Implications of interchange fees for loyalty marketing

Implications of interchange fees for loyalty marketing

On 13th of November 2022, the interchange charges on credit card transactions in New Zealand will be capped at 0.8%. This fee is commonly how financial services brands have funded their loyalty rewards for at least the past decade. So how should New Zealand’s banks and brands respond, and how should other brands collaborate with partners to reduce dependency on any single source of funding?

Of course, this has happened before in other jurisdictions. In 2017, legislation in the European Union reduced the interchange fee from 2-2.5% down to 0.3% on credit cards and 0.2% on debit cards. Within one year, over 100 bank-sponsored loyalty programs in Europe disappeared.

Shutting down the loyalty programs was a huge strategic mistake by the banks.

The fact is that loyalty points are a driver of profit – so if banks see this as an opportunity to cut a perceived business expense, it indicates their loyalty programs are not running optimally in the first place.

The first section of this article explains why it’s irrational to view the funding of loyalty points as separate from the funding of other marketing channels – many of which are less profitable than loyalty marketing. Most brands fund loyalty points without any revenue from interchange fees – and they will gladly fund a bank’s loyalty points if they know the program is popular with their existing and potential customers.

Next, we explain how to increase the perceived value of your loyalty currency, so that your loyalty program is more effective, and the ROI increases.

Finally, we talk about how you should drive down the cost of loyalty marketing – by reducing operating costs, instead of reducing customer value.

Even without interchange fees funding points, banks should be building open and collaborative loyalty networks to enable more commerce between their merchant clients and their retail customers – and creating benefits for all stakeholders.

Loyalty points are a form of economic value; banks should want to be at the center of the ecosystem enabling loyalty commerce, while helping their merchant clients thrive.

Rationalizing loyalty ROI vs other marketing channels

Merchants have always needed to balance their marketing investments across various channels of customer acquisition and retention. Funding points as an incentive should be no different. Merchants offer cashback and discounts, pay affiliate fees, and spend heavily on click advertising – all of which can cost between 4% and 15% of sales.

Customer acquisition and retention can be expensive. In July 2022, a US retail study reported on Business Insider said that brands were losing an average of $29 on each customer acquired – and that the cost of customer acquisition had risen by $222%.

So, clever merchants are always looking for effective ways to optimize their CAC (Customer Acquisition Cost). The more sophisticated merchants allocate funds across all these channels based on the CAC and channel ROI. When CAC is lower and ROI is higher on one channel, merchants will shift more investment to that channel until CAC rises and ROI lowers to be in line with other channels.

Loyalty programs are a very capital efficient customer acquisition and retention channel, and many merchants’ loyalty programs could be made more profitable if they collaborated with banks, and other complementary brands, to issue the loyalty currencies that customers most value – as we’ll see below.

When a merchant has its own loyalty program, it often runs in parallel and with little coordination to other customer acquisition channels. This siloed approach creates channel conflict, confuses customers, and leads to overall higher operating costs. Consumers become confused if they are offered 1% to 2% in loyalty points when they buy direct, but 4% to 10% in cashback or 10% to 25% in discounts via merchant funded offers. This actually trains the savvier customers to be mercenary rather than loyal, in order to get better value.

Such arbitrage should not exist in this decade, since marketing leaders should be coordinating marketing activities across the entire business. Where such activities are coordinated, reporting can also be consolidated across teams to deliver greater insight on how the company is performing.

Were this to happen at banks, the temptation to slash loyalty investment would abate. Banking professionals would discover that loyalty is a lot more capital-efficient and profitable than other acquisition and retention channels – particularly if the points are funded by partner brands, as happens at the most mature and popular loyalty programs.

So, if you are a bank, you should be investing in loyalty – whether out of interchange fees, or out of any other method of monetizing the transaction volume – in order to keep your card(s) top-of-wallet. But with interchange fees dropping, you should be relying more on merchant partners to top up the incentives by enabling them to fund additional points when customers engage.

Co-funding points, and Increasing the perceived value of points through loyalty collaboration

Collaboration around popular loyalty currencies is the key to creating a loyalty CAC that’s lower than that of affiliate marketing channels, discounts, cashback and search engine marketing.

The greatest value is created when you allow the customer to earn whatever loyalty currency they value most in an open loyalty ecosystem of complementary brands.

loyalty partners partnerships

Such partnerships are important because the majority of customers simply don’t need to spend heavily in any one category of goods or services. Since most loyalty programs only offer interesting rewards for those members with a lot of points, most customers simply cannot reach interesting rewards.

The ‘opt-in’ is key to give the merchant or bank permission to analyze data and remain engaged with the customer.

A bank’s merchant partners should be keen to fund this investment, because offering 1-5% in points will be less expensive than most of their other acquisition or retention channels – and it also saves them the operational cost and complexity of running their own program.

Or, if a merchant in the network wanted customers to earn their own loyalty currency first, they could easily set up the ability for customers to exchange into the bank’s program, or other partners’ programs, at the rates agreed by the partners.

