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Cashing in Rewards Programs
BY BOB GROTHE
Cash has its place in a well-rounded rewards program.
Financial institutions have incentives to keep cash part of the mix for their card rewards programs but not to let it dominate.
Despite the increasing electronification of payments, cash is still king in certain circumstances — such as card reward programs. When our banking clients have asked their customers what their preferred form of rewards is, customers usually respond, “getting cash back.” And the banks have listened; cash rebate programs currently represent 36% of the rewards programs available in the market.
To be sure, making cash the sole reward has some undeniable benefits:
- It’s easy to communicate.
- It’s easy to set up.
- It’s easy to manage.
- It does influence spend behavior.
Despite these advantages, cash isn’t the best reward method to anchor your loyalty program. In fact, cash as a stand-alone reward comes with plenty of drawbacks compared to other options, including:
Cash is easy to match and easy to beat.
If it’s easy for you to launch a cash rebate offer, it’s also easy for your competitors, so there’s little sustainable competitive advantage. Blended percentages that tout “Up to X-percent back” have been surpassed by flat rates that give members the top percentage immediately. Now, we’re seeing double cash-back for purchases in some categories. There’s not much competitive differentiation in such a bidding war.
Cash doesn’t expire.
When a program utilizes miles or points for rewards, a percentage of credits are never redeemed, which is called “breakage.” While customers understand the “use-them or lose-them” nature of points, they are less understanding when it comes to cash balances, so the financial institution typically doesn’t receive the positive benefits of breakage.
Cash has little lasting impact.
Reward items that are used repeatedly for tangible items (cameras, TVs, etc.) continue to reinforce the loyalty program’s benefits. Recently, for example, I was admiring a friend’s digital camera and he responded proudly, “Marriott Rewards!” Would anyone do that with credits listed on a card statement? Unlikely.
Cash isn’t right for everyone.
Research consistently shows that cash holds less appeal for affluent cardholders than for mass-market customers. Affluent audiences want exclusive offers and access from their rewards programs. At the same time, there will always be a group of customers who will redeem only for cash. So, how do you use cash within a rewards mix to achieve real benefits to your loyalty program?
Marketers can use cash’s appeal to help lower their program’s cost-per-point. For instance, one U.S. bank’s program has a $25 statement credit at 5,000 points, which equates to a program cost-per-point of 50 basis points. A $25 restaurant gift card in the same program requires 3,500 points to be redeemed, which equates to a cost-per-point of roughly 70 basis points. Thus, it will cost participants roughly 43% more in points to get $25 cash versus the restaurant certificate. Participants who want cash have to redeem at a much more advantageous cost-per-point to the bank.
When it comes to rewards programs, then, cash can play a role but it doesn’t have to be king of the hill.
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