Innovation in Rewards Programs

Navigator Edition: April 2012
By: Sarah Phelps

Despite various references to the potential negative impact of recent payments industry difficulties on rewards programs, they continue to form a central part of payment products, including serving as the basis of account acquisition and retention strategy. In fact, new investments and innovations are appearing everywhere. As before, much of the change is being driven by external factors such as regulatory change, access to new marketing and distribution channels, and smart phone adoption. While the examples of actual implementation of these solutions are in some cases few and far between, program managers should pay close attention as each advance has the potential to drive engagement, and therefore revenue, for the sponsoring organization as well as for key partners.

Repositioning Enterprise Programs: In the beginning, the customer value proposition for enterprise rewards such as Banco Popular and Citi ThankYou, came from two primary sources: credit and debit spend. While it’s true that many enterprise programs also began to leverage their currency to drive point earning for utilization of non-payment products; without combining credit and debit, the value from these other sources was insufficient to drive customer behavior. With debit interchange regulation presenting a significant practical challenge to points-based debit rewards, the rationale for enterprise programs has lost footing. However, with banks more broadly re-positioning base retail product strategies, watch for points-based rewards to play a role. You may see points programs connected to a range of activities including account type, monthly balance, debit spend tiers, or direct deposit account ownership. As an alternative to or a component of enterprise programs, points based debit is also being replaced, or supplemented, with merchant offers that either give the consumer discounts on purchases or deposit cash into an associated checking account.

Merchant-funded: In the wake of debit interchange regulation, these programs continue to captivate program sponsors. While the potential for the traditional model (centered on online purchases), to penetrate card volume and spend has been challenged historically; the underlying business of these networks remains attractive. For example, in financial services programs, the merchant-funded revenue share rate eclipses that of legacy signature debit and even credit interchange. That said, merchant-funded program revenues are unlikely to drive a meaningful difference until spend penetration increases. The program sponsor also has to decide what proportion of those revenues will be passed on to the cardholder rather than retained by the bank. Bank of America’s Add It Up program maximizes spend penetration by enabling online banking customers to use the program through all card products linked to the online banking account.

Mobile Commerce: Many rewards program managers continue to struggle with how to extend into the mobile channel. One underlying challenge is that most organizations are still experimenting with how to deploy their own brand into mobile; recognizing that the device is already crowded with a diverse range of customer utilities (telecom, e-mail, texting, information discovery) and that the consumer’s behavior in this environment remains somewhat of a mystery. Several organizations are in the midst of taking more obvious or practical steps, like making available points balance available as an extension of the mobile banking application, or serving up alerts for redemption activity. A few organizations are focusing on this channel as a way to drive their merchant-funded programs with stand-alone applications for merchant offer distribution. Perhaps the most notable innovation in the segment, is the integration of the mobile device into the redemption experience through in-store purchases. While in their infancy, each of these solutions has the potential to impact program economics over the long term, potentially driving a better consumer experience, increased merchant-funded volume or lowering redemption cost.

Social Media: Perhaps the greatest of the unknown horizons is the social media space. Three issuers: American Express, Chase and Capital One, have boldly gone where no others have gone before. What is fascinating is the slightly different approach each player has taken in expanding into this channel. American Express and Capital One, for example, have planted their stakes at the brand level each having over two million fans while Chase has tied their Facebook presence at the product level with approximately five hundred thousand Fans. More intriguing are recent moves that cross into the merchant-funded space with issuers distributing offers through Facebook and Twitter. Based on current volumes, it is unlikely that issuer postings drive a significant amount of activity for merchants; however, with the remarkably low cost of this as a channel (arguably materially lower than even e-mail), future attempts at utilizing social media to drive customer engagement are inevitable.

Be it points-based, cash or discounts, membership programs and customer incentives will continue to form an essential part of product strategy across key loyalty industries (financial services, travel and retail). Rewards programs are central to the customer value proposition for these organizations and their most valued customers are also the most active participants. Moreover, program member lists and activity data, not to mention accrued program balances, are key assets of the sponsoring organization. Having a constant flow of communications broadcasting new ways to utilize the program and to garner incremental value is core to sustaining customer awareness and driving ongoing engagement. In the near term, expect some program sponsors to leverage innovation to drive customer engagement and others to move more aggressively into the mobile and social media channels.

For more information, please contact Sarah Phelps, Principal specializing in Loyalty Support,

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