Shanghai Subway Riders Loyal to Groove Street

By Maria Trombly | Card Technology | February 2005

It doesn’t make much economic sense for a taxi driver to install a smart card reader. The meters are expensive, and it’s cumbersome to download the data off the readers. It takes time for you to get your money out of the system -- and, unlike the card issuer, you don’t get to enjoy the benefits of collecting interest on the cash that you customers have deposited on the card in advance.
And, of course, you can say goodbye to that sweet, sweet moment when the customer hands you a large bill and says, “Keep the change.”
That’s why Hong Kong, with its freewheeling free market economy, has had trouble getting taxi cabs to take Octopus cards.
In Shanghai, however, you can get into any cab in the city and see that little smart card reader sitting on the dashboard on the customer side, hardwired into the taxi’s meter.
There are benefits to living in a command economy. In this particular case, the mayor of Shanghai decided that the city needs to have a modern transportation card system, and so it was done.
Hong Kong’s Octopus card does, however, have a cooler name than the “Shanghai Public Transportation Card.”
Shanghai’s smart card readers are found not only in taxis but also ferries, buses and metro (subway) stations.
Despite its problems getting into taxis, however, the Octopus card is accepted in a large number of other locations -- Coke machines, supermarkets, convenience stores and fast food restaurants, to name just a few.
The Shanghai card is trailing far behind.
I can spend it on bus fares and taxi rides, but not on much else. I can refill it at the convenience store down the block, and at some metro stations, but not in too many locations.
And I can take it to McDonalds and wave it all I want around the cash register without getting a single burger. But, if I wave it often enough, I might be able to get an iPod.
That’s because McDonald’s, without waiting for the Shanghai government to change the rules restricting the use of the cards for commercial purposes, has signed up for a card-based loyalty program run by a Hong Kong-based startup called Groove Street.
McDonald’s doesn’t take money off the transportation card for payment, but it does have a reader that registers the amount of purchase and credit’s it to the customer’s loyalty account.
The loyalty program, called SmartClub, is only open to one leading vendor in each category, so it’s unlikely to ever get as ubiquitous as Octopus is in Hong Kong.
And despite being only two years old, it’s already a nation-wide program, with consumers anywhere in China being able to log onto its website (www.smartclub.com.cn) and register their credit cards, or any other plastic they have lying around so as to earn loyalty points on their spending.
Groove Street isn’t the first company that tried to set up a loyalty program in China. But it is the first one that’s working.
“Loyalty cards have tended to be rubbish in China until that one,” said Paul French, director of Access Asia, a Shanghai-based business consultancy focusing on retail and consumer markets. The difference, he said, is that members can actually redeem their loyalty points for things worth getting.
“Normally, the loyalty cards have a longer list of what you’re not allowed to do, than what you’re allowed to do,” he said. “Like you’re not allowed to use it before 4 o’clock.  And they have good prizes. It’s not just 5-quay (50 cent) things. They were giving away Lufthansa tickets to Europe.”
“It’s a nice, advanced scheme. It’s one thing Shanghai’s got that’s world standard,” he added.
What’s interesting about the Shanghai card is the way that Groove Street is using it as the heart of a multi-vendor loyalty program.
The loyalty points aren’t stored on the card itself, said Groove Street CEO Henry Winter. A loyalty program wasn’t considered when the card was first created, so there was no room on the card to store loyalty points.
Instead, the points are stored on a Groove Street computer, which gets sent spending information by participating merchants.
Unfortunately, it means that users aren’t able to redeem their loyalty points immediately, he said. But, on the plus side, they don’t lose all their loyalty points when they lose their card.
Users register the number on their transportation cards, either by phone or on a Web site. They can also register credit cards number at the same time, Winter added.
“Then, whenever you use those cards, you might get points,” he said.
The loyalty program meets two needs -- it increases customer use of these cards instead of cash when using public transportation and it brings additional revenues into the city’s coffers.
“The challenge for the transportation card company is not that people don’t have the card,” said Winter. “Every white collar person and university student has the card. But people don’t always use it -- either they didn’t charge it up for money or just forget it.”
In Hong Kong, card usage is over 95%. In Shanghai, by comparison, it hovers around 25%, he said.
Part of the reason is that consumers in China are more used to paying with cash than plastic, he said.
“Cash has worked for 10,000 years,” he said.
By adding an additional benefit -- a rewards program -- the city hopes to increase the card’s usage rate.
The Shanghai Public Transportation Card Company, a separate legal entity, wasn’t in a position to create a loyalty program of its own.
