How to Launch a Merchant-Funded Rewards Program: A Step-by-Step Guide for Issuers

Rewards are now a baseline expectation. 

Eight in ten Americans have a rewards credit card, and nine in ten say they value it. A majority of cardholders (58%) now use cash back cards specifically, and that preference is only growing.

For fintechs and banks competing against Chase, Amex, and a crowded fintech stack, that's the table stakes. But most emerging fintechs, neobanks, community banks, and credit unions simply can't match what the big banks spend on rewards without taking a serious hit to their margins.

Merchant-funded programs change that equation: brands pay to reach your cardholders, you generate revenue, and your members get cash back. Here's how to build one.

What Is a Merchant-Funded Rewards Program?

Instead of funding cash back out of your own budget, you connect your cardholders to brands willing to pay to reach them. A cardholder spends at a participating merchant, the merchant covers the reward, and you take a cut for providing the distribution channel: your app, your card, your cardholder base.

How it differs from traditional bank rewards

In traditional bank rewards, points, miles, and travel perks sit on your balance sheet. You fund every redemption and margins erode as engagement scales.

In a merchant-funded model, the dynamic flips. The more your cardholders spend at participating merchants, the more revenue you earn. Your rewards cost goes down while cardholder engagement goes up.

The mechanics: CLO and transaction matching

The engine underneath most merchant-funded programs is card-linked offers (CLO). A merchant sets an offer — say, 8% cash back for new customers.

With most CLO software, cardholders will have to click to activate that cash back offer in their banking app. That way, they can more clearly track attribution.

But that adds a lot of friction to the process. Platforms like Kard provide a balance between the CLO always-on model and click-to-conversion trackability that marketers are used to.

We have click-to-activate, tap-to-boost, and tap-to-renew offers for attribution, but we also have a robust matching engine that automatically scans a cardholder’s account for any active offer and automatically credits the reward to the cardholder's account. No manual step required from the consumer.

The cardholder gets cash back, the merchant gets a verified customer, and you get a revenue share from that purchase.

Step 1: Build vs. Buy

Building in-house makes sense if you have millions of active cardholders, an existing merchant sales org, and the engineering depth to build transaction matching, offer management, fraud prevention, and real-time attribution from scratch.

Chase and Bank of America went this route because their scale justifies it. At that volume, owning the infrastructure means owning the margin.

Buying is the right call for most fintechs, neobanks, community banks, credit unions. You get a pre-built merchant network, a proven matching engine, and an API that connects to your existing card stack. You trade some margin for speed and infrastructure you don't have to maintain.

Step 2: Integration

Assuming you're buying a card-linked offer solution, here's what the technical work actually involves.

What the integration requires

The core data flows are straightforward:

1. You send transaction events (authorization and/or settled transaction data, depending on the matching approach your platform uses) to the CLO platform.
2. The platform returns offer eligibility status and reward confirmation. 
3. You render the result in your app.

Key questions to answer before scoping: 

• Do you have access to authorization-level transaction data? 
• What card processing infrastructure are you on, Galileo, Marqeta, i2c, or in-house
•  Does your CLO partner support your processor natively, or will you need custom middleware?

Getting clear answers here before the contract is signed will prevent the most common integration delays. 

Read ‘What to look for in a CLO platform’ →

What slows teams down

The code itself typically takes a few weeks for a competent team working with a well-documented API.

What extends the timeline is everything around it: 

• Internal security review of data-sharing arrangements
• Legal sign-off on the platform contract
• UX approval on how offers are displayed
• QA testing across device types and edge cases

Plan for a few months of work from contract to soft launch. If you're being told it takes significantly longer, ask specifically what's driving that.

A modular approach — start with core offer display, add push notifications and personalization features later — compresses the initial timeline without sacrificing future capability.

Did you know? We recently launched WebView: a turnkey rewards experience solution that lets you ship a fully baked offers UI (and keep it current) without building the frontend yourself. Read more about it →

Step 3: Offer Curation

Your merchant catalog should reflect the demographics, preferences, and location of your cardholders, not just a list of merchants who were easiest to recruit.

