You can't pick up a major daily without stumbling over at least one article about credit woes and bank losses. But rather than run away from the overwhelmingly negative news, bank-marketing firms are trying to spin an upside message, using various rewards programs to rebuild tarnished customer relations.
Changes were long overdue anyway, and the subprime collapse has forced banks to cut costs, rebuild customer relationships and develop additional revenue from products, says Jonathan Silver, the chief executive of Affinity Solutions, which creates relationship-marketing programs and whose clients include Citibank, Washington Mutual and U.S. Bank.
Obviously, offering merchant-funded programs instead of bank-funded programs is the most cost-effective option for banks, and they've developed into a more viable option than rate-based marketing, Silver says. "We didn't see it until the fourth quarter, when the banks started to say, 'Let's respond specifically to the mortgage issue,'" Silver says. "In the last three or four months, there has been a substantial focus on how can we use this platform to reduce existing costs. How can I use the rewards side of the house to build customer relations that have been tarnished? How can I use the rewards environment to drive incremental revenue to offset the bleeding?"
Silver says that it's still too early to know if these programs designed to change customers' attitudes toward banks are actually drawing more customers. However, he has followed the rapidly growing traction of card usage over the past two years — and sees nothing but upside for banks. Credit- and debit-card usage grew rapidly between 2005 and 2007, according to TowerGroup.
Moreover, debit-card usage skyrocketed 35 percent, while credit-card usage (and ACH transactions) jumped 18 percent during the same period.
Rewards programs can also be used for more than just cards. Online bill-pay merchant-funded rewards programs offer rewards to customers who pay bills via the Internet for their wireless phone, cable and health-club expenses, for example. These programs return a percentage of cash spent back to the customer.
Silver also says that mid- and small-tier banks are offering merchant-funded rewards programs for home-equity loans or lines of credit, which reward customers with cash back for using their loan proceeds at particular retailers, such as Lowe's or Home Depot.
Loyalty programs that have proven effective in the past can work in today's economic environment, says Thad Peterson, a strategist for the financial-services sector at Maritz, a marketing firm whose clients include Bank of America, HSBC and Wells Fargo. "The idea of using loyalty programs and rewards to hold a customer and reinforce the value of a relationship is certainly important right now," says Peterson, referring to the subprime-mortgage crisis. "There is a lot of energy around developing programs that will optimize the programs that are already out there and to make sure to hold a customer and hold the value proposition in place."
Not all industry observers believe rewards programs are effective in improving customer attitudes. One of those naysayers is Will Wittkoph, senior global director of loyalty marketing at Carlson Marketing, which advises financial-services clients on rewards programs. In fact, he warns banks not caught up in the subprime meltdown to avoid changing marketing strategies.
Customers are smart: They can smell fear a mile away. And they certainly understand when their long-time bank, for example, is trying to buy their loyalty. "Banks are getting smarter about relationships in general," Wittkoph says. "If you start down this 'I'm going to pay for the relationship [using rewards programs],' it's a slippery slope. The loyalty, then, is to the incentive rather than to the financial institution or the benefit they get by working with them. Loyalty doesn't necessarily mean giving away points or prizes." However, the strategy has traction for a reason: Customers do understand points, prizes, airplane miles and cash back.
(c) 2008
