Banking on Rewards to Preserve Customer Loyalty

The banking industry is undergoing an identity crisis. It faces a dwindling number of financial institutions, declines in non-interest income; and competition from challenger banks. Customer retention for financial institutions is more essential than ever, making rewards that sweeten the deal with consumers more popular — and more crucial — than ever. 

The declining financial institution numbers are not temporary, according to a report “After the Pandemic – What?” from Raddon, a Fiserv company. In 2010, the number of banks and credit unions stood at 15,157; in 2020, the total fell to 10,100; and Raddon projects the total financial institution count to dip to 8,000 by 2025.

Brick-and-mortar based financial institutions no longer present the only competition for many banks and credit unions, with digital-first banks and fintechs needing no physical presence to attract customers from everywhere. Much of the challenge comes from fintechs using digital technology that enables ordinary banking chores like depositing checks, moving money and paying bills.

In addition, the impact of so-called challenger banks, or online-only banks, has been extensive. These competitors offer apps, software and other technologies to streamline mobile and online banking to consumers no longer willing to put up with poorly designed and outdated services. 

Challengers can start up quickly by utilizing banking as a service (BaaS) platforms, and other innovative financial technology, to deliver competitive loan rates, checking and savings accounts, payment and money transfer services. Digital banks and fintechs also distribute conventional banking services to distinctive groups.

More evidence that the banking climate is changing comes from EY’s “NextWave Consumer Financial Services” research that found 37% of consumers now consider a fintech firm as their most-trusted financial services brand, compared with 33% for financial institutions and 12% for wealth management firms. 

Meanwhile, many traditional financial institutions are trying to figure out how to stop the loss of customers and revenue.

FI Works statistics reveal financial institutions typically lose 15% of its customers to attrition each year, and each new customer generates only $150 in profit annually. On the other hand, it takes $200 to acquire and onboard new account holders.

Some financial institutions also must give up some steady revenue sources such as overdraft fees as neobanks, fintechs and big banks announce they will either no longer charge or significantly reduce non-sufficient funds (NSF) fees. Raddon’s Performance Analytics program has already seen the NSF charge per checking account decline from over $100 in 2006 to less than $50 today. 

Traditional financial institutions need to start exhibiting the same type of agility as their challengers by bringing new features and benefits to account holders. One way is to reward customers. 

Rewards and loyalty programs are becoming a competitive battleground for banking institutions. Utilizing a rewards program to improve customers’ experiences while also meeting the heightened expectations of savvy digital banking customers is an effective way to add customer value, improve customer retention and experience, and create generous new revenue streams.

Consequently, rewards have become a big part of financial services. Capital One, for example, constantly hypes its rewards program, and last year PayPal acquired Honey Science Corp. with its suite of money-saving tools, including cashback and coupons for online shopping.

Americans clearly love their rewards, discounts and coupons. Some 80% of U.S. adults belongs to a loyalty program, according to a recent Synchrony Financial poll. Market and consumer data firm Statista forecasts more than 145 million adult users will redeem digital coupons in 2021. Statista also cited coupons and discounts as the second leading reason why people buy specific products online, after free shipping. 

The downside is consumers do not love all loyalty programs alike, nor the process to get rewarded. According to The Loyalty Report 2019 people belong to 14.8 loyalty program memberships on average, but are only active in 6.7 of them. The benefit is that 36.5% of customers spend more on brands to which they are loyal, and 59.3% refer their peers to these brands. 

Customers using rewards want benefits which are simple to find and redeem. The problem is using an online coupon often involves multiple steps such as finding coupons, inserting or copying and pasting codes, ensuring the coupons have not expired, reading instructions, finding an online link, discovering if it is an affiliate coupon, and checking coupon verification.

A successful rewards program that stays top of mind and top of wallet, allows financial institutions to help win back and retain customers by using cash back and savings as the central currencies in their marketing budgets. Interchange-funded and card-linked offers, which began as differentiators, have now become table stakes. 

Reward offerings come in three main flavors: 

1. Interchange-funded points and cash back.

2. Card-linked offers for restaurants and local businesses.

3. Merchant-funded rewards for e-commerce, including cashback benefits and digital coupons.

However, it is not enough to offer rewards. Too often consumers either must manually retrieve any rewards or become commandeered to another site to redeem discounts and coupons, or receive other benefits, from their shopping experience. 

Instead, consumers can have rewards delivered directly to them as they shop. In this scenario, when a member visits retailers such as Macy's or Overstock.com, or any of thousands of stores, the accountholder automatically sees coupons and cash-back offerings brought to them by their bank or credit union. This system seamlessly finds and applies the best coupon at checkout, branded by their financial institution, enabling shoppers to get the best deals. Accountholders will appreciate their financial institutions capability to reward them with, for example, 5% cash back or save them 20% at checkout. 

What does that mean for a banking customer? It drives retention, loyalty and revenue. A key advantage of e-commerce rewards is these programs can deliver as much as 400 basis points in incremental revenue to financial institutions and card issuers, above and beyond interchange, all funded by merchants.

Customers are on the lookout for value in a rewards or loyalty program. Financial institutions who connect account holders to merchant rewards, discounts and coupons easily and seamlessly are going to be more effective in staying relevant with their customer base and succeed in attracting added revenue.