‘Customer Loyalty’ has become a key buzzword in 21st century banking. Banks deploy loyalty programmes as a marketing strategy to engage and incentivise their existing customers, apart from rewarding valued clients for their engagement with the bank.
An effective ‘Customer Loyalty Programme’ helps a bank to maintain a high customer retention rate, which subsequently, leaves a good impression on the entity’s brand value.
Venturing into the territory
Retaining customers, increasing their lifetime value and appreciating these individuals for using the services are the common goals any business adopts to achieve success and the banking industry is no different from the principle.
As per Zendesk’s 2021 Customer Experience Trends Report, 75% of customers base their product purchasing decisions on their ‘experience’ with the concerned business. As a banking customer, if I am getting loyalty points for maintaining account balances, making transactions, and using specific products, and then getting the opportunity to accumulate and redeem these points for direct cash rewards, gift cards, travel vouchers, merchandise, or banking fee discounts, I will not only stick with my bank, but will encourage my near ones to become the customers of the same venture.
So as a customer, I am getting enhanced engagement from my bank, which is meeting/increasing my satisfaction level, and getting new customers through positive word of mouth. It is a win-win scenario. The bank has a competitive advantage in the industry due to higher customer retention and onboarding ratios, apart from getting to know about their customers’ financial needs, before tailoring their product offerings.
Since 2020, the world has been plagued with headwinds like the COVID-19 pandemic, market disruptions due to geopolitical crises and persistent inflation. Also, like any other industry, banking is going through a digital transformation, as things like artificial intelligence, machine learning, and predictive analysis become the new normal for the sector. We have fintech and challenger banks, who, with their digital-only set-up and their innovative way of engaging customers, have disrupted the sector.
In this scenario, loyalty programmes are becoming more crucial for the legacy banks, as they face a ‘Make or Break’ situation.
Identifying the perfect recipe
Banks face the challenge of deepening loyalty and engagement with these customers to retain them. A high customer attraction and retention ratio is a must for a bank to maintain confidence among its investors.
Also, customers’ expectations, especially those belonging to tech-savvy Millennial and Gen Z groups, are constantly evolving. Banks need to keep up with these evolving expectations, while constantly keeping track of the emerging trends in the financial sector. The perfectly tailored financial product is the one which makes the market trends with the customers’ financial needs. Add a pinch of loyalty programme in it, with a seamless digital experience, you have the recipe for your success. Customers now have facilities like online comparison platforms, where they can compare the financial products offered by the banks, before switching their service provider.
Due to the advent of fintech, we have AI, Machine Learning and Predictive Data Analysis scanning vast amounts of customer data and leveraging them effectively for tailoring targeted and personalised products and services. Along with embracing digital transformation, banks need to be proactive in understanding customer needs, as ‘value-added services’ are doing wonders in the 21st century.
According to Mastercard, when cardholders receive personalised promotional offers, the reward redemption rises by 18%, and customer churn is reduced by 75%. Customers feel valued and understood, which, in consequence, leads to higher consumer satisfaction and loyalty.
Talking about types of loyalty programmes, we have points-based (customers collecting loyalty points based on their banking activities and payment card usages, then redeem the points for rewards like merchandise, gift cards, travel, cashback), tiered loyalty programmes (different levels/tiers of benefits and rewards based on customer loyalty/spending levels) and cashback loyalty programmes (which provide customers with a percentage of their purchases as cash credit rewards).
Add exclusive privileges like access to airport lounges, discounted/waived fees, preferential loan rates and personalised financial advice. Through these, banks can add more muscle to the ‘exclusivity’ factor in their ‘Loyalty Programmes’.
Also, integrating loyalty programmes into digital wallets has become a new trend. Customers can earn and redeem rewards through their mobile banking apps/digital wallets, which in turn, enhances the overall customer experience and encourages engagement with the loyalty programme.
To make these rewards a market success, the programme structure needs to be clear and attainable, as customers need to understand how to earn points/rewards and what to expect in return. Rewards not only should hold value and align with customer preferences; the bank also needs to regularly review and update the programme to ensure it remains relevant and competitive in the market.
Also, rewards need to be tailored to individual preferences. By offering a range of reward options, a bank can create the best possible scenario for its customers, as the latter can choose the relevant product as per their financial needs.
Customers expect a consistent experience in branches, online banking apps and other communication channels, when it comes to reaping the benefits of these ‘rewards’. Banks must invest in technology to create a unified customer experience. Launch interactive campaigns through email, SMS, or in-app notifications to get real-time customer insights on these rewards.
Gamify the project by bringing progress bars, badges, and challenges to motivate customers to earn more points and reach higher tiers.
In the banking industry, rewarding loyal customers involves several aspects that require a detailed understanding. For this purpose, Global Business Outlook caught up with Mr. Abhinava Bajpai, Head and Co-Founder of Acies TechWorks. This venture not only delivers cutting-edge technology-enabled risk, regulatory, and business transformation initiatives to its clients but also offers solutions that bridge the gap between technology and financial literacy.
Mr. Abhinava Bajpai gives his take on Customer Loyalty, ‘Credit Card Rewards’, ‘Cash Back’ and ‘Miles’ programmes, and much more.
