.

What is needed in the industry today is an Electronic Coupon Clearing (ECC) solution that enables retailers to scan and validate coupons and lead to accurate and quicker redemption for manufacturers. Many attempts at such a process over the years have not resulted in a standard practice for the industry.

There is an urgent need for a new direction for Electronic Coupon Clearing.

Today’s Coupon Process

Today’s coupon process is tedious for retailers and manufacturers, and even for consumers who have to find the offers, clip them and save them. In the store, checkout lines are often long with some people sorting through coupons as they approach the cashier. Forgetting coupons at home is a common occurrence.

Cashiers have to accept the coupons, scan them and place them into register drawers. At the end of the day, the amount of coupons accepted and redeemed must be tallied. They are then bundled up and shipped to the corporate office where the coupons from perhaps thousands of stores are counted. They are then shipped to the retailer’s clearing house, typically located in a facility in Mexico . The cost goes up when shipping and insurance are taken into account. Coupons are counted, scanned again and the coupon information is captured.

From the retailers clearing agent, the coupons are shipped to an agent who handles that particular manufacturer. The manufacturer’s agent once again scans and accounts for the coupons. Once they are verified, the coupons are accepted and shredded.

At this point, reports are submitted to the manufacturer and the retailer’s agent is reimbursed. Large retail chains usually get their money within one week. If it is a smaller chain, reimbursement takes much longer. Smaller chains might have to use a finance company and the entire agent’s handling fee is passed on to the manufacturer.

The industry has attempted to remedy the situation of “double counting” by using several techniques. “One-Count Processing” means that one of the two clearing houses that count coupons is eliminated. Totals needed for the retailers and manufacturers are gathered uniformly in one operation.

The current systems that account for coupons are laborious and expensive. When coupons are shipped out of the country, they must be insured and shipped securely, which is time-consuming and costly. Additionally, the cost of clearing the coupons for some small manufacturers often exceeds the face value of the coupons redeemed.

There are even more issues for manufacturers who issue coupons. They are paying for those coupons without knowing who redeemed them, what product was purchased with the coupon, and when and where it was redeemed.

There is currently no proper system in place to catch or prevent several recurring incidents:

A dishonest employee puts a few coupons into a cash drawer and removes cash
An unscrupulous retailer adds a few coupons to the bundle at the end of the day and/or manipulates invoice deductions.
A disgruntled manufacturer who sees high redemption rates from a retailer refuses to pay the full amount and manipulates charge backs and adjustments.
A corrupt clearing house manipulates coupon submissions, deductions, charge-backs or adjustments to the retailer and/or manufacturer
A fraudulent third-party group takes advantage of the deficiencies in our coupon handling system and collects cash from the clearing house.

Electronic Coupon Clearing

The process of Electronic Coupon Clearing (ECC) involves retailers scanning and validating coupons in the store. They submit electronic totals to the manufacturer and typically receive payment within a week. Coupons are then stored, and most are never counted and sorted in coupon processing plants.

In the past, manufacturers were unwilling to accept coupon counts directly from retailers. As a result, third-party vendors emerged to collect and control the quality of electronic coupons clearing data. Unfortunately, several efforts by these third-party vendors have not been successful in establishing a standard process.

The challenge for the industry is to find an ECC process that can take coupon handling to the next level. Such a cutting-edge system would provide a complete “proof of purchase” and eliminate the need for physical paper coupon review and counting. It would significantly minimize the cost of coupon handling and clearing for both retailers and manufacturers of all sizes.

The origin of coupon scanning goes back about a quarter of a century.While coupons have been used as a promotion tool for nearly 120 years, coupon scanning began in 1982. By 1988, the major food trade associations created a committee made up of manufacturers and retailers with the goal of spurring the use of coupon scanning.

Most current POS systems can scan coupons and some can partially validate them prior to redemption. “Validation” can be defined as the system that matches the following:

The manufacturer ID on the coupon to the manufacturer code on the product scanned.
The family code on the coupon to the specific item purchased. Currently, the product is matched through a three-digit “family code” in the coupon bar code to a family code for each item in the customer’s order. The product bar code does not have a family code. So, the family code in the coupon bar code is matched to the product through a family code database that lists all the items under each family code for each manufacturer.
The customer name or ID number, if available.
Other transaction details such as cash receipt number, cashier who handled the transaction, date, time, store number and POS number. If the coupon is at least partially validated – that is, at least match the coupon to a family code and/or to the manufacturer – the system subtracts the value found in the code on the coupon.

Today, only about 40% of supermarkets validate coupons to family codes at checkout. This low number is due to the fact that family code maintenance is laborious and prone to errors. This may cause valid coupons to be rejected and invalid coupons to be accepted by the system.

