Abstract
A new report from Mercator Advisory Group' s Retail Banking Practice,
Weaponizing Loyalty: New Schemes Bolster Bank Competitiveness offers an
in-depth examination of bank loyalty initiatives vitally relevant in today' s
banking environment. These new rewards/loyalty initiatives are supported by a
new crop of loyalty vendors offering financial institutions, and their
merchant partners, the ability to parse bank customer transactional data to
craft customized rewards across a spectrum of deposit products. These services
will change the competitive landscape of the retail banking industry.
By year end 2010, Mercator Advisory Group predicts that 360o
relationship-based loyalty programs will be the New Normal within the banking
industry and that merchant funded co-branding, deposit account-based rewards
programs and promotion individuation will become the hallmarks of these
programs.
Weaponizing Loyalty: New Schemes Bolster Bank Competitiveness examines how to
turn the notional concept of customer loyalty into a dynamic feature of the
day-to-day life of a bank and how bank' s can "dynamicize" loyalty to serve not
just as a retention tool, but to become a bank' s most import competitive
weapon.
A challenge program designers face is that customers have an explicit
preference for cash-back rewards programs but banks realize their greatest ROI
on points/miles-based programs featuring products/flights as redemption
objectives.
It is Mercator Advisory Group' s position that loyalty/rewards program managers
can retain products (including gift card) as a preferred reward by enriching
their programs one of two ways: they can harness the synergies of merchant
funded networks or they can turn the ROI modeling of their programs on its
head.
"Rewards Checking was the first mainstream banking product that directly
correlated paying high interest rates on checking accounts with specific
banking channel usage. That model is being enhanced by new vendors leveraging
merchant funded discount networks and their rich cash-back/discounts to make
specific demands of customers." comments Elizabeth Rowe, Group Director of
Mercator Advisory Group' s Banking Advisory Services and author of the report.
"The next feature of increasingly sophisticated bank loyalty programs is
customizing rewards and cash back bonus percentages to mirror account
balances/transactions, channel usage and age/loyalty of the account."
Report Highlights Include:
1. This report examines issues and strategies affecting the overall
profitability and margins of bank rewards programs; new vendor offerings
driving bank customer behaviors in ingenious ways by touching each account and
payment method of that relationship; and the loyalty communications that can
be deployed to captivate new customers and nurture long standing customer
relationships.
2. Many smaller banks ($10 billion) report a surge in new customers coming
through their doors. In fact, much of that new business is only offsetting
their losses in core deposits in late 2007. Acquiring and growing new accounts
is critical to this segment as they work to optimize opportunities against
larger competitors.
3. Overdrafts continue to be the engine of cash generation for the commercial
banking industry and overdraft income will increase at least 15% for 2009.
Rather than dramatically raising first incident overdraft fees, banks will
escalate the frequency of triggering events and raise the incremental cost of
each additional overdraft item. Fortification of rewards and loyalty programs
is required to overcome the ill-will generated by overdraft fees.
4. Loyalty initiatives should focus on online customers (both bill pay and
non-bill pay customers). They are banks' most active and profitable retail
banking customers. At a minimum, they are 20% more profitable than offline
customers, almost 30% of them have household incomes greater than $100,000 and
Fiserv has just found that active online bill payers carry 79% higher account
balances than average customers.
5. Tiers within rewards/loyalty programs should reflect both the number of DDA
transactions and the dollar values of those transactions. With an overarching
wrap of years of account ownership, programs naturally cost-sort themselves so
that low dollar, infrequent transactions by new account holders receive the
lowest number of points while big spending loyal customers are most generously
rewarded.
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