May 2, 2008

Interview: Card loyalty and rewards trends

Recently, two payments journalists in two separate interviews asked me similar questions on trends in card loyalty and rewards programs. Here is a paraphrase of some of the questions, along with my answers.

“Card rewards programs appear in Europe to be merchant based whereas in the US the bank funds the rewards directly. Why do programs work so differently between the US and Europe?”

In fact, most banks in Europe also offer bank-funded points and cash back rewards, just like US banks. The difference in some programs comes from a structural difference between how banks in other parts of the world are organized. Outside the US, you can frequently find large national banks that are big in card issuing and big in merchant acquiring at the same time. For example, in the UK, three banks dominate the acquiring market, RBS, Barclaycard and Lloyds. These three banks are also very large card issuers. Banks that are involved in both issuing and acquiring can leverage their organizational structure to develop deeper relationships with merchants and create more value for their card programs. US banks do not have huge market share in acquiring, and thus have more trouble developing such relationships with merchants.

“What is the goal of banks working with Welcome?”

Many banks use Welcome’s technology to enhance their loyalty and rewards programs, through a combination of bank-funded points or cash back as well as merchant promotions delivered only on the bank’s cards, i.e. “on us” transactions. In this context, the promotions are seen by merchants as an extension to the bank’s loyalty or rewards program.

Welcome is now beginning to provide the acquirer division within banks the ability to offer promotions on all cards, not as an extension to the bank’s loyalty program, but instead as a value added service that can be charged to merchants in the same category as other promotional marketing services that the merchant pays for.

A bank’s acquiring division could use our software purely for “on us” transactions, or could also explore a combined approach, for example by providing merchants the ability to offer promotions on all cards, at a fee per targeted message/promotion, yet privileging the bank’s cards by making the promotional fee on those cards free. The objective in this case is to satisfy the merchant’s need to target the largest number of customers, while also getting the merchant to encourage customers to use the bank’s card more. We can explore many different combinations of business models.

“Are points programs thriving, or are they on the contrary doomed to disappear?”

It often seems that every bank has a points programs, and that they are all absolutely identical. Add to that the growing pressure around the world on interchange, and it is easy to understand that points and cash back programs have clearly reached the point that they have to evolve into something new and different.

Banks have two ways of looking at the cost issue, essentially by asking themselves one of two very different questions. Some banks seem to be asking, “How do I reduce the cost of my loyalty program and get merchants and other partners to fund part of that cost?” Other banks are beginning to look deeper at the original objectives of loyalty programs, objectives that can sometimes be achieved through other means than traditional loyalty points or cash back.

For example, if the bank is trying to establish stickiness and encourage usage, perhaps this can be achieved by adding a contactless feature in partnership with the local transit system. Barclaycard is doing this in London with the London underground. Of course, the feature won’t help Barclays outside London, but for London cardholders, having a single card to get in and out of the underground could prove to be stickier and more “loyalty generating” than what we normally think of as loyalty when we focus too specifically on techniques like points and cash back.

Another example is through merchant promotions, where merchants can leverage all card transactions to offer instant promotions based on prior usage, right on the credit or debit card receipt, for a fee, whereas doing the same thing on the cards from a specific bank or even a specific payment scheme is free to the merchant. This would clearly give the merchant an incentive to put signs in the store encouraging customers to use that bank’s or scheme’s cards, and offer some promotions specifically to encourage usage of those cards. Tie in a lower interchange rate on those cards, and the merchant will get even more excited!

“Could coalition loyalty programs be the answer to get merchants to fund more costs?”

Coalition loyalty has been around for many years, yet I have only seen two countries, Canada and the UK, where these programs work on a decent scale. Both of these countries have similar retail market structures. In both the UK and Canada, customers can choose between two or three major food retailers, two or three major petrol retailers, two or three major multi-category department stores, and so on. A coalition program that combines one retailer in each category can be a viable proposition to customers, since most customers are likely to shop at each of those retailers anyway. But in most other countries, where the choice of retailers is larger, a coalition loyalty program will inevitably leave out several key retailers that a customer prefers to shop at. So you haven’t seen successful coalition loyalty programs take off on a big scale across the world, in spite of the fact that they have been around for many years.

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