John Sylvester, Director at P&MM, looks at how financial organisations can maintain customer loyalty as the upcoming cap on credit and debit card transaction fees puts pressure on cashback.

Cashback credit cards pay consumers a percentage of everything they spend on them, potentially amounting to a significant saving each year. It is a valuable retention tool for banks and finance companies seeking to ensure customer loyalty but it is now under threat.

An upcoming European Parliament cap on credit and debit card transaction fees could mean the death of cashback credit cards. Under new rules, from October 2015 card issuers will only be able to charge shops a maximum transaction rate of 0.3 per cent on credit cards or 0.2 per cent on debit cards. This means the card issuer will no longer be able to hand the charges back to the consumer as a cashback loyalty incentive. The loss to card issuers is forecast to reach £2.4 billion as the European Parliament clamps down on what it considers to be excessive and opaque charges.

Cashback under pressure

Cashback has been a key marketing tool for the financial sector, yet In April, Capital One scrapped its cashback scheme for new customers and experts warn that other card providers could follow suit, withdrawing cashback and other loyalty rewards that have, until now, been funded by these transaction fees.

Financial organisations are of course free to continue to fund loyalty schemes directly from their marketing budget, however the EU-driven changes may present an opportunity to re-evaluate current practices and consider alternative methods to create customer loyalty. Consumer trust remains an issue in the banking and finance sector and an effective loyalty scheme can go a long way towards addressing that. Organisations operating in this sector should be wary of leaving consumers feeling short-changed.

Reassessing retention

Studies across a number of industries have revealed that the cost of keeping an existing customer is around 10% of the cost of acquiring a new one. So, it makes good sense to budget for loyalty schemes. In recent years the maxim of ’Cash is King’ has held true as consumers valued every penny during the recession. However it may be time to reconsider the spend on cashback and focus on more segmented and targeted loyalty schemes that engage consumers and minimize churn as people simply transfer to next best cashback deal. Discounting is not the only tool in the financial marketers’ arsenal.

Changing consumer behaviour is the ultimate aim, converting ‘rate hunters’ and ‘stoozers’ into loyal customers. Highly targeted loyalty programmes work well by tapping into the specific interests of individual consumers. Effective personalisation will offer individuals something that is of value and meaningful to them and, pound for pound, may result in far greater loyalty.

Alternative options

Discounts and benefits related to your own products, such as a 0% interest periods, are useful introductory offers to attract customers, but financial organisations need to create programmes that outlast the introductory offer period.

Agencies that specialise in loyalty marketing solutions are able to provide bespoke on and offline loyalty rewards, including gift cards, points based accounts that deliver merchandise or travel rewards, and discounts on everyday shopping. They are also able to deliver cashback options through agreements made directly with retailers and therefore not affected by changes to EU regulations.

Delivery of personalized communications and rewards is essential and here retailers have blazed a trail, with special offers straight to our inboxes or letterboxes based closely on our past purchases. Customers might be offered the chance to choose from a selection of rewards from gardening vouchers to money off shopping. The finance company can then learn from these preferences to tailor rewards to the individual in future tactical campaigns.

A recent report titled ‘Loyalty analytics exposed: What every program manager needs to know’³ found that rewarding the top quartile of loyal customers may account for 60% of the profits generated. So it is clear that not all members generate equal profit. An effective loyalty scheme should reflect that fact through both the perceived value of rewards on offer and a tiered system of communications designed to educate consumers and drive up their spend at appropriate moments in the user journey.

Loyalty in a competitive sector

Banking and finance institutions have seen some success with their customer loyalty initiatives and it is vital that they prepare for the impending regulation changes if they are not to fall behind rivals. Research conducted by Bain & Co⁴ suggested that customer loyalty in retail banking improved in 2014 from the previous year, as leading banks intensified their efforts. The report ‘Customer Loyalty in Retail Banking: Global Edition 2014’ states: “The banks that have begun to pull ahead will likely accelerate their progress as they further sharpen their focus on earning loyalty. Those that don’t pick up the pace risk falling further behind to the bottom line. “

Many institutions are preparing to scale back their cashback offer or take the hit on their marketing budget and continue to offer cashback cards to maintain competitiveness. However there is another way forward that focuses on looking afresh at the organisation’s approach to loyalty and retention and using the budget to greater effect.

About the author

John Sylvester is Director at P&MM Motivation, an award winning motivation and performance improvement company. Follow John on Twitter @johnsylvester 

References

¹ http://www.theukcardsassociation.org.uk/wm_documents/February%202015%20Full%20Report%281%29.pdf

² http://www.thisismoney.co.uk/money/cardsloans/article-3039035/A-new-EU-rule-forcing-big-names-axe-loyalty-perks-credit-card-next.html#ixzz3al9d9hLk

³ http://www.pwc.com/en_US/us/insurance/publications/assets/pwc-loyalty-analytics-exposed.pdf

⁴ http://www.bain.com/publications/articles/customer-loyalty-in-retail-banking-2014-global.aspx