Why the shifting interchange landscape will alter the way financial companies approach loyalty

Rising prosperity and urban growth has had a profound effect on the global economy.  Whilst there remain significant disparities in income, the middle class is swiftly expanding, particularly in Asia, Latin America and Africa.  The OECD expects this group to grow from 1.8 billion in 2009 to 4.9 billion globally by 2030.   Those within the top 10-15% of income for their countries – the affluent middle class - have considerable spending power and the potential to shape the aspirations, buying habits and behaviour of other consumers. 

Whilst brand cachet clearly plays a part in where this group of consumers decide to spend, financial services loyalty programmes have traditionally 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 affluent middle class, 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 brands to reconsider their customer loyalty programmes and question how they can continue to acquire, engage and retain customers at a time when the primary way of paying for these programmes is being reduced. We’ve recently undertaken global research with 4,400 high earners from Brazil, China, India, Italy, Singapore, the United Arab Emirates, the United States and United Kingdom to help understand the behaviour and motivations of the affluent middle class in the low interchange era.

Financial services companies have traditionally defined customers by income, spend or the products they buy.  Through our research, we identified four ‘tribes’ whose traits cut across age, gender and international boundaries, and provide a more meaningful way of segmenting this group:

• 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 are four 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 affluent middle class are increasingly aware of the value of their custom and expect more from financial services providers. Rebuilding trust, destroyed by the global financial crisis, remains crucial with 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 this climate, it is too risky to rely on 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 encourages patronage and increases engagement. By focusing on tailored offerings and customers’ motivations and aspirations, loyalty programmes provide a means of protecting and creating value for consumers, even as interchange revenues decline.