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Loyalty in the banking sector is typically driven through credit cards. According to a recent Bankrate study, there are approximately 2 billion credit card holders in the USA alone, and each person carries four credit cards on average. Additionally, the rise of fintech start-ups is threatening the share of wallet for even the largest of banks. The competition is real and intense! To differentiate themselves, banks need to center their offering on core customer needs and evaluate their loyalty strategy to draw synergies from these emerging start-ups.
Loyalty programs for banks are mostly focused on credit cards, for which the revenue comes from three key sources – consumer card fee, interest fee and interchange fee. The revenue stream that credit card loyalty traditionally influences is the interchange fee income, by driving increased credit card usage. However, the interchange rate is very low (0.5%-2% of the transaction value) and does not form a significant chunk of overall credit card revenues (the largest source being interest income), thus, reducing the overall impact of loyalty. Aside from the revenue, the funding allocated to a loyalty program is also limited due to low margins on credit cards (3% or lower).
Additionally, with the recent introduction of cap on interchange rates in regions such as Europe and Australia, trevenue to issuing banks has declined. To combat this, some banks have taken drastic measures such as increasing card fees and lowering the rewards generosity, which has a detrimental effect on the overall customer experience.
From a customer perspective, most banks have undifferentiated credit card perks. As a result, customers choose banks based on fees, which only serves to reinforce a transactional relationship between customer and bank.
Furthermore, with advancements in data and technology, customers increasingly expect instant gratification of the services. This has contributed to the emergence of fintech organizations across the banking value chain, such as real-time payments, immediate credits, checking accounts, etc. This is eroding the traditional banking revenue. According to Accenture’s 2016 Fintech report, almost 2% to 3% of the bank revenues are at risk from fintech competition due to lower loan origination, net income and fewer customers acquired.
These challenges reflect variations in performance of bank (card) loyalty programs as evident from Aimia internal benchmarks.
The loyalty programs that are performing better than the others, per Aimia performance benchmarks, have been leveraging one or more of the below mentioned best-practices:
While the above current best practices can help banks perform better, these may not be enough to sustain differentiation in a competitive financial services sector. A futuristic banking organization has to be centered on customer needs – both their financial as well as non-financial digital eco-system. Maximizing value through internal and external assets, building trusted advisory and enabling instant access through technological innovations would be key to success in the future.
For banks to stay relevant and sustainable in future, they will need to buckle down and act by placing customer needs and interests at the heart of their business and loyalty strategies. Setting up a loyalty eco-system that rewards customers across their entire bank relationship, leveraging synergies from fintech players to enhance customer experience and establishing trusted relationships through a 360-degree view of customers, will prove to be the biggest differentiators in the long run.
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