Rethinking Card Loyalty Programs
New Payment rails and the recent Visa/MC ruling should prompt Credit Card companies to reimagine their reward programs
March 2024 Update: I wrote a version of this article last summer when FedNow was approved and am updating it gvien the recent Visa/Mastercard ruling.
For decades, credit card loyalty programs have relied on simplistic points and cash-back systems, offering only superficial transactional value that provides little enduring worth and, and limits the scope of the relationship these institutions can have with their customers. They are an antiquated way of maintaining and deepening customer relationships and should be reimagined.
Recent developments though are going to force these institutions to act. In the short to medium term the recent class-action settlement between Visa, MasterCard, and over 12 million retailers which could begin to put pressure on the revenue model for these programs. With merchants being able to charge more depending on which card the customer uses, the days of higher interchange fees that support higher reward cards may be in the past. Admittedly, this change may never fully catch on with all merchants due to its complex implementation, but in the longer term the United States has begun an inevitable march towards instantaneous and direct account-to-account payment options.
These new payment rails, such as the recently launched FedNow, have the potential to not only displace less efficient payment systems like checks and ACH, but over the long term also displace lucrative credit card transactions. The reason for this is not regular retail customers, although they will gravitate to products that allow them immediate access to their funds, but rather the retailers and merchants. These entities pay over $100 billion a year in processing fees to banks and would likely embrace a ‘pay-by-bank’ products built on networks like FedNow to reduce those expenses.
Any change to ingrained customer behavior and legacy systems will obviously take considerable time and a total shift is highly optimistic. But just the mere potential for disruption in consumer payments should prompt incumbent credit card providers to rethink the value prop of their products. And the best place to start is to take a hard look at their loyalty programs.
The goal of a loyalty program is to prolong and increase engagement between the institution and customer. Current loyalty programs function as if rewards and perks are the only tool that they have in achieving this goal. This results in programs that have shallow loyalty and even worse limits the value that could otherwise be gained from users. The executives running these programs have been alright with this because all their competitors do it the same way. They will soon be forced to change and if they do they should rebuild these programs by seeking inspiration from an unlikely model: universities.
Consider the university experience. Students don’t just take classes — they join an immersive ecosystem fostering skills, knowledge, identity and relationships. Advisors chart personalized learning paths based on interests and ambitions. Clubs build bonds around shared passions. Alumni networks unlock professional opportunities. At graduation, students leave with tangible accomplishments and skills to live a better life.
Now imagine card issuers redesigning loyalty to mirror this enriching environment. It starts by understanding a cardmember’s goals and crafting a personalized “curriculum” of tailored deals, content, services and connections. For example for a new entrepreneur, that could mean Shopify discounts, mentor pairings, free legal advice, and matching with similar business owners. Another example could be a new parent, for whom issuers could provide parenting workshop enrollments, connections with other local parents, college savings bonuses, activity discounts, and tools to find pediatricians and track child development. The intent is to have your loyalty program become a customizable journey supporting cardmembers’ evolving needs, goals and aspirations. This requires building platforms, not just offering products. It means collaborating with partners to integrate non-traditional offerings like education, professional services and peer communities. Done well, this makes customers’ lives frictionless and builds lasting loyalty.
Transitioning to this model requires overhauling legacy systems and significant upfront investment. But the long-term benefits are manifold. Dramatically increased customer lifetime value comes from elevated engagement and share of wallet over decades. As an integrated platform in cardmembers’ lives, vast new monetization opportunities emerge — from service facilitation to subscriptions to data insights. Utilizing advanced algorithms to continually customize interactions based on personal goals also makes these programs difficult to replicate, creating durable competitive advantage.
Reinventing loyalty also unlocks synergies with other financial products. Owning more of the customer journey allows seamless cross-selling of mortgages, investments, insurance and more. While costs are real, the potential to cement multigenerational devotion — and expanded business lines — makes evolving loyalty an imperative. Facilitating identity and community can breed lifetime value exceeding any upfront investment.
Issuers who reconstruct loyalty on personal growth and community — already proven loyalty drivers for universities — not just transactions will give them the best chance to navigate potential disruptive technologies, FedNow or anything else, down the road. And even if these new technologies do not take off, a program built on these principles will allow issuers to stand out amongst competition and build sustainable loyalty resulting in lower churn and dramatically increased life time value.
