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Issuers and merchants need to rethink reward expense

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In the coming year we’ll see more banks slam the brakes on their expensive rewards programs and rethink the route to profitability.

It doesn’t mean credit card rewards will be "so 2018" a year from now — on the contrary. But we should expect to see their renaissance, as innovative solutions emerge to benefit both those providing and receiving the rewards in a more cost-effective manner.

When the credit card rewards competition heated up in the early 2010s, financial institutions saw loyalty programs as a great way to compete and attract new customers. But they weren’t the only ones learning. As The Wall Street Journal points out, “consumers figured out how to game the system” and it’s bad news for card issuers.

One solution would be to move to infrastructures where card issuers can share the cost of offering rewards with the retailers — making it a win-win-win situation. Card issuers can offer rewards at a lower cost and retailers can capitalize on the process by reaching a wider range of cardholders through a bank’s loyalty-enabled mobile app.
Ultimately, consumers get a loyalty experience where they can collect rewards on payments not just from banks, but from linked retailers, too. This would also open up opportunities to personalize rewards programs far beyond what is currently available.

This will happen as banks and fintechs extend their cooperation to improve and tailor services for consumers. Many traditional financial institutions are finally starting to realize that they need to innovate faster — and provide the services their customers already demand. Working closely with fintechs is one of the few ways to implement desperately needed digital services before it’s too late.

This is also true for retailers. As payments and banking is increasingly done through the comfort of smartphones, retailers — especially those that already have a mobile presence or app — will start to wonder how they can make the most of this changing dynamic in the payments process.

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