The Case for Easier Redemptions

  It used to be pretty easy for the folks in the marketing cubicles. Roll out a rewards program tied to airline miles, watch cardholders scramble to earn points, then count your returns because so few cardholders redeemed their miles.
  There was a small problem. Cardholders who didn't use their points had a habit of filing the card in the bottom of a drawer, or even switching to the next attractive card offer from a competitor.
  Card marketing experts now find that the best cardholders are those who take the time to redeem their points, whether it is for that trip, a DVD, or a gift certificate. This year, issuers are introducing new redemption programs that make it easier for cardholders to use their points.
  "Redemption was considered a four-letter word. But redemption is the key driver to loyalty," says Lars E. Holmquist, executive vice president of business development at Alpharetta, Ga.-based ESC Loyalty, a subsidiary of processor Total System Services Inc. (TSYS).
  Cardholders classified as redeemers outspend non-redeemers by as much as 355%, according to ESC's studies of clients' portfolios (chart, page 18).
  Clearly, rewards card are popular. Synovate's Inside Track, a survey of cardholder behavior, found that the average monthly new charges in the first quarter on a rewards card were $943 compared to $360 for a card that didn't offer rewards. That spending differential of $583 is up nicely from the $489 differential between rewards and non-rewards cards that Synovate found in the second quarter of 2003.
  "We encourage our clients to promote redemption. The cardholder feels the card is more valuable," says Gail Sneed, market development manager at Fenton, Mo.-based Maritz Loyalty Marketing whose clients include seven of the top 10 banks. "If they don't redeem, they aren't loyal."
  But getting them to redeem can be a challenge. A recent Maritz study found that nearly half of all consumers have never redeemed any of their loyalty points or airline miles, even though 36% of cardholders have been enrolled in rewards programs for over five years.
  In response, issuers are introducing a number of new rewards programs to snare consumers.
  Providian Financial Corp. began promoting recently its Real Rewards and Real Benefits programs in its effort to reach out to what it calls mainstream America. The Real Benefits angle offers cardholders free online access to their credit scores, and to request online an increase in their card credit line.
  Real Rewards appears somewhat more substantive. Along with the usual one point for $1 of spend, cardholders can earn points for carrying a balance on their accounts, or for paying their bills on time. Points can be credited to late fees or to lower the interest rate paid on a balance. Redemption is easy too, with $10 gift certificates earned for 1,000 points.
  The program seems to be finding consumer favor quickly. Over 500,000 cardholders had enrolled in Real Rewards since its introduction last November, Susan Ehrlich, senior vice president of new product and brand development, said at Thomson Media's 16th Annual Card Forum & Expo in Orlando, Fla., in May.
  Consumer Frustration
  Capital One Financial Corp. also is moving to easier rewards redemption with its replacement this month of its MilesOne Rewards Visa card with a Go Miles Visa. The major difference is a downshift from MilesOne's 25,000-point redemption minimum for a flight to Go Miles' 9,000-mile threshold. The new formula roughly translates into 9,000 points for flights of 100 miles or less. Go Miles also drops a 21-day advance purchase notice and a Saturday night stay that had been part of the MilesOne program. Cap One's program offers flights on virtually all U.S. airlines.
  The McLean, Va.-based issuer declined to discuss the change in detail but a spokesperson notes that consumers are frustrated that many airline programs require the same mileage thresholds for longer flights and for shorter, less expensive flights.
  Marketers are trying to be more creative in the rewards offered, with a focus on flexibility. Horsham, Pa.-based GMAC Mortgage is one of the 10 largest residential mortgage-loan servicers in the country with a $196 billion portfolio and about two million customers. This spring it introduced the GMAC Mortgage Equity Rewards platinum credit card that credits $25 to the cardholder's mortgage principal with GMAC Mortgage once she has earned 2,500 points.
  The MBNA Corp.-issued MasterCard awards one point for every dollar in retail purchases on the no-annual-fee card. Redemption of the rewards is automatic and credited quarterly. There is no annual limit on points or how many rewards can be applied to the cardholder's mortgage. GMAC Mortgage is a subsidiary of General Motors Acceptance Corp., the finance unit of automaker General Motors Corp.
  Along similar lines, Citigroup Inc.'s Citibank offers the Citi Home Rebate Platinum Select MasterCard with 1% of the cardholder's purchases deposited in her designated mortgage account to pay off outstanding principal.
  Cardholder flexibility has become the watchword at American Express Co., arguably the king of the card industry's rewards hill. In the last decade AmEx has put huge promotions behind rewards and it appears to have paid off. It was an early leader in expanding rewards to include merchandise along with miles. About 60% of its cardholders are now enrolled in at least one of its Membership Rewards programs, up from 30% in 1998, according to a spokesperson.
  It was around that time when AmEx began emphasizing "everyday spending" with its card at retail merchant locations, a radical move for the travel-and-entertainment giant whose card was mostly used at airline ticket counters and travel agencies, hotels, and fancy restaurants. The most visible promotion was its double and sometimes triple points for spending at gas stations, grocery stores, and drug stores.
  Everyday spend now accounts for about two-thirds of charge volume on AmEx cards, compared to the one-third spent on T&E, the spokesperson says.
  AmEx has expanded its rewards line-up to offer cardholders the ability to create their own deals. The consumer press recently got a bang out of AmEx and its "experiential" rewards, including an edge-of-space flight in a MIG-25 supersonic jet for three million points.
  New rewards of a more earth-bound sort include a charitable-giving feature in which cardholders can donate their points to any of the 850,000 not-for-profits that can be found through the AmEx Web site. Points donated to a charity are valued at $5 per 1,000.
