Consumer banking: money can’t buy loyalty

Consumer banking: money can’t buy loyalty

There’s no shortage of articles saying that banks ought to tackle the “multibanking” problem by becoming more like challenger banks.

These articles are missing the bigger picture.

Traditional banks enjoy fairly resilient customer retention; people are more likely to leave their spouse than their bank[ii]. So there is no existential crisis facing the banking sector (yet).

There is, however, a crisis of incremental profit.

The customers flocking to challengers are not doing so in search of traditional banking services, but in search of enhanced value. And while some of this value can be provided by modernizing your consumer-facing technology, the challenger bank space is already crowded with lookalike competitors, and straying too far along this path may create branding problems for a venerable institution. Indeed, banks are mostly not pursuing this strategy.

More urgently, banks should play their ace card, and offer the truly exciting forms of enhanced value, which will lie out of reach for challenger banks for years to come.

This ‘ace card’ is the banks’ goldmine of customer data and, most profitably of all, their wide-ranging merchant networks, which can be leveraged as new, compelling reasons for customers to remain loyal.

Extra what?

In 2000, UK consumer bank Halifax launched a fairly successful marketing slogan: the people that give you extra[iv].

“Extra” was a 4% interest rate which earned the average working family 100-200 a year – the kind of value you can earn from a supermarket loyalty card.

Or, in the form of the now-prevalent sign-up bonuses that come from switching banks.

Halifax’s Extra is just one example of a now-tired global trend, not just in banking but across sectors, of a loyalty strategy invested entirely in modest sums of reward value to drive a specific action.

In retail banking, this manifested in various ways: relatively high interest rates and ‘free’ account services in the UK, or card-linked offers (CLOs) which found a degree of appeal in the US and have been expanding worldwide.

Bribing customers is easy and, as with most easy initiatives, not very profitable.

For starters, it isn’t financially sustainable.

Banks have been in and out of rewards programs for decades – but their focus ebbs and flows depending on the economic cycle as well as the regulatory framework. Recent years have thrown this into focus. For more than a decade, central bank interest rates worldwide have been historically low. Compounded in Europe by the slashing of interchange fees, banks have been left with reduced margins from which to carve out rewards value[v].

This led many banks in Europe to close their rewards program over the past three years.

The smart ones kept a loyalty strategy even if they eliminated the points, but some foolishly acted as though their rewards program was their loyalty strategy – and threw the baby out with the bath water.

Economic cycles aside, though, the real problem is that it attracts entirely the wrong sort of customer.

Loyalty programs tend to work great for frequent customers of any brand – especially in travel – but loyalty programs often miss the mark for the mid-tail and longer-tail customer because of fragmentation.

In legacy banking loyalty models, these customers are instead prone to disloyalty in exchange for tiny rewards, and likely to be of very poor lifetime value (LTV) to your business.

True enough: in the US, CLOs have become less effective due to a bidding war between major banks. Rewards value rose 15% in Q3 2018 alone[vi]. Certainly, this generosity has helped the likes of American Express, Chase, and their ilk keep their brands top of mind – but it also led in turn to a surge in customers ‘gaming’ reward cards. Card attrition rates rose to 15% in 2018 from 10.5% in 2017[vii].

Customers appreciate the free money, but it simply doesn’t make them loyal.

To retain truly valuable customers, therefore, banks should not just gift extra value, but do something extra to earn loyalty.

Their first port of call (and indeed, the approach that some have started to take) is to ask, “if my bank can t fund an interesting level of points for customers, who else in my ecosystem could?”

The answer all along has been the businesses in their merchant networks.

Merchants across retail, travel, utilities, healthcare, etc. have been funding customer acquisition and retention to the tune of 1% to 20% for decades. In some cases, they are offering loyalty points, but in most cases they have been offering hefty discounts or cashback.

Merchants looking to acquire working capital cash advance funds may want to look for a merchant funding business that works with merchants even when their credit is less than perfect.

Banks are in the brilliant position to deliver target customers at a lower cost, and keep value (and data) in their ecosystem, by becoming a market maker and using loyalty mechanics (effectively the loyalty program) to facilitate a dynamic marketplace that adds more value to each stakeholder.

