Merchant-funded loyalty programs provide financial institutions with a way to boost what has been a large, but stagnant, loyalty base, according to a recent webinar by the National Association of Credit Unions and Affinion Group.
“This is a largely untapped space with tons of potential for credit unions, offering new ways to attract, retain and engage members [credit union parlance for customers],” said Tim Lukens, Affinion vice president.
The industry needs more engagement with customers to drive more profitability, Lukens explained. Average member profitability is down at most financial institutions following financial crisis; globally, average member profitability declined 5 percent to 15 percent since the crisis
Efforts by financial institutions to restore profitability face hurdles, Lukens added:
· Fifty-nine percent reported decreased member loyalty
· Sixty-three percent say members more price sensitive and seeking value
· Members/customers have a greater to switch financial institutions to move away from what they consider to be poor service
Traditional profit recovery strategies – rate and fee increases, conventional products and organic growth – will not readily fix the problem, Lukens said. Many financial institutions will struggle because:
· Members/customers have broader expectations
· Service demands have increased
One of those increases in service demands is for payment options other than cash. New payments methods combined with card payments evolving as preferred methods of payments, thanks largely to the growth in e-commerce, with expectations that $1 in every $10 of discretionary spending will soon be spent online.
At the same time, consumers are looking to stretch their dollars through coupons, according to Lukens. Among all credit union members, 68.9 percent indicated they were likely to use a personal coupon service and would be willing to pay $4.03 per month.
Lukens added that as consumers search for value, group buying and deal-of-the-day sites are continuing to flourish in both traffic and usage. One quarter of consumers purchased a gift during the 2011 holiday shopping season with a flash sale site.
“Nineteen percent of consumers with household incomes over $100k+ say they subscribe to at least one flash sale site,” Lukens said. Therefore, retailers quickly adjusting how they reach consumers and how they spend their ad dollars. One area that they see promise in is loyalty programs, for a number of reasons that Lukens outlined:
· The average household belongs to 18 loyalty programs.
· Recent downturn in the economy has contributed to increase in loyalty programs
· Financial Institution loyalty programs have turned from a nice to have to a must have, yet they are in need of new innovation to re-spark growth.
These programs help financial institutions provide members/customers with some of their needs, including products and services that will help them save time and money and programs that offer value, flexibility and choice, according to Lukens. However members/customers don’t want “one size fits all” offers – they want relevant and targeted offers based on their spending patterns.
Such programs build on a strong base, Lukens added. Financial services leads all industries with nearly 429 million customers in loyalty programs. The airline industry is second at nearly 325 million, while specialty retail has nearly 287 million. Yet financial services industry loyalty participation has been relatively flat since 2008k due to reduction of card spend, new card acquisition, and increases/changes in fee structures due to the regulatory environment.
“Loyalty programs are more important than ever in the current regulatory environment,” Lukens said.
Merchant-funded loyalty programs can help the financial services industry get off this plateau because they transfer the cost from the financial services firm to the merchant, are easy for customers to understand and use and provide highly targeted offers, Lukens said. Customers also benefit because there is no cost and they can earn rewards or savings on everyday purchases.