LOYALTY IN THE POST-INTERCHANGE ERA

By Mark Roper, Group Commercial Director at Collinson Group

Rising prosperity since the turn of the millennium has had a profound effect on the global economy, with consumption patterns beginning to signal that a new ‘normal’ may soon be upon us. We are all aware of the disparity between the 1 percent and the rest, but the real story has been the expanding middle class in Asia, Latin America, and Africa.Millions of consumers, flush with newly-acquired disposable income, will emerge in these regions over the coming decades – the OECD expects the global middle class to grow from 1.8 billion in 2009, to 3.2 in 2020, and reach 4.9 billion by 2030.

The values and outlook of these increasingly prosperous consumers are of particular interest to financial services providers of all kinds. The best place to look for clues about how best to engage with these consumers is towards the higher end of the earnings scale – a group known as the Mass Affluent. These consumers, within the top 10-15% of the income bracket for their countries,have considerable spending power and the potential to shapethe aspirations, buying habits and behaviour of other consumers. It is no surprise that many companies and financial services organisationslook to attract and retain this group’s custom.

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Whilst brand cachet clearly plays a part in where this group of consumers decide to spend, much of the mass affluent’s loyaltyto financial services companies has been driven by rewards, whether through cashback on credit cards, travel incentives like air miles and airport lounge access, or discounts on products. Financial services providers have traditionally funded these rewards largely through the interchange fees levied on merchants. And with the European Union now mandating these fees are capped at 0.3% for credit cards and 0.2% for debit cards–a reduction of up to 1.85%–the future of these programmes is at risk. On March 1 of this year, Visa reduced its Debit Card fees, and on April 1, MasterCard began reducing fees on their credit cards, both with the aim of reaching the E.U. regulated levels by mid-2016.

These interchange reductions will affect the mass affluent to a greater extent, as the credit cards held by this group are more likely to have been on a premium interchange rate which largely funded their higher value rewards. As the interchange transition gets underway, now is the time for financial services companies to relook at their customerloyalty programmes and question how they can continue to acquire, engage with and retain customers at a time when the primary way of paying for these programmes is being reduced. Here at Collinson Group, we wanted toassistbusinessesin understandingthe behaviour and motivation of the mass affluent, which could then be used to inform how loyalty programmes in the low interchange era can be run. To achieve this first step in-depth research was carried out with 4,400 high earners from Brazil, China, India, Singapore, the UAE, US and UK.

Mark Roper
Mark Roper

Through this research, we identified four ‘tribes’ that share common traits which cut across age, gender and international boundaries. For too long, financial services companies have defined customers by income, spend or the products they buy. We believe these tribes provide additional valuable insight into the motivation and expectations of the world’s growing middle class, and will be especially useful for financial services providers:

  • Prudent Planners are the largest tribe representing 41 percent of respondents, most prevalent in the United Kingdom and United States. Three quarters of this tribe cite spending on family members as a priority and they have a higher than average interest in giving to charity and protecting the environment.
  • Stylish Spenders seek the finer things in life, and are most common in China and the United Arab Emirates. They arefour times more likely to buy leading brands and drive a luxury car than other affluent middle class consumers.Stylish Spenders are a small but very influential tribe with over half under 34 years of age and almost a third earning over $190,000 per annum.Interestingly, this group is the most loyal to brands they trust, participating in an average of five loyalty programmes and feeling loyal to up to eight brands.
  • Mid-Life Modernists stand out for their enthusiastic use of technology, with 61 percent citing gadgets as their biggest indulgence, 90 percent spending more than five hours a week using their smartphone and 45 percent spending over 20 hours a week online via a computer. They are well represented in India, China and Singapore, and as digital experiences have a significant influence on this group, businesses that invest in this area can create powerful advocates amongst them.
  • Experientialists value unique, money can’t buy experiences and exclusivity rather than standard products and services. Prevalent in China, the United Arab Emirates and the United Kingdom, this tribe is most likely to enjoy experiencing a different culture and using travel as a way of keeping in touch with friends and family. Experiences such as spending on holidays, dining out and luxury foods are also high priorities. Flexible rewards that include attainable travel redemption options and enriching lifestyle benefits are effective ways to tap into this group.

The mass affluent, increasingly aware of the worth of their custom, are also making additional demands on financial services providers. Rebuilding trust, destroyed by the global financial crisis, remains crucial as demonstrated by almost seven in ten expecting their bank to follow ethical practices.The pressure of delivering returns to the business has also never been higher, as financial services organisations struggle to contend with easier switching models, increased competition from agile new players, and more regulation than ever before.

In summary, it is simply too risky to stand still, and not offer valued, differentiated, personalised experiences and rewards, that start to move beyond the traditional transactional loyalty programmes. Providers need to get to the heart of what motivates a customer to join, spend and stay with them. This could be through‘Wow’ experiences, things that benefit the whole family, new technology or travel opportunities, and start to define a customer loyalty strategy that protects patronage and increases engagement.And by focusing on tailored offerings and customers’ motivations andaspirations,it is still possible to run effective loyalty programmes at an affordable cost to the business. This new approach will encourage the right behaviours and the long term loyalty and engagement of new and existing customers.

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