This could also prove a great boon for SMEs which make up most of the merchants in a bank’s network, and which have been locked out of sophisticated marketing programs because alone, they lack economies of scale. The bank’s medium and larger merchants participate in CLO programs, other forms of cashback, or have their own loyalty program – but these are not incompatible with a bank leveraging its entire merchant network to build a coalition.

We will return to the power of the bank’s merchant network near the end of this article.

CX enhancements at scale

Another part of that “something extra” is your own proprietary customer experience.

Granted, such efforts have underpinned the early successes of neobank startups. A 2018 study by payments consultancy Optima found that only the Monzo and Starling Android apps allowed customers to do all of the following:

  • log in easily with touch-ID
  • see balances in real-time
  • filter views of their transactions (i.e., by merchant, or by retail category)
  • stop and control spending on the card instantaneously
  • pay easily using Google or Apple Pay

…whereas mainstream banks’ incursion into this space has been slow.

Functionality via digital channels is important, but bigger banks have opted for wide-ranging customer experience enhancements across all channels which, at their very large scale, present far more salient opportunities.

In the same year that Halifax launched their Extra campaign, I was one of the founding investors in a new bank in Chicago, called United Community Bank. Our primary business strategy was to provide good customer service at a time when large banks’ customer service was typically terrible. Six years later, we sold the bank for over three times invested capital because customers had flocked to good service. Good customer service is valuable in a world of multiple businesses in all corners, you need to be able to show your customers that you care about what they want and deliver that to them, this is where software tech like Loop can help businesses by providing customer service software that can keep them on track. You must do what you can to be the best provider of services to keep them coming back.

Similarly, Singapore’s DBS Bank boosted profits not by imitating trendy tech startups, or giving away rewards, but by simply becoming a better bank.

When Paul Cobban first joined as COO in 2013, a taxi driver quipped with him that the acronym DBS stood for “Damn Bloody Slow”.

By 2017, the bank claimed to have saved 250m wasted customer hours a year by ‘shaving minutes and hours out of every process and interaction’. Revenues also increased by 10.4% over the same period[viii].

That 10.4% equates to $76m USD. For context, Monzo turned over 2.65m GBP last year ($3.3m USD), against a 30.55m loss[ix].

To be perfectly clear, this does not mean that any bank should cease to innovate around consumer-facing UX. In the DBS example, the incremental profit is a proxy for customers improved engagement, which will pay dividends for years to come.

But it does illustrate how traditional banks operate at such a scale that, if they do things that matter to customers, their opportunities for incremental revenue far exceed those of neobank startups.

Don’t outsource your relationships

Unfortunately, however profitable CX enhancements may be in the short term, they are easily copied. We have seen it time and again in other consumer sectors, where the cost of creating these services falls, and the differences between them narrow, until they all become practically the same.

In retail and travel, and now in mobility, brands have solved this problem by looking beyond their own core proposition, to find natural ways to create unique value. For very large businesses, this happens by leveraging their partnerships with other brands. You can read our article on loyalty coalitions to find out more.

In banking, this will naturally transpire as the shift from a product focus (each banker’s job is to sell you the product they are responsible for, which means each bank has several people trying to sell you ‘their thing’) to a relationship focus, such as helping customers optimize their finances, and achieve better value across all their daily spending across all products and services.

The key is enabling merchants to decide how much incentive they want to offer customers, enable the accrual of points, and settle/reconcile (using their payment processor role) with each party to the transaction.

And, if the bank is an anchor player in such an ecosystem, their brand will be present where the customers are in their daily journeys. Furthermore, they will perform a very natural role – which is managing economic value on behalf of merchants and consumers.

This is a win / win / win for the customer, merchants, and the bank.

The problem with CLOs

For a time, banks hoped that third-party CLO providers would help banks achieve their loyalty goals. Unfortunately for too many banks, the CLO program is the entirety of their loyalty program.

In this outsourced loyalty marketing model, the CLO provider would allow merchants to issue offers to bank customers, whose card data would help ensure the ads were targeted effectively.

There is now a veritable swarm of such companies (Wikipedia lists ten[x]; there are in fact hundreds) but they are severely limited by their access to banks’ card data.

