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Strategic Excellence in Payment Card and Bank-wide Loyalty Schemes- 3rd edition

Published: February 2010

Strategic Excellence in Payment Card and Bank-wide Loyalty Schemes

The changing role of the debit card has resulted in the successful components of credit card marketing programmes featuring more in the debit space. One outcome is the rise of the rewards scheme.

Loyalty programmes have become increasingly popular and are prominent features of many cards in both developed and emerging markets.

Section one of this report reviews recent innovations, global market intelligence and best practice in the running of a loyalty and rewards programme. Section two presents the key fundamentals and metrics needed to create a successful programme.

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Loyalty and reward programmes are critical marketing tools, allowing issuers to achieve key strategic goals, including:
●        reduced acquisition cost;
●        lower customer attrition;
●        penetration into new market segments;
●        increased card activation rates;
●        higher spending levels per customer;
●        fee revenue from both the card and loyalty programme;
●        higher levels of cross-selling of other products;
●        greater brand strength and awareness;
●        higher revolving balances.

Specific benefits include:

●   Loyalty programmes have allowed card issuers to add value to their offering. The favourable economics of customer retention are often cited. The first formal study, conducted by Frederick Reichheld and W. Earl Sasser in 1990 found that in service industries, profits increased in direct pro- portion to the length of a customer’s relationship. The authors noted that at MBNA, a 5% improvement in customer retention increased the average customer value by 125%, and concluded that halving defections could more than double the growth rate of the average company.

●  In the card business there is no doubt that customers are more profitable over the longer term . In fact, given the high cost of acquisition in many markets, cards only become profitable if a customer remains for a certain length of time. Even though a customer relationship is clearly one of the most valuable assets a card company can have, the relationship is often undervalued. The emphasis has been on recruiting new cardholders - and overlooking the value of existing cardholder relationships. However there is a growing recognition of the importance of customer retention as profits have come under pressure from competition, regulators, and the less certain operating environment.

●   Customers have become more sophisticated and expect more from financial services providers. With competitors offering an endless variety and combination of perks and benefits that accompany cards, many issuers are using a loyalty programme to compete more successfully.
As markets mature, competition between issuers invariably leads to increasing costs for loyalty programmes as new entrants and established issuers try to outdo each other  by offering increasingly more attractive programmes. Issuers have tried to avoid this escalation of costs of loyalty programmes by enhancing the creativity of their offerings and by refining the match between their loyalty programme and the prospective customer.
Section one of this report reviews recent innovations, global market intelligence and best practice in the running of a loyalty and rewards programme. Section two presents the key fundamentals and metrics needed to create a successful programme.

Section one of this report reviews recent innovations, global market intelligence and best practice in the running of a loyalty and rewards programme. Section two presents the key fundamentals and metrics needed to create a successful programme.

Lloyds looks to Loyalty

Lloyds Banking Group has rolled out an upgraded customer loyalty programme as it looks to meet its competitors head-on in the  drive for UK current accounts. The bank believes it will continue to be a front runner in what could be a significant year of change for the country's retail banking market.

Halifax and Bank of Scotland, two retail banking subsidiaries of the UK Lloyds Banking Group, have launched a new customer programme in the latest new year within the hotly contested UK retail banking market.

The new scheme, named 'Rewards' at Halifax and 'Exclusives' at BoS will reward customers who fund their Halifax or BoS current account with at least £1000 ($1.629) per month, by offering them a range of discounts on their products and services. For Halifax, the initiative expands upon both the new range of current account accounts launched in 2009, and the banks previous loyalty-based programme for current account customers, 'Extras'.

Speaking to RBI, Mark Regnier, director of current accounts at Halifax, described the Halifax reward current account, launched in February 2009, as having been "very successful".

"We have a long history of offering loyalty-based products to our existing customers. We launched 'Extras' at the beginning of 2009 and prior to this have featured a range of innovative products and offers linked to cross product holdings.

"The re-launch of Halifax 'Extras' as Halifax 'Rewards' extends the concept of rewarding our customers from our current account range across to other areas", said Regnier.

