Give loyalty credit

Management has its fashions. And one of them in the current climate seems to be the popular, but often misinterpreted concept of "loyalty". Does a bank want the loyalty of customers who have a bad credit history? Does a supermarket want the loyalty of customers who buy only loss-leaders? Probably not. 

Many card marketers would say loyalty is reflected in spend, because that is an indicator of front-of-wallet position. Some would also focus on tenure - years that the card has been held. But these definitions fail to capture the true measure of a customer's attractiveness: profitability.

So how do credit cards encourage loyalty among their profitable customers?

For the overwhelming mass of users, the main appeal of cards is their convenience. This convenience is delivered to all customers, profitable or not, by a wholly commoditised transaction experience at the point of payment. But it's hard to establish loyalty if all cards provide much the same experience.

To create some level of differentiation, American Express has been successful in building prestige and status around their products - ultimately creating an aspirational brand with valued customer benefits. Other card associations have tried to follow this path by launching super-premium products, such as Platinum or World Card, but their efforts have been devalued by issuers who have used them as a mainstream acquisition tool.

Another area where issuers have tried to create loyalty is around price. In most markets this essentially means lower APRs for borrowers. In the UK and Australia, for example, many issuers have been engaged a folly of competitive balance transfers - most offering extended 0% interest free periods. Rather, card companies are now focused on rebuilding net interest margins to repair profitability and cope with the wave of credit losses caused by economic downturn and, in too many cases, doubtful lending decisions. Few banks really want to start another price war.

Instead, the best-managed issuers are concentrating on cutting costs by discouraging inactive accounts, reducing credit losses, and driving down operating expense. At the same time, they're building revenue by renewing their focus on high value accounts, searching for acceptable sources of fees & value-added services, and looking to improve their performance on cross-sell.

In short, there's a flight to quality.

Loyalty & profitability is fashionable again

There is again a focus on loyalty with a clear value proposition for the customer. Indeed well-managed loyalty initiatives are proven to deliver and retain quality customers: a European programme launched 18 months ago has delighted the issuer with how it has improved the balance of profitable vs. non-profitable accounts.  

Even though it is a trend that some observers are surprised to see, there has been a resurgence of interest in rewards programmes. But this trend isn't at all counter-intuitive: not only do well-managed programmes benefit issuers, crucially they offer extra value and benefits to hard-pressed, cautious customers who are set on maximising the value of their spend.

However, rewards programmes don't often come cheap. Stand-alone schemes can be extremely valuable in terms of customer insight and data collation, but often require a greater upfront investment. In the past, coalition programmes were seen as the best way to share marketing and operating costs, and leave more money on the table as customer value.

A new loyalty model: the pros and cons

Today, some observers are hailing merchant-funded rewards as the latest way to cut programme expense - initiatives like Riyad Bank's Hassad concept in Saudi Arabia, and Barclaycard Freedom, just launched in the UK.

These merchant-funded models build on the highly successful concept pioneered by Garanti Bank in Turkey: their Bonus card doubled Garanti's portfolio ROI, while moving them from fourth to second place in market share. Its great attraction to issuers is that most of the programme cost is paid for by merchants.

How do programmes like these play out in practice?

Many customers will be attracted by the ability to earn 1% in reward money that can be redeemed at participating outlets, something that Barclaycard Freedom offers. On the other hand, consumers are very aware that substantial retailer discounts are available as merchants compete for their custom: they may prefer to shop at a store offering an immediate 20% discount irrespective of whether that merchant is part of a loyalty programme.

From a merchant perspective, many resent funding what they see as yet another bank rewards programme. And all of them need to be convinced of incrementality: that the programme will either deliver them new customers at an affordable price, or more importantly encourage customer behaviour so that it drives profitability. The paradox here comes around national merchants: their size is needed for visibility, but the bigger the retailer the harder it is to sell the incrementality. In this context it's noticeable that Freedom publicly is focused on small and medium retailers. The ultimate question for retailers, of course, is how much access to customer data will be allowed. 

One key test of the merchant-funded model is how long retailers continue with the programme: in Turkey, the Bonus initiative enjoys significant longevity. But in another significant European scheme, many of the launch merchants had dropped out a year later, as they saw insufficient incremental business to justify the cost.

Will consumers be tempted by this new breed of merchant-funded schemes? It is difficult to tell, although it is clear that there needs to be a distinct value proposition for the customer, issuer and merchant.  New schemes will have a tough battle against the standalone and existing coalition loyalty programmes, however issuers such as Barclaycard clearly have brand power and reach on their side.

The loyalty balance sheet

Credit card issuers should look to generate loyalty - but only among desirable customers

1. To do this, they have to identify & analyse the behaviours of those customers and offer them incremental and relevant value
2. Well-designed and well-run rewards programmes can do this (many aren't and don't)
3. They have to generate satisfactory ROI for the issuer
4. This must come from a renewed concentration on quality, customer relevance, better targetting, proactive account management, and the adroit use of tactical opportunities.

Or, to answer the question posed by the headline: Yes, credit cards can and should create customer loyalty - but all stakeholders need to be clear on how this is delivered and ultimately what it means for them.