The 'loyalty economy' pushes issuers to think beyond simple points
As adoption of digital payments and mobile wallets (Apple Pay, Google Pay, etc.) accelerates, financial institutions are challenged to maintain and grow relationships with customers. The bottom-line question arises: “How do we get consumers to place our card in the No. 1 position in both their physical and mobile wallets?”
A paradigm shift is under way in the loyalty rewards market. Loyalty points are becoming instantly convertible to cash. So, with a swipe on a smartphone payment app, consumers can redeem—and earn—rewards at any point of sale (POS). Card issuers can build new customer experiences around this new capability to increase use of rewards programs, build brand loyalty and enable issuers to turn rewards programs into drivers of growth.
In an increasingly competitive market, issuers have traditionally thrown costly incentives, such as cash-back rewards, at new sign-ups.
The same type of customer that can be attracted with such come-ons is also likely to jump at the next tempting offer, creating a race to the bottom. Meanwhile, another set of customers doesn’t even bother redeeming rewards (around $100 billion by some estimates), creating massive liabilities for financial institutions. A large portion of cardholders don't redeem rewards, because of the time, effort and complexity of tracking of points on multiple programs and limits on how points can be used. The result: Financial institutions lose money and customers get no additional value for their “loyalty.”
The new model for the “loyalty economy” is coming into focus. Customers will expect to be able to use their rewards currencies at the point of purchase and apply rewards to any item, rather than being confined to choices in the issuer’s rewards catalog.
Program participants no longer have to think about which card to use to earn miles on a preferred airline or points for a preferred hotel stay. Instead, points become universal currency to use with all airlines, hotels, restaurants and retailers, reducing friction and barriers to redemption. This point ubiquity will trigger a huge change in consumer behavior, turning loyalty redemptions into a part of routine shopping transactions and potentially unlocking billions of unused rewards dollars. Rewards behavior data can also become part of data-driven, real-time marketing programs, releasing new sources of value, enabling new kinds of customer experiences, increasing engagement, deepening customer relationships and giving issuers new opportunities to secure top-of-wallet status.
In this new loyalty economy, redemptions will no longer be viewed primarily as an expense to be managed, but rather as a tool to create value through higher spending, brand engagement and long-term loyalty.
Kroger Pay, a digital payment program recently launched by the giant grocery chain, illustrates some of the possibilities. It combines shopper payment information with loyalty cards and promotions, including digital coupons and personalized offers. Kroger has also introduced a new debit card under its rewards card program that offers discounts on private label products, bonus fuel points and more.
The card, along with the Kroger Rewards credit and prepaid debit cards, offers additional rewards when used through Kroger Pay. Altogether, Kroger Pay and its store rewards card program enhance loyalty, provide data about those loyal customers' purchases and responses to marketing, and they're a stream of revenue in their own right.
In the loyalty economy, the upside for both consumers and financial institutions is immense. Consumers will be able to use points like dollars where, when and however they want. Financial institutions can use loyalty to drive purchase frequency and increase total spend while helping to work down the massive accrued loyalty liability mentioned earlier.
Financial institutions looking to succeed in the loyalty economy can tilt the scales in their favor in the following ways: Focus on the moment of truth, or the point when consumers use rewards currency and receive their reward; deliver a best-in-class rewards redemption experience and refine rewards programs with new data technologies; design a rewards program that is fun and that evokes emotional attachment driving loyalty and usage; and put consumers in control of their rewards points and present opportunities for frequent redemptions. This winning combination will allow financial institutions to differentiate rewards programs to thrive in the new loyalty economy.