Some retailers have started submitting coupon redemption totals taken directly from the POS system. Some manufacturers and clearing houses have started to accept an “electronic file” of coupon redemption data, only from certain large retail chains that validate the coupons. Validation, in most of these cases, just means that the system has matched the coupon to the product purchased using a family code database. “Quick Pay” is halfway to the goal of “electronic clearing” using electronic data file taken directly from the POS system.

These retailers submit electronic totals, and manufacturers pay usually within a week. Discrepancies between the actual count and the electronic totals are reconciled later on. The coupons are then stored. Most are never counted and sorted in coupon processingplants. Test counts are made every so often to ensure accuracy.

Most manufacturers have been reluctant to accept coupon counts directly from their retailpartners. As indicated earlier, third-party vendors are thus needed to collect and control the quality of electronic coupon redemption data. But the vendors have yet to truly succeed. This is where the momentum of ECC has come to a halt.

For the most part, retailers have endorsed submission of electronic redemption data files taken from POS to facilitate Electronic Coupon Clearing. But many manufacturers are less enthusiastic, claiming to be uncomfortable with the idea of electronic totals. Additionally, downsizing has left one person doing two or three jobs, making another method of coupon counting too much to handle.

Manufacturers are typically unwilling to accept “after-the-fact” electronic coupon redemption files taken directly from the POS system. Most systems only perform partial validation and not complete validation. Even if they match to a family code database, they have their own inherent weaknesses. Most POS systems do not match coupons to the specific items purchased or to the customer who redeemed the coupon. They also do not provide complete “proof of purchase.”

Deficiencies in the current UPC barcodes and outdated POS systems also make manufacturers less comfortable in accepting electronic redemption files from the POS. If the data is taken directly from the POS system and there is no independent third-party verification, this data is vulnerable to dishonest manipulation by retail personnel.

Vendors claim that the poor quality of bar codes on coupons is another major roadblock for electronic clearing. Retailers have faced fines of up to $10,000 due to manufacturer error in regard to coupon coding.

Benefits of ECC

Electronic Coupon Clearing provides the fastest exchange of payment to retailers and redemption information to manufacturers. Most of the charge backs, adjustments and invoice deductions that occur in the traditional and one-count processes are eliminated. Mark eting information is expanded. ECC will help manufacturers measure the true effectiveness of their marketing campaign and customize their future programs. Fraud and mis-redemptions are reduced by product validation and matching coupon to the customer.

Under ECC, there is no need to send coupons to Mexico, thereby eliminating shipping, insurance, customs and related costs. The new system will provide accurate and reliable coupon redemption data in virtually real time to all interested parties. It will also eliminate a lot of middlemen handling charge backs, adjustments, and deductions for retailers and manufacturers. Of course, the cost of coupon clearing will be significantly reduced for both retailers and manufacturers. Additionally, the reduction in coupon fraud and mis-redemptions will save an estimated $300 to $500 million per year for retailers and manufacturers.

But a true Electronic Coupon Clearing solution must include a complete front-linevalidation of the coupon before it is accepted or sent to the point of sale. What is needed is an independent third-party solutions provider that validates the coupons prior to redemption, captures and reports redemption details, and guarantees every coupon redeemed through the platform. Once a coupon is validated and redeemed, the provider accepts complete liability to the manufacturers and to the retailers.

In the past, the systems that were proposed and tested did not have the same capability.

Most of those systems just took the coupon redemption data directly from the retailers’ T-Logs (Transaction Logs). That was one of the reasons why they were not completely accepted by all parties. They may have addressed some of the concerns faced by trading partners, but did not truly address all the concerns faced by everyone involved.

Obstacles to ECC

Retailers are faced with the challenge of purchasing costly new hardware and software. Plus, they demand a compelling value proposition of profit and ROI (Return On Investment) before they are willing to begin. Since electronic clearing primarily benefits manufacturers, retailers want the manufacturers to pay all or a portion of the cost.

Front line validation, data retrieval and archiving could be a stumbling block for this technology, as well. If the coupon is not scanned properly or matched to the customer and/or product purchased and then properly accounted for at the POS, then the store cannot be compensated and the brand cannot be billed. To prevent this, retailers must quickly assess and compensate for any technical issues at the front end of the store.

Time and history are also obstacles to ECC. There have been many good systems tested over the years, but before they are rolled out, the company goes out of business. Everyone is aware of this trend and waits to see if the company is going to last. Another factor is that clearing houses do not seem to want the change as much as everybody else.

Another roadblock is that retailers would have to eliminate their deduction programs . For some, this means eliminating a source of revenue. Manufacturer agents would also lose a source of revenue through the elimination of traditional and one-count programs.

