Loyalty in the banking sector is typically driven through credit cards. According to a recent Bankrate study, there are approximately 2 billion credit card holders in the USA alone, and each person carries four credit cards on average. Additionally, the rise of fintech start-ups is threatening the share of wallet for even the largest of banks. The competition is real and intense! To differentiate themselves, banks need to center their offering on core customer needs and evaluate their loyalty strategy to draw synergies from these emerging start-ups.
Key Challenges Facing Bank Loyalty Programs
Loyalty programs for banks are mostly focused on credit cards, for which the revenue comes from three key sources – consumer card fee, interest fee and interchange fee. The revenue stream that credit card loyalty traditionally influences is the interchange fee income, by driving increased credit card usage. However, the interchange rate is very low (0.5%-2% of the transaction value) and does not form a significant chunk of overall credit card revenues (the largest source being interest income), thus, reducing the overall impact of loyalty. Aside from the revenue, the funding allocated to a loyalty program is also limited due to low margins on credit cards (3% or lower).
Additionally, with the recent introduction of cap on interchange rates in regions such as Europe and Australia, trevenue to issuing banks has declined. To combat this, some banks have taken drastic measures such as increasing card fees and lowering the rewards generosity, which has a detrimental effect on the overall customer experience.
From a customer perspective, most banks have undifferentiated credit card perks. As a result, customers choose banks based on fees, which only serves to reinforce a transactional relationship between customer and bank.
Furthermore, with advancements in data and technology, customers increasingly expect instant gratification of the services. This has contributed to the emergence of fintech organizations across the banking value chain, such as real-time payments, immediate credits, checking accounts, etc. This is eroding the traditional banking revenue. According to Accenture’s 2016 Fintech report, almost 2% to 3% of the bank revenues are at risk from fintech competition due to lower loan origination, net income and fewer customers acquired.
These challenges reflect variations in performance of bank (card) loyalty programs as evident from Aimia internal benchmarks.
Current Best Practices in Banking Loyalty
The loyalty programs that are performing better than the others, per Aimia performance benchmarks, have been leveraging one or more of the below mentioned best-practices:
- Real-Time Redemption: Introducing real-time ‘pay-with-points’ rewards option opens the door to a frictionless redemption experience, as well as a plethora of reward choices for customers. Offering customers the option to offset points in real-time directly through mobile phones helps banks encourage credit card use. One bank's customers redeem their loyalty points during purchase by replying via text. As of 2016, the bank experienced 318% growth since launch, including 4.6 redemptions per redeemer.
- Digitization of Banking Activities: With the digital revolution, customers increasingly demand convenience and hence, the traditional banking system is shifting toward a digitally driven holistic approach to craft a cohesive customer experience across channels. Offering instant peer-to-peer payments, authentication through biometric technologies, new account opening or filing loan application online, etc. are some of the ways banks can deliver an easy and convenient experience as well as instant gratification to their customers. DBS Bank Singapore is a pioneer at digitizing the banking experience for their customers, right from opening a new deposit account, to transferring funds in real-time through QR code scan. Another APAC brand uses a mobile wallet with more than 785,000 users and processes more than 15,000 Peer-to-Peer (P2P) transactions per day.
- Personalizing Rewards: Banks must differentiate rewards to attract customers. By building holistic customer profiles and designing rewards around customer preferences, banks can establish an emotional connection with customers. The BankAmeriDeals from Bank of America, USA, is a classic example of leveraging frequency-based mechanics to drive stickiness among value-conscious customers. Members can unlock up to 15% off deals from their favorite merchants, and also earn ‘coins’ for every deal unlocked, which rewards them with incremental cash-back, based on the number of coins collected. During its initial two years (2012 – 2014), Bank of America served 1.5 billion offers to their 30 million online customers and 14 million mobile banking customers.
- Engaging Members through Experiential Rewards: Partnering with cross-industry players to curate experiential benefits can help banks establish deeper emotional connections with their customers and make them feel special, thus, building brand ambassadorship. The American Express Centurion Black Card, an invite-only card, rewards its members with exclusive experiences and luxurious benefits including complimentary top-tier hotel membership status (Starwood Gold, Hilton Diamond, IHG Platinum Elite and more), Platinum Medallion status with Delta airlines, priority access to hundreds of airport lounges worldwide and VIP event invites. According to 2017 Credit Card Satisfaction Study by J.D. Power, American Express was ranked number 1 in overall customer satisfaction amongst all credit card providers in the USA.
