Rewards in Interesting Times - PYMNTS.com · for relationship reward programs, where the point earning benefit is broader than just card transactions (e.g. product openings, balances,

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MASTERCARD WORLDWIDE

Rewards in Interesting Times

How market factors impact loyalty program member behaviors

Bob Grothe

7/1/2013

The economic turmoil of the last five years has left imprints

on the financial industry that their products, programs and

customers will feel for years. This document looks at

impacts to loyalty programs, customer reactions, and what

the future holds.

MasterCard Worldwide – Page 1


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Key Takeaways

The economy and legislation in the last five years have impacted marketing programs from financial institutions. As a result, established loyalty programs

supported a renewed marketing focus on responsible banking behaviors.

Bank loyalty programs have seen dramatic shifts in reward redemptions from the traditional cash back, gift certificates, airlines and merchandise to banking

products and services. Many factors influenced this shift including more

availability and better value for customers.

With the introduction of banking products to the mix of redemption options, banks saw the opportunity to retain the redemption dollars internally while

both growing assets at the bank, and deepening customer relationships.

Future redemption options will continue to capitalize on the growing trend of customer control. Customers wanting greater immediacy and flexibility will

look to use their points anywhere for anything.

Increasingly, smartphones are becoming the first point of interaction with a brand. Loyalty program benefits will integrate more immediately with mobile

devices to provide location and time-based services that are both unique and

relevant.

Debit card rewards programs have been greatly impacted by the Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection

Act of 2010. Many affected banks closed their programs while others shifted

the focus to relationship rewards or merchant-funded offers.

Spending averages on debit cards where the programs were closed dropped-off relative to debit card spending where rewards were still available. Even

for relationship reward programs, where the point earning benefit is broader

than just card transactions (e.g. product openings, balances, etc.), spending for

rewards members outpaced non-reward members.



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The Chinese have a saying, “May you live in interesting times.” Often considered a

blessing, ironically, the expression is a curse implying “May you live in much turmoil

and disorder.” The last five years have certainly been interesting times for U.S.

banks and their customers.

Starting toward the end of 2008 with the credit market collapse and government bail-

outs, continuing into 2009 with double digit unemployment, and peaking with the

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-

Frank”) and all of its subsequent impacts, the economic turmoil of the last five years

have left imprints on the financial industry that their products, programs and

customers will feel for years to come.

A bank’s best customers are often the focus of their loyalty and reward programs.

Customers who use their credit and debit cards the most reap the greatest payback

from card-based reward programs. “WIIFM” is short-hand loyalty marketers use to

describe the benefit customers get from participating in their reward programs

(“What’s In It For Me”). Prior to 2008 the WIIFM for customers from card programs

often included cash back, store gift cards and travel. After 2008, the WIIFM

changed.

The financial crash and bailouts left the banking industry in need of an image

makeover. Hoping to lead customers back onto a more financially secure path, and

regain their trust in the process, banks shifted marketing efforts toward promoting

responsible banking behaviors. Loyalty programs began adding banking products to

their redemption catalogues. The additional products support smart banking

behaviors like savings accounts deposits, 529 contributions, loan payments as well as

credits toward fees and commissions. As illustrated in graph 1.1, customer

redemptions shifted to these banking products in dramatic fashion.



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Banking product redemptions increased by roughly 23 percentage points in 2010, due

to a number of factors.

WIIFM – Longer Term View

With the renewed focus on responsible banking behaviors, program members shifted

from the immediate, tangible rewards (WIIFM today) to a longer- term benefit of

savings, investments and paying down loans. Cash, Airline and Merchandise all lost

share of redemption relevance as Banking Products and Services gained momentum.

More Availability

As banks saw the growing appeal of these types of products in loyalty programs,

more banks started adding them to their redemption options.