Q) Talking about customer engagement and the banking industry, how crucial loyalty programmes are, when it comes to building a financial institution’s brand value?
A) Service quality, product pricing, incentive programmes, rewards and personalised services are the key decision factors for a customer. Service quality levels and product pricing have become more standardised with digitisation and market competitive behaviour. The other three drivers are usually bundled together in the form of loyalty programmes. Hence these loyalty programmes are one of the key contributors to building the brand value of a financial institution, especially for their premium segment customers.
However, the brand value depends on the quality of incentive programmes and the ease of accessing such incentives. There are incentive programmes which may harm the brand image of the financial institution either because their incentives are very difficult to claim and come with many riders or conditions, or the social status of those receiving such incentives is not considered very high in the eyes of the customer. The incentive mechanism needs to be personalised to satisfy the emotional needs of the customer, which is one of the main goals of incentive mechanisms.
Among the benefits of loyalty programmes, priority and personalised service to customers is one of the major aspects of these loyalty programmes. Other aspects such as discounts, access to events, partnerships, and earning loyalty points add to the brand value – however, customer service is the key contributor.
Q) As per recent studies, loyal customers are 50% more inclined to explore new banking products compared to new customers. Do you see this trend continuing in coming years too?
A) This trend will continue and strengthen as we move forward in the coming years. Ease of access is one of the major drivers for customers to try new products. If banks can bundle the ease of access with innovative incentives (tailored to their customers’ preferences), they will have a better chance of their customers willing to try more products.
Cross-selling or up-selling is typically easier for banks as the cost of sales is lower as compared to the cost of new customer acquisition, hence banks should focus more on their existing customer base. Banks should design their campaigns based on the defined customer tiers basis their loyalty programmes. Linking the benefits of loyalty programmes across different products will help in achieving this objective.
Q) ‘Credit Card Rewards’ have now armed the banks to promote customer incentives aggressively and meet the latter’s spending needs. What is your take?
A) Rewards are not usually the driver behind customer spending, it will be the driver behind spending using a specific credit card, hence credit card rewards would be used to pull the customer to spend for a specific purpose using a specific card. As mentioned earlier, service quality and product pricing have been largely standardised and hence customer incentives are used to differentiate the cards.
In today’s age, customers of one financial institution usually will also have relationships with other financial institutions. The decision to use the services of one financial institution over another is usually influenced by loyalty programmes.
Q) Credit cards are also offering ‘Cash Back’ and ‘Miles’ programmes to address the needs of specific consumer sections like travellers. How will you analyse this trend?
A) This is one of the examples of targeted and personalised deals. Rewards programmes which have greater personalised deals for the specific needs of the customers tend to be more beneficial for financial institutions. However, in many cases, the benefits are fixed and predetermined. Hence such credit cards tend to be used only for specific purposes.
Financial institutions should work towards a more flexible programme where, depending on the type of spending activity, the customer can choose the accumulation of benefits. This will enable financial institutions to increase the spend on one card rather than customers using multiple cards for different types of transactions.
Q) Due to the entrance of fintech and neobanks, the rewards programmes space has become more crowded. How can the traditional banks stay ahead of the competition?
A) Traditional banks have the advantage of size, existing customer base, financial muscle, and diversity of products. At the same time, they are disadvantaged due to regulatory constraints, legacy IT infrastructure and bureaucracy, to make changes. They have the advantage of knowing the customer’s history and they can provide more personalised deals to them to cater to their emotional and financial needs.
Traditional banks should also take advantage and focus on creating an ecosystem where customers get to obtain all the services within the same umbrella, linking rewards programmes across the products, and providing priority services based on the categorisation of the customers. Many traditional banks have started onboarding fintechs to overcome some of their disadvantages – however, the rewards programmes should not be outsourced to them. Instead, delivery and distribution of the programmes and taking benefits through the data gathered through the programme can be done with the help of fintechs.
Q) Third-party providers are now creating a ‘White Label Loyalty Programme’ and offering it to businesses under their own branding. Can you enlighten us about this trend?
A) White Label Loyalty Programmes are used to provide a ready platform with institutional-specific customisations to enable a more wholesome loyalty programme. Some of these providers offer only the platform while others provide both the platform as well as incentive mechanisms, partnerships, and reward programmes. These programmes work well for a niche customer segment or for institutions looking to start/ re-start their loyalty programme.
Financial institutions are looking to differentiate and create brand loyalty using loyalty programmes, while label programmes may not be sufficient for meeting their objectives. They will work very well for starters or for a niche area where the institution has more expertise.
Q) As the ‘Customer Loyalty’ sector sees more innovation, how do you envision this arena emerging as a separate industry within the banking and finance industry in the coming days?
A) I do not see this as an entirely separate industry segment, but as part of the ecosystem of the banking and finance industry. There will be a lot of scope for technology players, aggregators, and other niche players in areas such as travel, concierge services etc. These players will tend to provide differentiated services to more than one banking and finance institution. Management of the loyalty programmes would be handled in-house to the bank/ financial institution, to ensure differentiation and personalisation for the needs of their customers. Utilising the players mentioned above effectively will be key to delivering a successful programme.