Match merchants to your cardholder base

If your card skews Gen Z and Millennial (as most fintech and neobank cards do) your highest-performing categories are QSR, fast casual dining, food delivery, apparel, and subscription services. 

A focused catalog of 40-60 well-matched merchants will consistently outperform a sprawling one of 300. A 2024 PYMNTS/Banyan study of nearly 3,000 consumers found that satisfaction with merchant-specific discounts correlates directly with higher redemption rates and greater use of available card benefits.

Segment your customers

New vs. existing vs. lapsed customer targeting is the most powerful segmentation available. A merchant who can distinguish between a first-time buyer and someone who hasn't purchased in 90 days will pay more to reach each group appropriately. The more precise the targeting your platform supports, the more attractive your cardholder base becomes to merchants -- and the better your offer inventory gets over time.

A food delivery service giving lapsed customers a 10% cash back reward on each delivery (up to $5) resurrected over 6,000 customers in just 7 weeks. The resurrected customer test group saw an 11.4% increase in AOV (significant, as they were already high spenders).

Offer structures that drive behavior

Flat-rate cash back is the simplest structure and easiest for consumers to understand. “Earn 5% cash back at [insert fast-casual restaurant]” requires no explanation and no mental math.

Tiered or diminishing discount structures — 15% on a first purchase, 10% on a second, 5% on a third — drive repeat behavior. And they give merchants a reason to offer higher first-purchase incentives while managing payout costs on loyal customers over time.

But in a world where consumers are bombarded with discounts and promos, you need to try a mix of different offer structures — ones that make your offer feel relevant, timely, and worth a consumer’s attention, i.e.:

• An offer that gets better with every purchase
• An offer that disappears fast
• An offer that gets them a higher rate with a single tap

Some examples of these dynamic offers could be:

• Tap-to-boost offers (available now): A user taps on an offer to “boost” the rate. For example, tapping a 5% cash back offer might get them 8% cash back. Note: In this example, cardholders will still get the 5% cash back if they don’t tap. Kard automatically matches transactions to available offers.
• Spend-tiered offers: A user receives a reward if they spend a specific amount (or more) with a brand.‍
• Purchase count offers: A user receives a reward after a specific number of purchases from a brand within a given timeframe — think of it as a punch card.
• ‍Progressive offers: A user receives a higher reward for each additional purchase (2% cash back on the first purchase, 4% cash back on the second purchase, 6% cash back on the third purchase). ‍
• Tap-to-renew offers: After making a purchase and receiving a reward, a user can extend the offer to their next purchase, leading to more card activity for the issuer and repeat business for the brand.‍
• “Flash” offers: A user can only redeem it during a certain period of time.
• “While supplies last” offers: A user can only redeem an offer while it’s still available. Once a set number of users have redeemed an offer, it closes.

Who manages the merchants?

Clarify this before signing with any platform partner: do they handle merchant acquisition and ongoing account management, or are you expected to source merchants yourself?

For most issuers, running a merchant sales org is not a core competency and not something you should be staffing for. A good platform partner removes this entirely and comes with an established merchant network on day one.

Step 4: Consumer UX and Marketing

This is where most programs fail — making sure cardholders know the program exists and use it. If they don’t, they simply won’t use your offers.

Where offers should surface

Three surfaces matter.

1. A dedicated rewards tab in your main app navigation. It can’t be buried three levels deep. 
2. Push notifications timed around relevant purchases. 
3. Transaction feed, where a confirmation message tells the cardholder exactly what they earned and when it will post.

That last one is chronically underused. A notification that says “You earned $3.20 cash back at Chipotle, posts in 5-7 days” does two things: (1) it closes the loop on the current transaction and (3) trains the behavior for the next one. Cardholders who see their rewards confirmed in real time redeem more often.