As illustrated in graph 1.2, in 2008 57% of MasterCard operated programs were

already offering banking products and services as redemption options in their

catalogues. By 2010, that number had risen to 88%. Banks not only saw the benefit

to providing reward options that supported their responsible financial partner focus,

they recognized the benefits of retaining these assets at the bank. Unlike gift card or

airline redemptions, offering savings deposit or 529 contribution meant the money

stayed in-house. That financial benefit led to the third factor in shifts to banking

products, value to the customer.

Graph 1.1



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Better Value

At the turn of the century, card-based programs were either cash back, miles or

points-based. The points-based programs originally allowed customers to redeem

points for airline tickets, merchandise or gift certificates. The mix of redemptions in

those categories often meant gift certificates took the lion’s share of redemptions (60-

70%). Loyalty marketers, realizing the appeal of cash as a reward option, started

adding cash-like items to the points-based redemption options. Often, cash back was

in the form of a statement credit or check, but later many moved to a prepaid

MasterCard where the cash could be used almost anywhere. With the introduction of

cash back into the traditional points-based program, almost a third of the redemptions

went directly to that category. Almost the entire shift came at the expense of the gift

certificate category. Customers saw the value in the flexibility of cash over the gift

certificates. Instead of being able to redeem at one store, they could spend the money

anywhere.

Loyalty marketers used the appeal of cash back to their advantage as well. In most

cases the cash back options were in higher reward tiers then the gift certificates of

equal value. For example, a $25 Best Buy card could require 2500 points to redeem

($25 / 2500 pts =100 basis points in value), but the $25 MasterCard could require

3000 points to redeem ($25 / 3000 pts = 83 basis points in value). Cash back

maintained its strong redemption share even with this point pricing premium because

of its flexibility over gift certificates. The benefit to the sponsoring banks meant a

lowered cost-per-point at the time of redemption, as well as lower future accrual

costs.

Graph 1.2



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With the introduction of banking products into the redemption mix, sponsoring banks

had the opportunity to retain the redemption dollars internally at the bank. Growing

assets at the bank while deepening customer relationships was seen as a win/win.

Deposit and Investment product managers welcomed this additional acquisition

channel to existing banking customers. The realization of the benefits of redemptions

in this category not only led banks to put their products in equal point tiers as gift

certificates, some banks went as far as placing an additional bonus on the amount

deposited, without a point premium. Customers followed the incentive, and saw it

was a better value to redeem for these products.

Future Redemptions

While there is no guarantee of a less tumultuous future, the next generation of reward

program redemptions presents some fascinating opportunities.

The World Is Your Catalogue

Customers today have greater control over the influence of marketing efforts. They

can fast-forward through commercials, filter e-mails, and narrow searches to select

criteria. While word-of-mouth was always an important medium, social networks,

with their immediacy and broad reach capabilities, have given those words much

more power and influence. The desire for greater control over marketing programs

will continue. Its influence in reward programs means greater say in the types of

rewards and benefits program participants want to see.

No longer will the choice of redemptions be based on a predetermined list of gift

cards and merchandise. Customers wanting greater immediacy and flexibility will

look to use their points anywhere and for anything. Redemption vehicles like

MasterCard’s patented Pay with Rewards product allows customers to redeem their

points anywhere MasterCard is accepted, essentially turning the world into a

redemption catalogue.

Social Cause du Jour

Charity redemption options have been included in point program catalogues for more

than a decade. And while this category is always less the 1% of the redemptions,

marketers continue to include them in the mix for both PR purposes as well as

fulfilling the philanthropic interest of some participants. Historical redemption data

points to the WIIFM being more personal than philanthropic (the “M” stands for

“ME” after all), but the rise of the social networks does lay a foundation for social

causes that are both personal and collaborative.



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An example of the power of social networking for a

cause is the Facebook campaign to get Betty White to

host Saturday Night Live, that seed of an idea from

Dave Matthews of San Antonio turned into a cause for

several hundred thousand Facebookers. Personal

networks can be banded together around a common

interest and goal, providing another redemption option

for program participants. Citibank is looking to

capitalize on this growing trend with the launch of its

point-sharing service. The point-sharing service

allows Thank You reward members to pool points

toward a common objective.