CLO providers have…

“focused resources on securing vast quantities of merchant offers, at the expense of building sustainable, core technology with a high degree of analytical rigor that provides increased performance and relevancy.[xi]”

Customers experience this flaw in much the same way as they experience offers from most old-school loyalty program providers: generic offers, probably manually negotiated at great length by the bank’s CLO provider and collaborating merchant, with insufficient personalization or experiential appeal to stand out among all the noise.

This is fundamentally at odds with the clever ways that some forward-thinking brands across sectors – a few banks included – are now using customer data to enhance experiences.

In 2017, Santander began an effort to move away from ‘big, molasses segments, like first-time house buyers’ and instead ‘reach people at specific parts of the customer journey with content that ‘was exactly relevant to them at the time’.

Efforts included combining CRM data with data from its Facebook page as part of a push to encourage more customers to use and download their app.

The bank was rewarded with a 12% improvement in loyalty (by the bank’s own definition), and its highest NPS score in 17 years[xii].

Now, what if a bank could repeat such improvements across their entire network of merchant partners?

What can you do today that will save a customer money, improve their quality of life, or even make them more money?

If you know they have been paying standard tariffs for gas or electricity for 20 years, why not suggest they renegotiate with the utility provider? In fact, why not renegotiate on behalf of all your customers? You might be able to save them 10-20%, but even 3% of their annual expenditure in this category is a material amount of savings.

No CLO will ever have the reach, the data or even the clout to realize such a lofty goal.

Banks already have all the above. If they can bridge customers to their merchant partners, via proprietary digital environments where customer behaviors can be measured and incentivized, the full potential of these advantages will become unleashed.

Read that last sentence again.

If banks leverage their business relationships and their consumer relationships, a great deal of magic and value can be unleashed for all stakeholders.

More money, fewer monies

Your payment card may register at dozens of online and offline touchpoints every day. The level of insight that this purchase data can shed on individual customers is unparalleled in any other sector – if the bank figures out how to tap the detail in those shopping baskets.

Loyalty points are the key to unlocking that detail, incentivizing the customer to actively participate in contributing the rich data profiles needed for personalization and memorable experiences.

To keep the customer engaged, this participation needs to be easy, so not surprise that banks with active loyalty strategies and a rational culture have been treating their rewards currency like money for some time now.

Citibank, for instance, allows members to redeem their ThankYou Points…

“…when they want and how they want on everything from gift cards to travel rewards, and statement credits to cash rewards. In addition, cardmembers can use their points for all or part of their purchase at participating Shop with Points partners like…”

For decades, American Express has allowed customers to use Membership Rewards for hundreds of purposes so each customer can choose what is most valuable to them. They even make the points more valuable when redeemed for aspirational items like hotel nights, than when a customer uses them to reduce their monthly bill.

Such an appreciation of the importance of liquidity (i.e., the customer’s perceived utility), in a loyalty currency, is only recently extending to retail, travel, and other loyalty sectors. But banks have been rational about this for years – and should build on this strength.

Traditionally, retailers, hotels and airlines feared that points too easily spent would furnish other companies’ coffers, to no real gain for themselves.

During the Loyalty Debate in October last year, Loyalty Magazine editor Annich McIntosh tested this idea (you can skip to around 00:48 for the most relevant segment).

Most loyalty brands are, however, waking up to the sheer value of the data that derives from allowing customers to earn and burn with a greater number of collaborating brands.

For a simple example, you can convert Tesco Clubcard points to Uber[xiii], which makes the points more useful and appealing – effectively, more valuable – to more customers.

Banks are also uniquely poised to enable spending on snackable rewards because they can enable redemptions at any price point.

Accenture found that 76% of people want to redeem deals tied to their card when swiping at the point of sale[xiv]; indeed, the ability of Choice Hotels Smart Privilege customers, to immediately burn points on Starbucks or Uber, is credited as part of the loyalty program’s success[xv].

This requires some level of technology integration for any rewards currency, but when you already own part of the payment infrastructure for fiat currency, as card-issuing banks do, this becomes easier.

Citibank has been proving this theory with gusto. In mid-2018 it was reported to have published no fewer than 37 APIs through its developer portal, including forging alliances with six Hong Kong businesses including a local mobility provider, Zurich insurance, and HKTVmall.

