Loyalty is perhaps the Holy Grail in retail banking, since having it means that a financial institution no longer has to compete based on margin-reducing commodity pricing or pay the price for constant churn.
Building a loyalty program that effectively engages customers has often been a struggle. And it’s even more so at a time of pandemic-induced mandates, when limited travel, entertainment and shopping, as well as reduced household income, block banks from relying on their go-to reward schemes to win and cement customer relationships.
“In the last several years, loyalty programs have been on the decline,” says Wilson Raj, global director of customer intelligence at SAS, a leading financial industry services and software provider. “In fact, you could say loyalty programs are dead. But the notion of the loyalty bank, the loyalty brand, the loyalty organization is very much alive.”
Loyalty programs serve a purpose – perhaps now more than ever, as banks face stiff competition, economic recession and customers who might otherwise not hesitate to seek out better deals. Loyalty programs are ideally “meant to encourage behavior, as well as usage,” according to David Shipper, senior research analyst for debit, credit and prepaid at Aite Group.
In the wake of COVID-19, bigger, savvier banks are already shifting their programs to appeal to customers facing this “new normal”—offering rewards in the form of groceries, food delivery service or cash back instead of flights, hotel rooms or fancy restaurant options.
Amber Foucault, vice president of product for Sensibill, a financial technology company that works on loyalty and personalization programs with banks, agrees that staying relevant is key to engaging customers and encouraging desired behavior.
“This is a very strange moment in time… but that’s all the more reason to stay relevant with the right messaging, offers and outreach,” she says. “It really starts with the small stuff.”
For example, consider President’s Choice Financial (also known as PC Financial), the Toronto-based banking subsidiary of a popular Canadian grocery chain. With a parent company that already sells basics like food, clothes and pharmaceuticals, Foucault points out the Canadian bank was well-positioned to offer loyalty perks that appeal to house-bound, cash-strapped customers. But the bank has also been gathering shopping information from customers’ payment accounts to offer more customized rewards – including the option to donate at local food banks –that engage customers emotionally as well as financially.
Even digital financial providers, who typically steered clear of loyalty programs, are seeing the opportunity to build on the momentum that lockdowns have created in terms of engaging more consumers and businesses electronically.
“Previously, online-only banks may have offered incentives to attract customers who could be wary of digital banking,” says Malcolm Cohron, national digital transformation services leader of BDO Digital. “Customers who adopt online banking during this pandemic are likely to permanently shift their behavior.”
Like other institutions, digital-first banks see the value in loyalty programs as “an important tool for both customer acquisition and retention,” Cohron adds. “They can help open opportunities for cross-selling and upselling banking products. Customers who are highly satisfied with their digital experience are much more likely to open new accounts with their existing bank.”
The challenge for banks lies not only in what rewards and messaging will hook customers, but how to make these programs cost-effective in today’s market, where, as Shipper points out, “the per-transaction net revenue is usually the same, but fixed costs are up.”
Some banks are opting to set the bar higher on their reward redemption terms or even on the expiration of points or rewards to lower costs and reduce liabilities. Also gaining traction are rewards that tie into financial management and budgeting tools – starting a dialogue about financial life goals and setting rewards based on meeting accomplishments. Programs that once relied heavily on travel or entertainment rewards are expanding to give grounded customers the option of using their accrued points on other products and services, including groceries, take-out meals or streaming entertainment.
Raj says that U.S. banks may take a page from counterparts in the Asia-Pacific region that are shifting from more monolithic, all-or-nothing loyalty programs to ones that incorporate multiple delivery channels, a more varied range of rewards and provide more frequent perks.