Merchandise Makeover

Merchandise typically accounts for 5 percent or less of a loyalty program’s total

redemptions. Traditionally, marketers have used the category to reduce the overall

program cost because the point value for merchandise is less transparent than specific

denominations of gift cards or cash back. However, with a few clicks an informed

customer can easily determine the “real” price of an item. If the price doesn’t

measure up to the value, the customer can redeem for a gift card or pre-paid card and

purchase the item for the lowest retail price.

Loyalty programs can still benefit from offering merchandise, but the programs will

likely evolve from a standing catalog of items to a rotation of “featured” goods.

Featured items may be exclusive offers available only through the program, deeply

discounted items where the value is much better than in the public domain or seasonal

items available for a “limited time only.” The dynamic new position of merchandise

has potential to become a marque feature within the program, by adopting this

fresher, more exclusive presentation.

Mobile and More Mobile

As smart phones usage trends continue to the point where the phone is often the first

point of brand interaction, we’ll see more smart loyalty marketers tying their

programs to behaviors outside of the purchase transactions. Location and time-based

interactive services that aid program members in their daily lives will be value-added

features of program participation. Elements like traffic warnings and restaurant

recommendations will open the door to cross-marketing and offer driven

opportunities while providing real-time benefits to cardholders beyond reward

redemptions.



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In 2012 MasterCard launched its digital wallet, MasterPass™. The tool digitally

stores credentials within the wallet allowing a customer to simply click and all

shipping and card information are completed automatically. Future “wallets” for

program members will include digital discounts and offers stored in the wallet and

applied automatically at check-out and/or real-time notifications to discount/offers

nearby using the location services.

Point Transfers and Anchor Programs

Ask someone, “Where do you bank?” and chances are he’ll respond with the bank

where his checking account resides. Customers associate “their” bank with their

DDA provider rather than their credit card issuer or investment provider. The

checking account is the anchor product. Ask someone, “Where do you get rewards?”

and chances are after a long pause, you’ll get a list of programs from different

industries including airlines, grocers and credit card issuers.

Consumers today utilize a number of different loyalty programs across various

industries. But, there is limited opportunity for those points to cross over or

cohabitate. Exchanges like Points.com, which allow program members to shift points

or miles across their reward accounts, will continue to grow in popularity. Banks

have an opportunity to capitalize on this trend. The payment card is in a unique

position of both ubiquity and frequency, as it interacts with virtually every industry

during purchase transactions, and members use their cards almost daily. By allowing

the card point program to accept other industry program currency, the bank’s program

can become the hub for its member’s reward networks.

Durbin and Debit Rewards

The Durbin amendment to Dodd-Frank requires that debit interchange be “reasonable

and proportional to the cost” incurred by the issuer with respect to the transaction.

The Board of Governors of the Federal Reserve System established standards for

complying with this requirement – in essence, regulating the debit interchange rate.

Not all issuers were impacted by the amendment. Banks with less than $10 billion in

assets are exempt from the legislation and retain the pre-Durbin interchange fees.

The historical structure of the reward programs for debit cards was naturally less rich

than credit programs. (e.g. 25 to 50 basis points for debit programs compared to 100

basis points for credit card programs). Even with this in mind, prior to the enactment

of the legislation, debit rewards were plentiful. However, according to a study done

by Pulse in 2012, 50% of regulated debit card issuers with a reward program ended

their programs in 2011, and another 18% planned to do so in 20121. Issuers with

debit reward programs in place generally reacted in one of four ways:

1

Federal Reserve Bank of Richmond, “Debit Card Interchange Fee Regulation. Some Assessments and Considerations” Third

Quarter 2012, page 170.



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1. Shut the program down

2. Leveraged merchant funding reward model

3. Leveraged enterprise-wide reward model

4. Maintained the current program

As graph 2.1 illustrates, the average monthly spend per active account for those

cardholders in closed programs declines relative to cardholders in programs that were

continuing to reward customers in some fashion.

