At first glance, Cardlytics (NASDAQ:CDLX) has a very compelling story: part fintech and part digital marketing, both of which tend to be high-margin, fast growing areas. If you use a mobile banking app and have seen promotions for bonus cash back offers at places like Starbucks, you've seen Cardlytics' service. Through 2019, the company was growing revenue at an exciting compounded annual growth rate of 40%. But recent shifts in marketing spend show that the company's unique position and strategy may not be as competitive as other marketing companies.

A mobile banking app displays bonus rewards offers from retailers.

Image Source: Cardlytics

A break in trend

The company's quarterly revenue and billings (basically, the total bill sent to customers -- a signal of demand for Cardlytics's services before complex accounting or even payment) were on a fairly steady streak up and to the right over the past 10 quarters. Then came the semi-expected COVID slump. Both billings and revenue fell more than 40% year over year .

A graph shows a steady rise in financial measures until a recent big drop.

Image Source: Cardlytics

That drop brought revenue and billings substantially below the company's first quarter of 2018. On the company's recent conference call, CEO Lynne Laube did point to a modest comeback, noting month-over-month increases in billings and revenue for April through June 2020. Laube also said, "this is a difficult time as an advertising business."

Indeed, 2020 is a difficult for most businesses and organizations. However, the marketing industry and its models are diverse. Cardlytics' poor results largely fall far behind other marketers, which could owe to the difference between its business model and theirs.

Lagging peers

Not all marketing companies saw as bad a drop in revenue as Cardlytics' 42%. In the exact same quarter as Cardlytics, ending June 30, 2020, Facebook (NASDAQ:FB) saw ad revenue grow modestly (by its standards) by 10%, despite ongoing publicity and political challenges. Multimedia marketing conglomerate IPG's (NYSE:IPG) revenue dropped 12.8% in the same period, while revenue fell 12.9% at online marketing specialist The Trade Desk (NASDAQ:TTD). The Trade Desk bounced back quickly, noting that despite the drop in revenue, by July advertisers' spending was already back up year over year .

Even the juggernaut Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) saw a slight downtick in advertising revenue. Google search revenue was down 10%, and YouTube  ad revenue was up 6% year over year.

In fairness, Facebook and Google are tough to compete with because of their reach and scale. But Cardlytics' niche strategy might help us understand why it underperformed other advertising businesses so drastically.

Competitive advantage?

Cardlytics buys aggregate card purchase data from big banks and card issuers. In fact, it has data on more than half of call debit and credit card purchases made in the U.S., representing more than $3 trillion dollars in transactions. It uses this data to sell marketing services to brands, creating a scroll screen of deals in its customers' mobile banking apps that's designed to tempt consumers with additional cash-back awards. So, if Airbnb wants to entice people to book a stay, they might partner with Cardlytics to find consumers who frequently spend on hotels or airlines.

There are real advantages to this approach. Unlike social media, a mobile banking app absolutely has an adult or near-adult with money (or credit) looking at the screen. As with all marketing, a treasure trove of data can help target ads to likely buyers. And consumers who enjoy bonus cash back rewards might increase their spending activity and remain loyal to their bank (Cardlytics's critical partner and key platform ).

A computer screen offers various deals to a banking customer.

Image Source: Cardlytics

Competitive disadvantage?

This model has two limitations for marketers. One big one is that a single icon offering 5% cash back is not enough space to tell a story needed to entice new customers. That's the power of video marketing in Facebook or YouTube, both of which saw such revenue rise slightly. On those platforms, brands can show how their product works and what it does. Even a billboard can tell a short story or highlight a change in a product in a way that Cardlytics currently doesn't. When you need the biggest bang for your marketing buck, it seems that Cardlytics is not the top choice.

The other limit to this strategy is that the customers with highest engagement might not be as additive as marketers hope. Would you spend $400 on a new mattress just to get 5% back? The customers most likely to engage with these deals are customers who are most likely already going to make said purchase. In which case the product is more of a rewards program with a margin-pinching rolling discount.

Should you buy the stock?

There's no shortage of options for investors when it comes to fintech or digital marketing. Cardlytics has grown rapidly since its founding in 2008. It has a role to play keeping customers engaged with their banking and their favorite brands. However, its long-term upside is harder to see than that of its competitors, who can offer marketers fuller-format marketing and marketing beyond the promotion of short-term discounts. Interested investors might consider moving this stock from their watchlist to the penalty box until it shows more parity in retaining its customers.