Participation in loyalty programs is rapidly rising across the financial services industry. In this post-Durbin world, with capped interchange fees and a web of new regulations, Financial Institutions (FIs) continue to invest in loyalty programs to help retain customers, reward loyal card users and generate sustained card revenue growth. Recent research by Accenture indicated that one-third of all North American cardholders participated in a loyalty program in 2011. Offering loyalty rewards programs helps FIs, especially community, regional and mid-sized institutions, attract and keep high-value customers. Highly customizable rewards programs have proven to motivate cardholders to activate their cards and use them frequently. In response to the lure of accumulating points, loyalty-driven cardholders use their cards almost twice as often as nonparticipating cardholders. Recent Fiserv research shows that card portfolios with rewards benefits sport 15 percent higher activation rates and spending increases of as much as 40 percent. Loyalty programs are proven to keep customers since program enrollees leave their FI at less than one-third the rate of non-participating cardholders. Loyalty programs benefit customers and FIs and, therefore, are here to stay.
Developing a Loyalty Program
To provide customers with a range of ways to earn and redeem points, a successful loyalty program will contain varied program offerings that include merchant- and issuer-funded rewards structures. In merchant-funded programs, cardholders earn points by shopping at select merchants, which in turn, remit funds to the institution to pay for the cardholder’s points. These programs offset redemption cost – the bulk of a rewards program’s expense – through thousands of partnerships with local and national retailers. In issuer-funded rewards programs, the financial institution sets thresholds to define how points are earned. This allows FIs to set individualized rules for earning and redeeming, including earn rates, thresholds, caps and point expiration. A third option, blended programs, combine merchant- and issuer-funded options, and typically provide the highest increases in retention, usage, activation rates and interchange.
Channels, Points, Partners Make for Differentiation
A financially viable points structure and customizable mix of product offerings can drive customer retention by placing place paramount importance on customer relevancy. Customers want options, and FIs can oblige by considering and understanding customer behaviors. Customers today bank and shop using a variety of channels. Loyalty programs must work across popular channels: online, mobile, tablet, point of purchase and in-person. Using their devices to track and redeem points will keep loyalty programs at the customer’s fingertips. To understand what customers want to buy, FIs must actively monitor where cardholders are spending money. Knowing how much money customers are spending, and with what retailers it is being spent, will help institutions choose the best retail partners to add value to their loyalty rewards programs. This is especially important since a blended issuer- and merchant-funded program yields the greatest spend rate. As a double benefit, FIs can pursue partnerships with local and regional businesses. Enlisting local businesses in the program adds a competitive advantage that attracts additional program registrants. These partnerships also provide a boost to commercial and small business banking relationships, and further serve to leverage operations throughout the institutions’ banking portfolio. Loyalty programs provide a way for FIs to increase revenue per customer. By effectively deploying a flexible and incentive-laden rewards program, FIs will drive retention, increase loyalty and enhance the customer experience – an important boon for FIs that are working harder than ever to retain and grow market share.
Holly Krest is the SVP of Loyalty Solutions for Brookfield, Wis.-based Fiserv.