  The creativity of this approach appears to build cardholder commitment, a marketing strategy advocated by AmEx's archrival, Visa USA. The San Francisco-based bank card association urges its members in a recent research report to build a commitment for card programs through rewards and by tailoring cards to various consumer segments (box, page 16).
  Committed cardholders put as much as 75% of their spend on their chosen card and they are less likely to drop the card, Visa found.
  Cardholders feel more committed to a card when they pay some kind of fee to participate, says Holmquist of ESC Loyalty. "It puts skin in the game if a program has a fee on it. (The cardholder) consciously chooses to use the card," he says.
  Redemption becomes a landmark for the consumer with spending on the card increasing as the reward threshold is neared, says Holmquist. Further, spending on the card continues after the threshold is passed because it has become a habit for the consumer to use the card.
  ESC found that redeemers outspent non-redeemers about three to one, depending on the portfolio. One ESC client reports its cardholders who redeem spend more than $2,500 a month versus about $600 for its non-redeemers (chart, page 18). Another client reports redeemers spending about $1,500 monthly versus $500 for non-redeemers. ESC declines to disclose the clients.
  Holmquist encourages issuers reinforce that greater spend by giving cardholders bonus points or double points after redemption. This approach deters the dreaded "cash and dash" phenomenon where cardholders drop a card after redeeming points or miles for a reward.
  Cash and dash is a symptom of cash-back programs, a feature that allows cardholders to take their money and run, Holmquist claims. "Cash back is a discount, not a reward. That's not motivational," he says.
  Tangible Payoff
  Issuers should use bonus points as a strategic tactic, adds Holmquist. For example, award double points for a grocery-store purchase to the cardholder who typically uses her card for travel. Or award the consumer with 500 points when he is getting near a redemption threshold or his annual renewal, Holmquist says.
  That kind of segmentation and targeting of rewards is a natural progression from a similar approach that has long been used for card-acquisition campaigns. Flexibility and creativity appear to lead to redemptions and redemptions forge the sought-after committed cardholder.
  "The most committed are those that actually use their rewards," says F. Alan Schultheis, a director with San Francisco-based card consultancy Edgar, Dunn & Co.
  Cards with rewards programs are growing faster than cobranded cards in general, and much of that is due to quicker redemption deals, according to Schultheis.
  Using rewards to bring in new cardholders can pay off, according to an Edgar, Dunn survey. "Half the people (were) actively using a card in 2003 that they didn't have in 2002. That usage was worth $2,500 in charges," says Schultheis.
  Did they all change cards because of an enticing reward? Not necessarily, admits Schultheis. But consumers said they would use a new card if it offers a tangible payoff.
  To get and retain cardholders, issuers should bundle short-term, easy rewards with the long-term aspirational deals, suggests Schultheis. Some cobranded gas cards have successfully adopted the tried-and-true merchant program where a gift certificate is automatically sent to a consumer after she crosses a spending threshold at the store.
  "They spend $2,000 and get a $20 gift certificate. It's immediate and says 'thanks for using us,'" says Schultheis.
  Meanwhile, an issuer should keep promoting the flights or other rewards that require tens of thousands of points so the cardholder is continually banking points.
  Point Burners
  Maritz has adopted an old-fashioned merchant technique of barnburner sales, dressed up for the 21st century as "point burners." A successful point burner will not only get some new redeemers but also clean out some of the stock.
  In the sale, new merchandise is offered for a limited period, or discounts are offered on older items, says Maritz's Sneed. The promotion can be sent to all cardholders or targeted to those who have stopped using their card. To put some pressure on, set a deadline on the deals or tie the sale around an event like Father's Day.
  "Stress immediacy. Encourage 'I see it, I want it,'" says Sneed.
  One issuer ran a point burner in which 29% of cardholders who redeemed had never redeemed before, says Sneed.
  American issuers may also consider taking a whole new approach to their loyalty programs. The Loyalty Group's Air Miles reward program in Canada last year notched its 15 billionth mile issued and 12 millionth redemption since its 1992 beginning. About 8.1 million Canadian households, or more than 15.4 million individuals, participate in the program with rewards offered by about 100 merchants.
  That extraordinary success comes with a big qualifier. The Air Miles program in Canada, unlike U.S. airline affinity card programs, is not tied to a single issuer. Instead of a bank card, participating consumers receive a magnetic-stripe card that they use whenever they make a purchase at a participating merchant. The merchant is responsible for updating the consumer's card with newly earned points. Cardholders paying with plastic must also hand a credit or debit card over to the point-of-sale clerk.
  The cardholder can choose among 500 rewards, starting with inexpensive movie tickets and gift certificates and going up to family vacations at Walt Disney World. Rewards are broken into five categories--travel, leisure and entertainment, merchandise, gift certificates and gift cards, and music. There is no cash-back feature.
  Toronto-based Loyalty Group promotes redemptions through quarterly statements, magazine ads, online promotions, and Travel & More magazine, a twice-yearly digest of offers and deals, says Mitchell Merowitz, a Loyalty Group senior director. Loyalty Group is a division of Alliance Data Systems Corp., the Dallas-based processor and private-label credit card marketer.
  Double Miles
  The American Express Air Miles card, issued by the American Express Bank of Canada, and Bank of Montreal's WestJet Air Miles card allow Air Miles participants to earn double miles. A cardholder must present at the point of sale the appropriate credit card along with his Air Miles card to earn the double miles.
  Air Miles is geared towards merchants, and American issuers have not knocked down any doors to offer a similar program in the states, despite its mass acceptance in Canada. But there are clearly a number of models for credit card issuers to choose from when setting up a program that encourages cardholders to redeem their points. It used to be enough of a challenge to acquire a customer and convince him to spend. Today, you have to entice him to redeem as well.