The latter is a popular ecommerce marketplace where Citibank loyalty program members can ‘…offset their online purchases upon checkout at HKTVmall using their reward points without leaving the shopping platform.[xvi]’

These are just a few partnerships – but imagine if a customer could earn the same loyalty currency across 70-90% of their monthly discretionary spending.

This is highly achievable. In most cases, commercial relationships and digital connectivity already exist around frequent purchase transactions – so the real work would be less technical, more around designing and marketing the new partnerships.

This would make the bank the anchor tenant in a large loyalty ecosystem, simply by leveraging their many consumer and merchant relationships, as well as their natural talent around managing value on behalf of every stakeholder.

That would influence customer behavior and shift share of wallet to participating brands. Greater loyalty will be your bank’s reward.

Loose ends

Traditional banks have many of the raw ingredients of a highly successful loyalty coalition: reach, scale, a common spending mechanic, and much of the digital infrastructure.

They are also widely trusted to protect sensitive data.

New entrants would face an uphill struggle, whereas the work needed for an established bank to organize greater collaboration among the customer-base and the merchant network to create value for everyone, is neither complicated nor expensive (unless your culture makes it so).

We have talked to about 15 banks in the past 6 months and only two are now preparing to capitalize on this market-maker position to create value for both B2C and B2B customers.

In the UK, four large banks still provide 70% of all UK chequing accounts. I guess if you have that much of the market, it’s perhaps harder to get your company to invest in a strategy to capture an even greater share.

But this state of affairs won’t last. You must leverage complementary relationships to create such value that no customer could ever seriously consider leaving. You can do this by building a collaborative loyalty ecosystem – without leaning on intermediaries such as CLOs, which siphon off much of the value that should be destined for customers and collaborating brands.

While elephant banks may currently only view each other as true competitors, neobanks will win regulatory approval to offer more services, and gradually earn the trust of more customers, allowing them to evolve into true competitors over time.

Brands from non-financial sectors will also weigh in.

Amazon, Apple, and Alibaba Group (Ant Financial) are probably in the best position to take market share; 54% of respondents in a survey by Bain & Co claimed they would trust a tech company with their money over a bank.[xvii]

Inevitably, these more agile businesses, with rapidly growing customer relationships, will launch their own financial services, and banks will find declining transaction volume in their own accounts until the customer finally just closes the account altogether.

Why not put up barriers to diminish this risk?

The mobility sector, in particular, could quite feasibly foster the rise of one or more world-beating loyalty programs which, if they become well-established, may morph into brands that serve many customer needs – including payments.

To capitalize on their potential in loyalty before others beat them to it, traditional banks should steal something from everyone.

From neobanks, they should steal simpler, more informative proprietary digital experiences; indeed, the more widely they’re used, the easier banks will find it to provide personalized customer services.

From leading loyalty brands, they should steal the concept of becoming facilitators of a better customer relationship, rather than simple purveyors of a commodified service.

The success of industry leaders such as and Ctrip has not been solely invested in travel bookings, but in capitalizing on their positions to become portals for a wider range of customer spending.

With their goldmine of customer data, their widespread merchant networks and ample resources, banks are primed to far exceed these achievements by building their own loyalty coalitions.

At the end of the day, most financial services are commodities. The very real and commendable progress that most banks have made improving their own proprietary customer experiences demonstrate that they are not blind to this reality.

But it cannot be ignored that simpler, faster, better services have never been enough to secure loyalty in any competitive consumer sector. These improved services soon become expected, rather than special.

Nor will they remain special in banking for very long.

The moat must be built around the bank’s ecosystem – not the bank, or bank account.

Of course, the ability to execute these ideas is much harder than to have the ideas. Most banks have proven very effective at killing good ideas once more than one department gets involved and legacy culture kicks in.

Big banks probably have much more digital prowess than neobanks, but startups have the advantage of rapid decision-making and the will power to see those decisions implemented.

The winners will be the big banks that make decisions and learn to execute like neobanks.

Customer loyalty is just one operational domain for a bank, but it probably has the highest ROI if the merchant network is leveraged.