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Rethinking loyalty programs in cards and payments

- By Siddhartha Chanda and Souna Uthappa

Customer loyalty programs have always been important for any business and financial services (FS) industry is no exception. To understand why loyalty is so important, we can recollect Pareto's principle which states that 80 percent of the business comes only from 20 percent of customers. In other words, loyal and returning customers make a business workable and profitable.

Coming to the FS industry and in particular the card business, when we talk about loyalty programs, the first thing that comes to the mind is the point per spend model or more commonly called cash back program. This can be substantiated by data where in the US, about 91% of card companies offers the cash back program to the consumers at the rate of one point per dollar spent. Historically, cashback programs have been quite successful in customer retention, as they directly offer monetary benefits. CEB suggests that point-per-spend program directly enhances card usage by two times and increases account retention with half as likely to attrite - thereby increasing the length of the customer relationship.

However, the future of cashback programs looks bleak, as tighter margins could make them outdated by the end of the decade. In addition, regulators are incessantly scrutinizing interchange fees, which govern most funding projects. As a result, interchange fees have already started seeing a downward trajectory -- it has been reduced to 50 basis points (bps) or lesser from 175 bps in major markets.. On the other hand, in markets where interchange fees have been cut, issuers have started using higher fees and annual percentage rates to fund rewards, which is driving down customer satisfaction levels. In the debit card segment, where interchange fees were drastically cut in the wake of Dodd-Frank act, leading issuers have stopped offering reward programs.

At this juncture, FIs are moving away from traditional loyalty programs to a model which focusses more on services and features. In terms of services, some of the banks and card companies are looking beyond rewards and are focusing more on pricing features like trimming cash advance and annual purchase rates for best card holders, offering fee waivers for some of the services, and more. Another American financial services giant is putting its money in a coalition loyalty program, where it has collaborated with some of the top-rated retailers in the region and customers can earn and redeem at any of the retailer's locations.

Digital innovations using emerging technologies like big data, analytics, and machine learning are being used to come up with innovative features for customers. For instance, in one of the banks, big data is being used to get insights about a particular growing community, which can be used to create a customized loyalty program. Analytics helped the bank to get data about education levels, home ownership, affluence, and other factors. Based on the bank's geographic footprint, customers were categorized into segments and then their financial needs were identified. By getting these segmentation insights, banks could strengthen customer relationships and increase customer base within this community by 10 to 15 percent.

In addition, innovative digital apps with high-levels of personalization are helping banks earn loyalty of customers in a digital world. For instance, new apps are being built which automatically calculate the average monthly income of customers, helping them plan their expenses and savings better. During months of high-income, the extra amount gets moved to savings automatically. In another mobile app, unimportant transactions and budgets are not shown to customers, instead customers focus on must know information like the amount that can be spent, upcoming expenses, and automatic transfer of money to savings at set intervals, etc. Such intuitive features and much more will be definitely liked by customers.
Reward programs have become a key differentiator amongst financial institutions to foster a more customer-centric brand image, thereby retaining valuable customers.

The traditional model of cashback has become expensive, which comes from the interchange fees is under scrutiny by regulators. Leading institutions should overcome these challenges by discarding reward points in favour of non-monetary rewards and targeted campaigns through digital innovations.

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