- Monetizing Data: Banks have copious data on customer transactions and demographics, which they can monetize to generate an additional revenue stream to support program costs. The data can be distilled into unique customer insights and sold to external vendors. Mastercard, USA, shared the anonymized behavior-based spend data about their customers with JetBlue airlines, to help them increase engagement with customers flying Caribbean routes. The partnership helped JetBlue achieve over 40% uplift in email conversion rate and double-digit growth in ticket size vs. the control group.
- Delivering Relevance and Optimizing Cost through Merchant-funded Rewards: Banks are leveraging their multi-dimensional data insights to run targeted campaigns and reward offers on behalf of merchants, funded by the merchants themselves. The CIMB Bank, Malaysia, has leveraged its credit card statements for merchant funded offers. This approach helps merchants gain direct access to customers through an established channel and technology, while also enabling banks to deliver personalized offers at minimum cost, thus, increasing engagement.
While the above current best practices can help banks perform better, these may not be enough to sustain differentiation in a competitive financial services sector. A futuristic banking organization has to be centered on customer needs – both their financial as well as non-financial digital eco-system. Maximizing value through internal and external assets, building trusted advisory and enabling instant access through technological innovations would be key to success in the future.
Futuristic Trends and Opportunities for Banking Loyalty
- Maximizing Value and Impact Through Pan-bank Loyalty: Pan-bank loyalty programs, a strategic imperative, can help banks optimize loyalty funding through shared cost model, as well as foster deeper customer relationships through richer insights from data consolidation. Integrating various product units such as credit cards, saving accounts, loans, forex, etc., banks can establish a more agile organization for speedy solution delivery and create customer lock-in by making banking processes more rewarding. From Aimia’s experience, pan-bank program members show a spend uplift of ~3x by accumulating rewards across their entire relationship with the bank. Aimia has helped Axis Bank India launch a pan-bank loyalty program, EDGE, which allows members to earn points across all their banking activities that can be redeemed across multiple categories such as utilities, dining, beauty, travel and hospitality.
- Driving Innovation by Partnering with Technology Players: Accenture’s 2016 Fintech report states that banks can gain 3% to 5% in revenues by collaborating with fintechs, through enhanced customer acquisition and lower cost of risk. Banks have a huge customer base, brand equity as well as the financial expertise, but tend to lack an agile architecture to support customer-centric technologies to keep pace with evolving digital needs. By partnering with fintech, banks can digitize and streamline their process and stay relevant to their customers.
- Deploying Blockchain: The emerging blockchain technology could prove to be a panacea for banks and financial institutions, owing to its decentralized, transparent and highly secure architecture. The technology can enable banks to run transactions more efficiently and securely, thus, increasing the cost effectiveness of various banking services including loyalty programs. The Royal Bank of Canada have leveraged blockchain technology to successfully reduce the time to process earn and rewards data from the previous 8 weeks to near real-time, allowing members to redeem their points in real-time at the point-of-sale (POS).
- Leveraging Social Media for 360-Degree Customer View and Better Engagement: Banks have traditionally stayed away from social media, owing to regulatory and compliance issues. However, if leveraged appropriately, social media can generate truckloads of customer life-stage and attitudinal insights, which when overlaid with a bank’s transactional data, can develop a 360-degree view of the customers. With these insights, banks can curate and deliver highly personalized segment-of-one financial solutions to their customers. Additionally, banks can leverage social listening to improve internal processes and engage customers better. Vantage Credit Union, USA, tracks customer conversations in online communities to derive insights and identify ways to improve customer service. Additionally, it has eased the process to retrieve members’ account information such as balances, cleared checks and money transfer by sending a direct message on Twitter.
For banks to stay relevant and sustainable in future, they will need to buckle down and act by placing customer needs and interests at the heart of their business and loyalty strategies. Setting up a loyalty eco-system that rewards customers across their entire bank relationship, leveraging synergies from fintech players to enhance customer experience and establishing trusted relationships through a 360-degree view of customers, will prove to be the biggest differentiators in the long run.