Many of the banks that sustained the reward program post enactment of the Durbin

amendment were the exempt banks (under $10B). These smaller issuers will

continue to have a marketing advantage, since the economics of the amendment will

allow them to reward for purchases made anywhere the card is accepted. In the

vacuum created by bigger issuers shutting down their programs, exempt banks have

an opportunity to fill the vacancy with reward programs that will now be a true

differentiator for them.

Merchant funded rewards market the benefits of using the card at select locations and

getting something in return (WIIFM is discounts or points). The merchants fund the

incentive in exchange for marketing access to the cardholder base. For debit

cardholders accustom to earning points everywhere they use their debit card,

merchant funded rewards can seem limiting as a standalone offer. Depending on the

Graph 2.1



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breadth and depth of the merchant network, the percent of actual rewardable

transactions can be less than 1% of the cardholders’ total transactions. However,

leveraging the historical data to target offers that are relevant to cardholders can make

these types of rewards just as meaningful for consumers.

Enterprise-wide reward programs recognize customers for their overall value to the

bank. These programs go beyond the card transactions and often include electronic

banking behaviors, deposit product behaviors, loan product behaviors, etc. When

revenues from debit interchange were significantly reduced by regulations, enterprise-

wide programs simply shifted the point-earning proposition to other profitable

behaviors. Well after the changes to the program, reward cardholders in one program

continue to out-spend non-reward cardholders as illustrated in graph 2.2. Reward

program members monthly debit spend average 42 points higher than non-reward

cardholders.

Graph 2.2



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Lessons Learned

The turmoil of the last five years has created many challenges for loyalty marketers in

the financial services sector. But those challenges have created opportunities to:

Banks that leveraged the redemption mix to support responsible banking

behaviors not only addressed cost, they deepened customer relationships.

Customers seek value and flexibility. Leveraging this insight, loyalty

marketers can manage reward cost by using point tiers to their advantage.

Continuing to give greater control to customers as it relates to reward

redemptions is key to future success. Allowing customers to use points

anywhere for anything they want will move your program from “close to what

I want” to “exactly what I want.”

In the face of reduced interchange revenues, banks that tweaked reward

offerings versus abolishing rewards were able to sustain debit card spending

averages.

Merchant -funded programs provided benefit to cardholders, issuers and

merchants. Leveraging customer spending history to target offers will make

the offers relevant to cardholders.

Relationship reward programs that have a broader focus than transactions

alone still have significant impact on spending



About the Author

Bob Grothe

Business Leader

Loyalty and Reward Solutions

[email protected]

As a Business Leader in Loyalty and Rewards Solutions, Bob Grothe provides strategic direction

for the development and enhancement of customized loyalty solutions.

Bob regularly consults with clients to analyze their marketplace, identify their best customers,

and design solutions that will drive current customers to be more loyal, increase spend volume

and maintain clients' customer base for an extended time period. He has performed extensive

customer profiling and gap analysis to drive strategic recommendations for financial services

clients. Bob has worked with clients such as Wells Fargo, RBS and Scotia bank. Bob led the

design project for the development and structure of one of the first enterprise-wide loyalty

programs for a major bank launched in the U.S.

Bob has more than two decades of experience with consumer loyalty marketing and promotions.

He led the consumer promotions and product development departments for a multi-billion dollar

company for six years. His experience in strategy, operations and business development with

many Fortune 500 companies gives him the broad knowledge necessary to design, operate and

evaluate effective loyalty programs.

His expertise includes:

Defining clients' key objectives

Aligning effective strategy with sound tactics

Profiling and segmentation of customers based on purchase data

Consumer program development focused on building customer relationships

Program impact forecasting and analysis

Documents

Rewards in Interesting Times - PYMNTS.com · for relationship reward programs, where the point earning benefit is broader than just card transactions (e.g. product openings, balances,