Loyalty: No Longer a Cost Center with the Loyalty 2.0 Framework

Competition among Financial Institutions (FIs) for valuable customers has heated up of late. A slew of challenger banks and other fintechs have taken market share away from once-solid banks, while a shift away from the branch banking model has pushed more consumers online, where new and innovative approaches to customer engagement have made customers happier. Add to that the downward regulatory pressure on interchange and other once-safe revenue streams for banking incumbents, creating significant revenue shortfalls, and the entire industry is looking for answers. And the answer, it turns out, is keeping your customers loyal, and to do that, you have to keep your customers happy. 

What is a loyal customer worth? It is said that the cost of acquiring a new customer is anywhere from 5-25x more than keeping an existing one. On top of that, repeat customers spend about 67% more. 

So how much should a company spend to keep a loyal customer loyal? 

Making Loyalty Pay

At a strategic level, the value of a loyalty program can be determined using a framework developed by Boston Consulting Group (BCG) based on the loyalty margin — defined as the benefits that the program offers to customers relative to the cost of those benefits to the company — as well as the incremental expenditure share the program generates, and the size of the program. 

The reality is that many loyalty programs struggle to keep pace with consumer expectations and the expenditures required to run a rewards program. Traditional loyalty programs are typically funded by some combination of interchange from the FI and contribution margin from the merchant. From the FI perspective, there is greater pressure on card-based profit and loss (P&L) to fund loyalty as interchange is stressed.

And what about the legions of debit customers who get the least amount of appreciation because interchange for debit was long ago decimated? That turns any attempt at a loyalty program for those users into a cost center, making it a non-starter. 

What if an FI could instead embrace the change in the industry and come out ahead, not just with rich rewards for their customers, but with a net new incremental revenue stream, as well? Can the financial side of loyalty programs become more self-sustaining? The answer is yes, but it requires fresh thinking and the deployment of a new set of tools to fully engage consumers with all the pieces of the puzzle to give consumers a complete picture of the value of the FI’s brand. 

Traditional Loyalty Programs: 1.0

Most FIs’ loyalty programs today have very similar design features, siloed capabilities, and disjointed customer journeys.  

Some of the current “loyalty 1.0” puzzle pieces include:

• Loyalty currency– including points, stars, etc. to drive usage.

• Earn and burn – that is either tender preference and / or tender neutral.

• Payment options – such as BNPL/installments, private label, co-brand, and debit for more payment flexibility.

• Card-linked offers and experiences – examples include Cardlytics and Chase Dining) for rewards through participating credit cards.

• Shopping rewards “mall” –  such as  BankAmeriDeals for rewards and offers within the FI’s website.

I should say that none of this is at all bad. In fact, many of these approaches are foundational to customer loyalty; they just don’t complete the picture and engage customers within the digital channels that are newly available. 

FIs and retailers need to innovate by thinking about loyalty in a new way, and adding new “Loyalty 2.0” capabilities to inspire improved consumer adoption/usage that also drives incremental system economics. 

A New Way To Look At Loyalty Programs: Loyalty 2.0

When integrated effectively, Loyalty 2.0 capabilities are new pieces of the loyalty puzzle that can transform the rewards experience by removing the barriers required today to  earn or burn the loyalty currency while reimagining shopping journeys via a seamless user interface (UI), user experience (UX), and customer experience (CX).  Increased adoption and usage will ultimately drive increased revenue to the merchant and FI. 

Progressing to Loyalty 2.0 capabilities to innovate their programs creates incremental revenue streams, and deepens consumer relationships. 

The best examples today are:

• Travel platforms that integrate travel buying experience with consumer deals and offers. Examples include AMEX Fine Hotels and Resorts (FHR), Chase/cxLoyalty, and Capital One/Hopper.

• Browser and app-based offers that integrate and embed deals and offers in the digital shopping experience such as RBC’s Avion Rewards ShopPlus,  PayPal Honey, and Capital One Shopping, among others.

• Retail media networks that create an effective advertising program to promote brands and products across channels, such as Home Depot, Nordstrom, and Albertsons.

• Proprietary, personalized offers platforms used to develop personalized and relevant offers based on consumer engagement data and purchase history, such as Starbucks Rewards. 

What it means for customers

A bank or other FI can very easily combine Loyalty 1.0 elements (for instance, a 1% cash back card that pays 2% when I purchase via the bank’s shopping portal) with Loyalty 2.0 components: merchant-funded cash back paying up to 10% and coupons up to 20%. This creates combined value for customers because offers stack on top of each other. 

When a customer does simple math to see they could save 30% on online shopping by being loyal to their bank, there is a good chance they will be.

Getting Started with Loyalty 2.0

In the short term: FIs and merchants should test, learn, and experiment with a goal of ultimately scaling marketing and technology. For FIs, there are affiliation opportunities available to test key Loyalty 2.0 capabilities with partners and white label providers in a variety of categories.

In the medium term: FIs and merchants ultimately need to have six core capabilities that include data and analytics to assemble/orchestrate all the loyalty puzzle pieces: personalization algorithms, marketing and advertising technology, a commerce engine, people and process; and the creation of an agile development process and operating model that enables teams to act quickly.

Loyalty 2.0 Creates a Win-Win-Win

The ultimate win-win-win loyalty program, created by implementing Loyalty 2.0 puzzle pieces, creates benefits for the consumer, the merchant, and the FI. The consumer gets rewarded, the merchant generates more sales, and the FI earns revenue from the attributable consumer traffic it generates.

As a final point, as FIs and merchants adopt Loyalty 2.0 strategies into the prevailing customer journeys and interactions with the brand, they must be sure to align the loyalty program with their brand values, messaging, and customer service to ensure that the program enhances the overall brand promise.