ECC can function efficiently with a proper family code database. But for ECC to be most effective, the system at retail needs to know what coupons are out there and what specific products apply for those coupons. Call it an “Offer Registry.” Unfortunately, most manufacturers have problems maintaining a list of the family codes for their products, let alone maintaining a database of offers. It is possible that requiring this “Offer Registry” to be maintained at retail may be time-consuming as well as it may cause many unauthorized coupons to go to the clearing house. This will result in extra costs for retailers and manufacturers.

Obviously, manufacturers and retailers cannot send and receive such an “Offer Registry” to/from multiple sources. An independent third-party is needed to facilitate the hosting of this “Offer Registry.” The solution provider introducing ECC would be the ideal choice.

If such an “Offer Registry” is only available from some manufacturers but not all, then a reliable family code database can be used to validate products from those manufacturers who do not provide one. They should, however, be prepared to accept some of the inherent errors in the family code database system.

Even if ECC is implemented, what happens to the physical paper coupons scanned and accepted by the retailer? Do they shred them? Do they send them to their corporate office, or to a wholesaler, or to a clearing house? If they shred or destroy the coupons at the retail store or corporate office, the manufacturers have no audit trail.

After the paper coupons are validated and accepted by POS, a simple solution is to have them bundled as usual (along with the ECC report) and shipped to the provider that implements ECC. This provider should save those paper coupons by store/chain and by day/week for a specified time period to allow manufacturers to audit the paper coupons and electronic reports. Such a system of audit trail will also meet the requirements of Sarbanes-Oxley.

Money is at stake. Say a coupon is accepted and the discount given to the shopper. Later it is found that the coupon has a problem such as being out of date, not matching with the right product, or triggering a mis-redemption. What happens? That cost must be absorbed by someone. But if a coupon is validated before it is accepted, then it can be rejected. That is a true validation. This “Front Line Validation” is one of the primary functions of ECC.

ECC requires ongoing database management such as an Offer Registry or a family code database, coupon redemptions and software maintenance, including front line validation logic. POS systems do not have all the necessary information built-in to perform complete front line validation or provide the necessary reports to facilitate ECC. Also, POS systems are not designed to capture “complete proof of purchase” to facilitate the ECC process.

What is needed to introduce ECC? A third-party software solution that can perform front line validation of coupons prior to redemption and report coupon redemption details to all interested parties. This ECC software should interface seamlessly with all POS systems, as well as possess ease of use and installation. And it should not cost a bundle.

A retailer basically needs one server per store that houses the ECC software and the databases. So the retailer may have to buy a new server (or use an existing server in their store) and license the ECC software. Is it worth it for a retailer to incur this additional cost? If their stores have a reasonable volume of coupon redemptions, then the answer is definitely “Yes.” Smaller retailers with low volume of coupon redemptions may not find ECC cost-effective.

Manufacturers are the primary beneficiaries of an ECC platform, yet retailers have to incur the time and resources necessary for its implementation. Until recently, there has not been an ECC solution that provides a compelling value proposition for the retailers.

The industry as a whole will benefit from this technology. Swift action on the part of the larger players will influence the smaller ones on a similar course – and that’s when there will be industry-wide change.

But Does Anyone Really Want Change? Manufacturers seem to want proof before they begin clearing coupons electronically. Everyone is waiting for a major manufacturer and retailer to step up and begin the process. In the past, when ECC was presented to all the big companies, most of their reservations dealt with cost.

Today, the benefits of ECC are obvious to all involved. The cost of hardware, software and installation has fallen drastically. With advanced technology and systems that are ready to be implemented, the time is right for the laborious manual coupon methods to be retired. Now more than ever, the industry is ready for Electronic Coupon Clearing.

New Direction

The GS1 DataBar (formerly known as RSS for Reduced Space Symbology) is scheduled to replace the current barcode in 2010. It will expand the number of digits in the manufacturer codes and family codes, and also allow multiple family codes.

Does the upcoming extended barcode help the prospects for adoption of ECC?
The answer is “No.”

While the proposed barcode is a step in the right direction and improves the quality of data captured by POS systems, it does not meet the requirements for ECC. The drawback of the GS1 DataBar (RSS) is that it does not match a coupon to the customer, nor does it provide a complete “proof of purchase.” Without an “Offer Registry,” the new barcode may not match the coupon to the specific product purchased. In this scenario, manufacturers may be hesitant to accept “after-the-fact” data and reports generated from many smaller retailers without an independent third-party validation/verification.

An effective ECC system must meet certain criteria. Remember, coupons are cash instruments and every redeemed coupon costs a manufacturer. An ECC system should validate coupons prior to redemption, and match the coupon to the product purchased and to the customer who redeemed it. It must ensure the reliability and accuracy of data as well as provide a proper audit trail for manufacturers and retailers.

Independent third parties must make sure coupons redeemed by consumers are properly captured, that the proper audit trail is put into place, and that the coupons are effectively shredded. This will prevent coupons from being recycled and re-used by consumers or fraudulent retailers, not to mention reduction in contingent liability for manufacturers.

