Building a credit card rewards program can be difficult, especially for community banks.

Smaller players have to compete against the largest card issuers, which can afford star-studded advertising campaigns. But more community banks are reconsidering offering credit cards as a new source of revenue and to deepen relationships with customers.

Providing a rewards program is essential to ensure a community bank's credit card ends up at the top of a customer's wallet, industry experts say. Small banks as a result are focusing on providing programs that are easy to use, offer cash back and capitalize on their knowledge of the local community.

"The burning of points is where the consumer relationship comes full circle," says Bob Legters, senior vice president of loyalty services at Fidelity National Information Services (FIS), a payments-services provider. "The customer either finds out they have a great relationship with the bank, or they end up not happy. A lot of banks, especially community banks, are looking for something that is more personalized and offers more diversity."

Continuous improvements are essential to prevent rewards programs from becoming stale, says Joe Hardway, chief information officer at United Community Bancorp in Chatham, Ill. The $1.3 billion-asset company recently revamped its credit card rewards after doing the same for its debit cards. United Community has tied earning rewards to other desirable customer behaviors, like signing up for electronic statements and using its online billpay.

"We have built our entire retail package around rewards," he says. "You have to have it in the forefront of your mind to be successful. You have to add and improve it as much as you can."

Experts on loyalty programs offer three bits of advice:

Keep It Simple

Many small banks make loyalty programs too complicated and fail to get across the benefits, industry experts say.

"There is a broad trend in the rewards industry toward simplification for the customer," says Frank Martien, who leads the commercial payments practice at First Annapolis, a consulting and investment banking firm for the payments industry. "People's lives have become more busy and complex so it is important that the program is easy."

Community banks are often tempted to diversify their rewards too much, says Fred Grigsby III, a senior director at cards processor Total System Services (TSS). Instead, banks should ensure that the rewards are aligned with customer preferences, he says.

A simple rewards program also makes it easier for branch employees - who are crucial to its promotion - to explain the rules to customers, Martien says. If a program is too complicated, employees are likely to avoid talking about it for fear of being unable to answer questions.

United Community's credit card rewards provides one point for every dollar spent, which can be redeemed for gift cards, merchandise and its most popular option, travel, Hardway says. The gift cards work at many stores and are branded with the bank's name.

Its branch employees typically call customers after they open an account for various reasons, and a discussion of credit card rewards is a great icebreaker, he says. The calls have the added benefit of encouraging customers to not only sign up for the credit card but to activate and use it.

"I'm a big believer in rewards programs after seeing what it can do for a card program," Hardway says.

Cash is King

Community banks have become increasingly interested in cash-back programs, industry experts say. Those programs are usually easy for customers to understand and the redemption rate is generally 100% since the rewards are automatically given back to the consumer, Legters says.

Cash-back rewards are the most popular among consumers, though merchandise and travel rewards also score well, says Ken Paterson, vice president of research operations and director of credit advisory service at Mercator Advisory Group, an advisory firm for the payments and banking industries.

However, cash-back rewards programs have some drawbacks, Legters notes. Every time the customer receives the cash, "the relationship starts over," he adds. "Now you have zero value in that relationship" unlike points that the customer uses for other products or services over a period of time.

Stay Local

Despite the interest in offering cash back, a significant portion of banks and customers are also interested in rewards that are tied to the local community, experts say. For example, a bank in Alaska might allow customers to redeem points for a local hiking tour.

"All banks, but particularly small banks, are interested in local content," says John Brown, senior vice president at Cardlytics, a card transaction analytics and marketing firm. "It is one of the main topics we hear about."

Merchant-funded programs are a way for community banks to take "advantage of their close proximity to where their client base is," says Brian Riley, research director at CEB TowerGroup, a research group. "Larger banks are dealing in so many different markets they can't get down to the essence of a community. Community banks can get the local flavor."

Through merchant-funded programs, customers are rewarded for visiting participating businesses. The retailer pays for the rewards, which may include earning cash back, points or miles. These programs can help community banks deepen relationships with commercial customers by helping those companies grow their customer base, Brown says.

However, doubts remain about the effectiveness of merchant-funded programs, experts say. Customers must be extensively informed of the merchant rewards they may qualify for, Grigsby says.

Because of this, merchant-funded rewards may work better with debit card programs than credit cards, says Michael Misasi, a senior analyst with Mercator. Customers generally log into their checking accounts multiple times a month, giving them ample opportunities to see merchant-funded offers. In contrast, customers usually visit their online credit card accounts less frequently.

United Community also has a merchant-funded rewards program, which currently focuses mainly on national businesses. However, the bank is considering using data about where their customers are shopping to help sign up additional local merchants, Hardway says.

"The key to merchant-funded programs is ensuring there is real value," Martien says. "You have to avoid the scenario where you are handing out a coupon book."

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