June 15, 2012

Financial institutions have long relied on rewards programs to strengthen customer relationships and cultivate customer loyalty, but with governmental legislation promising to significantly limit interchange fees, bankers must now find alternative ways to fund these programs.

To offset revenue losses and continue to provide value to their best customers, many institutions are now leveraging transaction-driven marketing, a process through which financial institutions present personalized offers to account holder's based on their actual spending patterns. Banks can provide rich, targeted customer rewards without having to rely on interchange fees, since transaction-driven rewards are typically funded by the retailers themselves. Retailers are willing to fund transaction-driven marketing offers because of the precise targeting capabilities, presentation of highly relevant offers to customers in their bank statements (places that, until recently, have been off-limits to retailers), and the precise performance tracking of campaigns.

According to Aite Group, transaction-driven marketing has become established within the industry and significant growth is projected for the near term. "If present trends continue, card issuers’ annual revenue from merchant-funded incentive programs will more than quadruple over the next four years, amounting to $1.7 billion by 2015 from about $300 million presently,” said Madeline Aufseeser, Aite Group senior analyst.

Transaction-driven marketing has significant advantages for both banks and consumers, but banks that implement such programs must also be aware of considerations for protecting their customers' personal information.

The Consumer Privacy Debate

In the digital world, level of access to information and impact on consumer privacy has been debated for years, and the rapid growth of social media has led to a sustained societal debate regarding consumer privacy. Many of the same concerns should be appropriately asked by bankers about transaction-driven marketing’s approach.

Bankers should not assume that all transaction-driven marketing programs have the same level of consumer and data protection. Banks have an obligation to ensure their products and services do not violate their customers’ privacy, but banks also need a solution that helps generate revenue. Programs should never collect personal information that could be released to marketers and advertisers.

Transaction-driven marketing programs should be able to personalize offers to ensure the offers are relevant to each recipient based solely on an account holder’s actual spending patterns rather than any identifiable personal information. Careful assessment of any transaction-driven marketing program before implementation is necessary to avoid tarnishing the financial institution’s reputation and ensure customers’ private information is secure.

How to Ensure Complete Protection of Consumer Information

Make sure that your rewards program does not require consumers to provide their bank account user name or password for any reason other than to gain access to their account. Your customers’ personal and transaction data should remain secure within your bank at all times. If your rewards program requires consumers to provide any personally-identifiable information, including bank account username and password, card number or email address, you could be allowing third party advertisers or marketers access to that account information.

To eliminate the risk of any consumer information leaving the institution, the rewards program should operate entirely under the control of the bank. Some transaction-driven marketing platforms require that the transaction data leave the bank for an off-site server to generate the offers, but once out of the control of the bank, consumers’ data becomes vulnerable.

Marketers can still take advantage of these rewards programs without relying on your customers’ information. Targeting specific purchasing characteristics, including ZIP code, store category, purchase frequency or amount of expenditure through an anonymous Account ID enables them to target specific customers without compromising their personal data. The bank itself routes retailers’ offers to the correlating Account ID based on predetermined purchasing characteristics. Through this method, customers’ personally identifiable information is never available to anyone outside of the bank.

As consumer privacy continues to be a point of concern, banks must ensure that new programs – including rewards programs – protect customers’ personal information. Following these suggested tips will not only protect your bank, but further strengthen customer loyalty and generate needed revenue by providing meaningful reward offers.

Lynne Laube is co-founder and COO of Atlanta-based Cardlytics, the pioneer of transaction-driven marketing for banks.