As the battle over interchange fees continues, the pendulum of power appears to be swinging toward the merchant. This power shift inherently changes the relationship banks have with merchants, which up until now has been built upon the convenience factor that banks' cards provide merchants' customers.
With the risk of new regulations compressing interchange, this traditional value proposition no longer works. Banks need to find a new value story around card acceptance in general and merchant-funded reward networks in particular.
Merchants are competing with one another more fiercely than ever. Understanding how their customer segments behave, including their spending habits and preferences outside their store, can give merchants the edge they need. This is the new value banks can offer — customer insight that retailers can't provide themselves.
For example, most of us have a routine errand run during the week or on weekends. We may drop off dry cleaning, then on occasion head to our favorite coffee shop, stop to fill up our gas tanks and then pick up some odds and ends at a discount retailer. While retailers can make marketing decisions based on shopper behavior in their stores, they don't know where I've shopped before or where I'm going afterward.
Banks can use this information to identify statistically significant segments of customers with similar behaviors, and design a network that would be appealing to these customers. But beyond designing a relevant merchant network, banks can work with partner retailers to design promotions that are relevant to the cardholder.
So, the next time I engage in my Saturday errand run, my gas station gives me a reduced rate for gas and tells me to enjoy a free drink with the purchase of a donut at my favorite coffee shop. I sometimes go there, so this is highly relevant to me and increases both my frequency and loyalty to both merchants.
The next Saturday, I may receive an offer for double points to shop at a store that's not on my regular route. I may like the deal so much that I add this store to my Saturday routine.
Relevant offers targeting preferred-customer segments can encourage cardholders to increase their shopping frequency, try a different shopping experience or simply purchase more at a particular store.
In the highly commoditized rewards space, these smart rewards programs can be a key differentiator for a credit card. In essence, the rewards program is a win-win-win for the bank, the merchant and the customer.
Unfortunately, too many rewards programs require customers to work for their rewards, whether it's carrying an extra card, printing out a coupon or keeping track of points.
If banks want to maintain profit margins and drive customer loyalty, they need to build better relationships with merchants and cardholders by creating relevant rewards programs that benefit everyone involved equally. This means working with merchants to build programs that segment customers and enable targeted promotions. It means instant rewards that happen automatically, rewarding customers when it counts, as close to the behavior as possible. It means communicating offers and rewards that are relevant to customers in clear, crisp language.