Four principles of effective rewards messaging

The best-performing issuers follow four principles consistently:

1. Relevancy. Cardholders respond to offers that make sense for their life, their age, income, geography, and spending habits. A Gen Z cardholder ordering delivery twice a week won't engage with a retirement travel offer. Think about this from an acquisition and retention standpoint, too. What will new customers want? vs. what will existing customers want? vs. what will make lapsed customers come back?
2. Simplicity. If it takes more than five seconds to understand the benefit, the message is too long. Lead with the value (“6% back at Retailer X”), use recognizable merchant logos, and include a single clear action, like “Activate,” “Apply,” or a “+” to add to wallet. Don't make cardholders think.
3. Urgency. Consumers act faster when they know they're on a clock. Highlight expiration dates prominently. Tease upcoming offers before they launch ("Mark your calendar: 6% back at X starts Friday"). Send reminders as deadlines approach to create a final nudge.
4. Consistency. BCG found loyalty program engagement dropped 20% largely because consumers didn't feel they were getting ongoing tangible value. Rolling out new offers regularly (weekly, even) keeps the program visible and signals to cardholders that you're actively managing it on their behalf.

Keeping momentum after launch

Here are four ways you can keep cardholder’s attention after a flashy go live:

1. Extend your reach via social. Millennials and Gen Z use cards at restaurants over 70% more than older consumers, so food deals perform particularly well on social.
2. Reinforce mid-campaign with progress nudges. “You've earned $5.25 this month, here are 2 new deals near you.”
3. Spotlight a rotating hero offer each season. For example, feature a tax software discount in Q1, then pivot to travel deals over the summer.
4. Celebrate redemptions when they happen. That last step matters more than most issuers give it credit for. A simple “Congrats, you earned 4% back at Store Y!” notification reinforces the spend-reward connection and primes the next transaction.

Want a full breakdown of how to run each phase? Read our guide to marketing rewards programs →

Step 5: Measurement

A rewards program with no measurement framework is a cost center. With the right metrics, it's a revenue line.

Offer activation rate: What percentage of eligible cardholders have engaged with at least one offer? A low number here points to a discovery or marketing problem, not an offers problem.

Redemption rate: Of activated offers, what percentage are actually redeemed? Low redemption typically means poor UX, an irrelevant merchant mix, or friction in the activation flow.

Incremental spend: Are cardholders spending more because of the program, or would they have transacted at that merchant anyway? This is the number your merchant partners care about most, and it's what separates real program performance from correlation.

How to measure incrementality

In marketing, you want to know definitively if your marketing initiative actually drove consumer behavior, or if those purchases have happened anyway.

Incrementality can tell you that. At Kard, we run incrementality lift studies for every campaign. Here’s how it works:

1. We create statistically equivalent groups: Dividing your audience into test (80%), control (10%), and reserve (10%) segments.
2. We expose only the test group to your offers: The control group receives no marketing intervention.
3. We measure the difference in outcomes: The gap in conversion rate is the causal lift.

The business case for getting measurement right is strong. According to McKinsey, top-performing loyalty programs increase revenue from customers who redeem by 15-25% annually through higher purchase frequency and basket size.

What Does Launch Involve?

There are four main steps to launch:

1. Decision and vendor selection, which involves answering the build vs. buy question, evaluating platforms, and engineering/legal review
2. API integration, which involves technical build, QA, and security review.
3. Soft launch, which involves going live with a set of pilot cardholders
4. Full rollout, which involves pushing the rewards out to all cardholders, plus any promotions or marketing or app push notifications that come with it.

Most issuers working with an established CLO platform go live in as fast as a couple of weeks, depending on complexity. The variable is almost always internal review cycles, not the technology.

Rewards as a Revenue Stream

The cardholder relationship is the most valuable asset a fintech or bank has. Rewards programs are how you defend it.

The issuers that figure this out early end up with higher engagement, better retention, and a revenue stream that grows as the merchant network expands. The ones that don't struggle to give cardholders a reason to stay.

Ready to explore merchant-funded rewards? See how Kard can connect your cardholders to brands that are willing to pay to reach them.

Or explore case studies from partners like Atlas and BM Technologies that are already running live programs.