Those areas now encompass savings, mortgages and credit cards: current account customers taking a new product with Halifax will enjoy an extra 0.2 percent on variable savings products for one year, a reduction of at least 0.2 percent on the interest rate charged on their mortgage, and an extra three months at 0 percent on purchases using the Halifax All in One card- a product which already offers 0 percent on balance transfers and purchases for the first nine months.

The bank says that making full use of these offers will make customers over £350 better off in their first year alone, a figure  which includes the £60 per year that customers can make from Halifax's existing 'Extras' offer of a monthly reward payment of £5 for customers who fund their account with £1,000 or more per month.

This scheme is indicative of the UK retail banking industry's growing interest in giving more back to current account customers. The trend could be seen as confounding expectations: in 2009, when the threat of UK bank overdraft fees being outlawed was still a distinct possibility, many observers believed the industry could end up abandoning its tradition of fee-free account provision.

But the push on customer loyalty, as exemplified by LBG's latest offering, will not necessarily preclude the introduction of such fees. Speaking at VRL's Loyalty in Financial Services Roundtable in London in November 2009 (See RBI 624), Patrick Muir, head of marketing at Citigroup's UK direct bank, Egg, said "The customer now knows there is no such thing as free banking, but they want to understand where it comes from and where it goes to... [with loyalty programmes] we can be upfront about where the money comes from and goes to, how much we invest in this and what the return is, and the amount of money you are paying for the service, as long as we ensure you are getting full value".

In terms of existing current account deals, UK retail banking customers can look not only to LBG  but also to the likes of HSBC, which is offering up to £100 to customers who open a current account with the bank as part of its annual 'January Sale' promotion.

Similarly, Alliance and Leicester, due to be rebranded under the name of parent group Santander later this year, is re-launching its own premier current account promotion which also gives new customers a £100 bonus. Much-valued retail banking debuts from the likes of supermarket chain Tesco, which intends to begin offering UK current accounts later in 2010, are likely to help further shake up an industry which has already undergone seismic changes over the past few years.

"Rewards is all about building meaningful and lasting relationships with new and existing customers", said Regnier. "We have always had a clear strategy of building long-term relationships with our customers so we can make them better off across a broader range of their financial needs. We achieve this by continually striving to meet their customer service needs as well as offering great value products."

For each competitor there will be challenges for Tesco, the task of gaining a foothold and new customers in a highly entrenched market; for Santander and HSBC, to find a way of reeling in market leaders LBG, Royal Bank of Scotland and Barclays. In the aftermath of the financial crisis the core issue for LBG itself, meanwhile, is one of reputation.

At the height of the crisis, rival such as Co-operative financial services, said they were seeing a significant number of new current account openings as a result of customers migrating away from larger, more troubled institutions. But Regnier remains confident that Halifax will continue to be a force to be reckoned with. "We are not publicly stating any targets for 'Rewards', but historically we have always been net beneficiary of the new and switchers market and would look to maintain this."

The VRL Round Table Discussion on Loyalty

On 26 November, 2009, VRL, the publishers of this report, hosted a Round Table discussion in London on the place of loyalty in an age of operational cost cutting and efficiency within retail financial services and payments. The event was sponsored by Private Label Promotion (PLP), a South African firm which has recently opened a London office, and focuses on loyalty, acquisition and retention programmes, as well as direct marketing.

Participants included representatives from 14 leading banks, payments firms, and loyalty specialists. Since the UK is an excellent example of a rapidly changing banking and payments market, and one, it seems, in which loyalty and related disciplines will play an increasing role in the fight for customers.

Destabilised by the financial crisis perhaps more than other leading global economies (nationalised banking assets account for around 30 percent of the total), a number of new entrants are moving into the retail banking market. These include new retail banks but also banking retailers, lead by loyalty expert Tesco.

At the round table, Barclays, the UK's third largest retail bank, officially confirmed what it describes as the country's largest coalition loyalty scheme. While HSBC pushes ahead with its successful Premier branded MA programme as its Marks & Spencer card portfolio.