The solution must be stable. It should have the ability to interface with all existing and new POS systems and be devoid of complex integration procedures. Installation and operation should be easy for both store management as well as cashiers.

The ideal ECC system should provide a compelling value proposition to the retailers, clearly showing them how the financial benefits and cost savings will exceed the cost of implementing and managing the technology.

ScanAps Solution
ScanAps has developed a comprehensive solution for paper and electronic coupon clearing, redemption and distribution.

Electronic Coupon Clearing: ScanAps ECC software performs complete front line validation, redemption and clearing in real time at the POS. ScanAps has a complete ECC solution for all coupons (paper coupons, electronic coupons, online coupons, mobile coupons, in-store coupons, and coupons scanned into the coupon scanner). ScanAps solution provides consumers, retailers and manufacturers with the most convenient, efficient and profitable way to “clip”, redeem, process and deliver coupons.

ScanAps ECC process uses a two-tier validation system – an “Offer Registry” if one is available, or if not, a “family code” database for validation. ScanAps ECC software runs on a simple server and is easy to use and install. It interfaces seamlessly with all POS systems -- a simple plug and play.

ScanAps ECC solution provides a “complete proof of purchase.” It matches every coupon to the customer who redeemed it, the specific product purchased, and the transaction details, including the store where it was redeemed, the POS #, cash receipt #, the date, the time and also the cashier who handled the transaction. ScanAps also provides an online reporting solution – all interested parties can review coupon redemptions online in real time.

ScanAps ECC solution significantly reduces coupon clearing fees for both retailers and manufacturers. The solution streamlines coupon handling and improves operating efficiencies. It also eliminates the manual, error-prone, labor-intensive clearing process and saves over $200 million in coupon processing fees and over $300 million in coupon fraud, mis-redemptions, charge-backs, deductions and adjustments.

Under the ScanAps system, retailers ship their paper coupons, along with their daily/weekly ECC reports, to the ScanAps central warehouse. ScanAps just stores these paper coupons for a certain time period and then shred them. ScanAps will not open the envelopes, process, scan or count them. Manufacturers and retailers have an opportunity to audit these paper coupons and ECC reports for a certain time period. No more manual scanning, counting or processing these paper coupons. No more postage, invoice charges, insurance or other charges. No more adjustment, charge backs, deductions or other charges to both retailers and manufacturers.

Coupon Redemption via Coupon Scanner: Today, there is no easy way for consumers to use coupons. They have to cut, clip, sort, save, make a mess in the house, and remember to carry paper coupons to the store. They have no mechanism to use a paper coupon for online shopping. In most cases, they cannot use a paper coupon at a self-checkout lane without cashier intervention.

ScanAps has also developed a Coupon Scanner for consumers. This device is a mini, key chain scanner branded and distributed by retailers to their customers. They just scan a coupon by the push of a button, and later dock the unit to redeem the coupon. Consumers can dock the Coupon Scanner at their home PC, at an in-store kiosk, or at the checkout lane to redeem the coupon. It’s a simple, easy and convenient way to use coupons and will save consumers time and money. They can also use this device to use paper coupons for online shopping. Coupon Scanner makes it easy for consumers to use coupons at self-checkout lanes.

The Coupon Scanner is programmed to function exclusively in the stores authorized by the retailer. Today, a consumer can redeem a paper coupon at any store in their neighborhood. The moment they zap a barcode from a coupon into this Coupon Scanner, they can only redeem those coupons in the stores authorized by the retailers. It will increase customer retention and revenues for the retailers and differentiate their stores. The device is an attempt to provide a compelling value proposition for the retailers and make it easy for consumers to use coupons.

ScanAps software keeps track of the number of redemptions by customers and will only allow them to redeem a coupon a certain number of times specified in the coupon. That will ensure that a customer will not redeem the same coupon multiple times and reduce contingent liability for manufacturers.

ScanAps ECC solution is a stand-alone software that can be implemented with or without Coupon Scanner.

Electronic Coupon Distribution: ScanAps has also developed a store-level electronic coupon selection and delivery system called TIPS (Targeted Individual Promotion Software). TIPS enables retailers and manufacturers to deliver customer-centric 1-to-1 price and promotion for each item in real time at the POS, based on each shopper’s level of loyalty to a store, chain or brand. The solution integrates all retailers’ and manufacturers’ paper and electronic coupons into one platform.

Bottom Line

The industry needs a reliable process that includes a complete front-line validation of the coupon before it is accepted or sent to the point of sale. There is an urgent need for this new direction in Electronic Coupon Clearing.

For more information:

Vijay Chetty
President & CEO
ScanAps
213-382-9837 (ext 211)
Chetty@ScanAps.com
www.ScanAps.com