Increased competition among banking rewards programs and a shift in consumer spending from credit cards to debit cards is forcing the financial industry to look for a new model for member rewards. As competitive pressure forces banks and credit unions to provide a broader selection of valuable rewards, margins from interchange continue to shrink. It's time to consider a transaction-based approach to drive more value.
Credit union executives know that rewards programs are increasing in popularity. The value of these programs is a significant factor for consumers when selecting a credit or debit card. As a result, it also influences the financial institution selection process. Once a consumer has chosen a place to bank, the value of rewards is key to long-term retention and loyalty. CUs must provide a wide range of reward options to generate interest. These options are paid for with revenue from interchange. As more financial institutions establish and expand rewards programs, more interchange revenue must be spent in order to compete.
This problem is exacerbated by the shift from credit to debit. Consumers, no longer trusting credit card fees and other policies, have quickly turned to debit as their primary payment vehicle. Unfortunately, their expectation is that credit and debit rewards are equal in terms of both cost and value. However, the lower interchange margins provided by debit make it impossible for CUs to provide rewards equivalent to credit card programs — and the national media has been quick to highlight the disparity. This is a model where nobody wins.
My experience as a banking executive has taught me a few things: first, the more relevant the rewards are to a consumer's tastes and preferences, the more valuable they are. Second, merchants will contribute more to a rewards program in exchange for better consumer targeting. Third, online banking is a huge channel with high customer engagement. Finally, the transaction data that lives within all banks is incredibly valuable and the key to reconciling both.
By linking rewards to actual transaction data in the online banking channel, CUs can provide rewards based on the products their members purchase every day. For example, a pizza chain can provide offers that can be positioned next to specific line items in the online banking experience for purchases made at its stores. Offers can be provided by local, national and online retailers seeking to reward members for continued purchasing, or to attempt to poach a competitor's customer. To redeem, members simply use their card — enabling them to redeem rewards at either the retail location or online Rewards earned are updated in the online banking statement — members never have to visit another site.
The strength of this form of targeting increases member participation in the program, which increases the dollar value of the rewards. Such an approach can provide an average user $100 to $200 per year in rewards and up to $1,000 or more for active users. Mary Olson, VP-marketing for Atlanta-based Delta Community CU agrees with the potential of transaction-based rewards: "Credit unions have become known for providing exceptional rewards programs. Embracing a transaction-based approach should enable CUs to bolster their competitive position and increase member loyalty by providing more meaningful rewards." Under this model, CUs simply deliver merchant offers to the online statements of members who fit a target profile. Member data is always secure, never leaving the CU.
The old model for providing rewards will continue to require CUs to spend more in order to provide a broader array of more meaningful rewards, while having less impact on loyalty and retention. A transaction-based approach provides a new model that will deliver more relevant rewards that merchants will fund.
This approach creates a valuable "win-win-win" opportunity for credit unions, members and participating merchants alike. Merchants are able to accurately target offers and members experience relevant rewards in the form of hundreds and even thousands of dollars in savings on products they normally buy. Most importantly, it presents credit unions with a profitable and relatively painless means of retaining and better accommodating members during their transition from credit to debit lifestyles.
Lynne Laube is COO and co-founder of Cardlytics, a provider of targeted, card-based, merchant-funded rewards technology. She can be reached at (888) 798-5802 or by e-mail at lynne@cardlytics.com.