It only collects 1 or 2 percent of each transaction -- a miniscule amount considering that a subway ride in Shanghai costs about a quarter. So there isn’t a big pool of cash available for overhead, much less for loyalty program prizes.
“If they give back 10 percent of their entire revenues to you, that would only be .002 RMB (a little more than a hundredth of a penny),” he said. “If you were the world’s most loyal user of the card, riding twice a day for a year, you still wouldn’t get $1 worth of prizes at the end of the year.”
By expanding the loyalty program to other merchants, such as McDonalds, loyalty points can accumulate much faster.
In the southern city of Guangzhou, transportation card users will be able to pay with it at McDonalds and other locations starting in February. SmartClub will go live in Beijing a couple of months later. Winter expects to see the restriction on payments lifted soon in other locations as well.
Meanwhile, McDonald’s is already getting benefit out of the program -- it can collect demographic data on its customers, and can tell whether marketing programs are working and how well.
Given that there’s still a scarcity of reliable information about consumer behavior in China, this is an important benefit for the fast food chain and other SmartClub merchants.
There are other group loyalty card programs in the world. The most notable is Britain’s Nectar card.
One problem with setting up such a program is that at least one merchant must be ubiquitous -- a chain of gas stations, or supermarkets, or convenience stores that customers regularly visit.
Shanghai’s transportation card program has 6 million cards outstanding. It’s as ubiquitous as it’s possible to get.
Currently, 100,000 SmartClub members have registered their cards and chosen to participate in the loyalty program. In addition to prizes -- like iPods -- they can also get discounts at participating merchants by showing a SmartClub logo that they download to their cell phones.
If the program takes off, it could be a model for other cities, said Tim Gower, an analyst with Datamonitor Plc.
Currently, there are very few loyalty programs in the world that use transportation cards, and no group loyalty programs that he knows of.
“The technology is there, it has been around for ten years,” he said. “It’s just a question of political will and developing the business relationships.”
Transportation cards are usually focused on increasing efficiency and ease of use in the transportation system itself, said Bruce Cundiff, an analyst with Jupiter Media Metrix, Inc.
“I haven’t seen anything worldwide that uses the transportation system as a proxy for the rewards program,” he said.
It also helps short-circuit the classic chicken-and-egg problem, he added.
Usually, merchants are loathe to invest in a payment infrastructure if few customers carry the card. And customers don’t want to bother getting the card if merchants don’t take it.
“That has been the big hurdle on the merchant side in the U.S.,” he said.
The closest thing to SmartClub is the Nectar card in the U.K., which works in conjunction with Barclay’s Bank. Customers can earn loyalty points at a major supermarket (Sainsbury’s), car rental agency (Hertz), gas station chain (BP), and even when serving their card at a Ford dealer.
Again, only one major merchant per category is in the program, and the loyalty points go into a common pool so they build up faster for consumers.
In return, merchants get detailed information about their customers, said Josef Mueller, managing partner for Accenture’s China retail and consumer products practice.
But to do that, the smart card has to be linked to an actual person.
A centralized database like SmartClub’s is an advantage here, he said.
In Hong Kong, for example, people don’t fill out demographic information when they get an Octopus card.
“I myself have three or four Octopus cards,” he said. “If I lose one, I use a different one. It’s difficult to attach the card to a real person.”
One criticism of Shanghai’s program is that it may help increase the use of transportation cards, but it isn’t likely to turn them into alternatives for cash.
“One drawback is that you’re only going to get one major vendor per category,” said Ross O’Brien, ICT Practice director at Intercedent Asia, an Asian market entry consultancy.
“You’re not massifying,” he said. “You’re not competing with cash head-on. After a while, the novelty of your award program wears off.”
Better bets in Asia are cell phone-based cash alternatives, he said, already in use in the Philippines and other Asian countries. As in China, most consumers in the Philippines have SIM-card stored-value phones rather than U.S.-style monthly subscription services.
When these phones are combined with a mechanism to move the stored cash from one telephone to another, or to a merchant, a cashless economy starts to evolve.
This isn’t news to Winter, who’s already started developing a phone-based payment system called SmartPay.
“We’re trying to get people to use their phone to pay for things,” he said. “And we will be giving people SmartPoints if they use SmartPay.”
One company that’s already has a telephone-based payment system going is China M World, which has partnered with one of China’s largest banks, the China Construction Bank.
But CEO David Teng said he isn’t about to move into micropayments such as those associated with the transportation card.
“Every transaction goes back to the bank, and the transaction costs are too high,” he said.
Instead, people now use their cell phones to pay utility bills and other higher-value amounts.
This is a big step forward for Chinese consumers, who cannot write a paper check but must currently pay their bills in person.