Executive Summary

Section I . Recent innovations and best practices

Chapter 1: Loyalty programmes, the killer application?
Why loyalty programmes are not the solution for all card issuers
How loyalty programmes have moved from credit to debit
Mistakes in creating Programmes

Chapter 2: Survey of market intelligence on Loyalty
Loyalty programmes: Marketing
More integration of offerings  
More opportunity for customer engagement
Loyalty as commodity
On the balance sheet
Few costs, real benefits
Nature of partnerships
Innovations in reward schemes
Debit cards: rewards programmes
A new view of rewards  
Loyalty programmes: EMV and Realtime Rewards
Loyalty and EMV  

Section II . Creating a Loyalty Programme

Chapter 3: Types of Loyalty Programme   

Card Loyalty Programmes
Types of programme 
Some Prominent  Loyalty Programmes  
Chase Card Services
BMO Bank Montreal
Fifth Third Bank
CO-OP Financial Services
Nordea Finland

Chapter 4: Developing Objectives, Strategies and Goals

The business case for a loyalty programme  – yes or no?
Objectives of the card loyalty programme
Evaluating the various strategies available to fulfil the programme objectives
Setting goals

Chapter 5: Market Knowledge  

Conducting a market review of existing loyalty programmes  
Indirect evaluation of the results of other loyalty programmes
Evaluating the perceived consumer benefits of each programme
Understand any obstacles which may exist in the market
Legal and regulatory
Customer behaviours
Gathering data on market resources for loyalty programmes
Understanding what consumers want and expect from card loyalty programmes  
A convenient advantage in the marketplace or in an activity in which they often participate
An aspirational benefit: The opportunity to have a treat or reward that they want but might not otherwise obtain
Added security or safety
A sense of membership or status
The ability to contribute to a cause they support
Market research

Chapter 6: Fitting the Loyalty Programme to the Business

Selecting a points-based vs cashback vs partnership, or a combination programme
How important is branding and what are the key elements for the programme?
Determining how customers will be rewarded and what types of rewards  will be most relevant
Programme currency
Point accumulation
Point redemption
Point expiration
Frequency of reward
Value of reward
Flexibility of reward  
Features and benefits of the loyalty programme
Defining an ideal loyalty programme for the customer base
Customer knowledge
Customer behaviours
Competitive offers
Presence of partners
Basic design of loyalty programmes by type

Chapter 7: Building a Financial Model

The cost components of a loyalty programme
Development costs
Rewards costs  
Redemption costs
Customer service costs
Account maintenance costs
Marketing costs
Human resource costs
Sources of loyalty programme revenue
Fee revenue
Business revenue
Programme participation revenue
Building a model to analyse and track costs
Developing assumptions for the financial model
Financial models

Chapter 8: Deciding Whether to Build or Outsource 
Company philosophy and strategy –is outsourcing a viable option?
The outsource option – availability and capabilities of vendors and suppliers
Outsourcing and retaining
Partnership and structures

Chapter 9: The Loyalty Programme Marketing Plan
Developing a successful marketing plan
Launch strategies
Key target segments and segmentation
Marketing channels
The loyalty programme marketing plan

Chapter 10: Potential Pitfalls of Loyalty Programmes  
Potential pitfalls
Financial pitfalls
A weak or unclear value proposition
Encouraging undesired behaviour
Opportunity cost miscalculations:  
Customer service failures
Not being able to deliver on promises
Partner/coalition failings
Marketing and positioning failures
Organisational failures
Legal and PR problems and liabilities
Failure to adapt or becoming obsolete
Exit strategy risks
Building in programme flexibility
Rewards flexibility
Partner flexibility
Termination flexibility
The exit strategy   
Determining the conditions under which to implement the exit strategy  
Planning for contingencies
Determining a timescale for termination
Deciding what to do with leftover points or other items of perceived value to the customer
Planning customer communication and relationship management during the termination
Determining the best way to end partnerships
Post-termination reassignment or removal of redundant personnel and capital
Programme evaluation
Estimating the costs of the exit strategy and making sure these costs are accounted for in the final cost/benefit financial analysis
Organisational preparation

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