Reconciling and settling in this open loyalty network is relatively easy for the banks to coordinate, since they are already settling between cardholders and merchants – and can easily withhold the amount invested in points.

Meanwhile, everyone benefits from capturing more first-party data, while opening the door to capture zero-party data through repeated engagement.

There are other techniques to enable interesting rewards for less frequent customers, but those are beyond the scope of this article.

The point is that loyalty partnerships have proven crucial, in other industries, to getting more customers to engage in the loyalty program. Historically, most merchants were able to get 20-25% of their total customers to join their loyalty program. If they offered popular points/miles from partner brands, or enabled customers to exchange into preferred loyalty programs, they should be able to get ongoing engagement from 50%, 60% or even 70% of total customers.

This graphic (which we created for the travel sector, but which could apply simililarly to brands in many industries) shows how much untapped potential there is for loyalty partnerships in every category of discretionary consumer spending.

That unleashes a great deal of data to improve customer profiling, and improve personalization.

As mentioned, getting customers to join and remain active in the loyalty program is crucial because it provides the brands with permission, under evolving data privacy legislation (like GDPR), to collect and analyze the customers’ data. This allows them to build the rich profiles needed to improve personalization – which makes all the brand’s marketing efforts more accurate and profitable – and then to keep the customer engaged through targeted omnichannel communications.

Low operating costs are essential for effective loyalty incentives

Most companies I speak with are focused almost exclusively on increasing revenues, but reducing cost is often easier and has a greater multiplier effect on results.

Funding rewards is easier when the technology used to run the program is affordable, and when it frees loyalty teams to innovate around customer value, rather than making innovation slow and expensive.

Greater generosity in issuing points will also reduce the channel conflict with the instant value offered via cashback or discounts.

At most companies, technology improvements are the best opportunity to cut total costs of operating the program – potentially by as much as 25%. This can be achieved by migrating away from expensive monolithic systems, onto more affordable, cloud-based software.

With traditional software, new partnerships present a significant and immediate direct cost, because each new partnership requires a hardcoded software integration – in the region of tens of thousands of dollars and often taking 6 months to implement.

Currency Alliance was built to address this problem. Our pure B2B SaaS platform enables the entire lifecycle of loyalty collaboration and partnerships to be managed at scale. The purpose-built, API-first, cloud-based platform is used by over 100 enterprises like Bank of America, TD Bank, First Abu Dhabi Bank, Al Rajhi Bank, Active Super (via Loyalty Boomerang), MPI Generali, dozens of airlines, most large hotel groups, mobility operators, telcos, and an extensive list of merchants to issue, redeem and/or exchange loyalty currencies among partners.

There is no CapEx or license fee with Currency Alliance, and no recurring monthly maintenance charges to use the platform. We charge just 2% of the loyalty value transacted. For example, if a customer puts $100 worth of gas in their car and they are provided with $1 worth of points, the Currency Alliance charge would be just 2 cents. For the gas retailer, this works out to 0.02% of their incremental revenue – which is close to nothing. If the bank was operating the program and their partners were paying our tiny 2% fee, there could be zero cost to the bank.

And because the Currency Alliance platform is API-first, all the platform functionality is available via API. Merchants, banks, and any other operators can build whatever customer experience (CX) into their existing apps, website(s), or other channels without creating confusion by having different customer-facing platforms in the marketplace, and with greatly reduced development costs compared to monolithic software.

With the combination of white-label solutions and the extensible API, Currency Alliance has helped brands launch new solutions in days or weeks – but rarely more than a month.

We also offer two ways for brands to identify the customer at the point of transaction. The cost of card-matching in the payment network can be significant – usually between 5 and 15 US cents per transaction. On smaller transaction sizes, this cost eats into the margin that can be allocated to fund points for the customer. Fortunately, there are alternatives that are much more cost-effective including spotting the transaction in a mobile wallet, or capturing the transaction at the point of sale (but without integrating into the POS).

The Universal Points Terminal application provided by Currency Alliance can run in any browser on any device by online or offline retailers. This application can identify the customer and with a few keystrokes, the merchant can enter the necessary information to issue points or accept points as the method of payment.

Alternatively, Currency Alliance also provides various white label screens that can easily be incorporated into ecommerce platforms to identify the customer. These can either issue the appropriate number of points or enable the customer to spend points towards a purchase.


Whether or not you choose to work with Currency Alliance, any steps you take to drive down the cost of loyalty marketing, and increase the value for the customer, will produce more profitable marketing.

Interchange fee caps being introduced in New Zealand now, or other countries in the future, should not be an excuse to reduce focus on customer engagement. Rather, it should be a reminder that easy wins always get harder to find.

When proactively collaborating with complementary brands that are relevant to your target customer, there are many creative ways to deliver greater value while sharing costs. The result is more engaged customers.

Enabling loyalty collaboration with API-first loyalty software

As alluded to above, the magic of the Currency Alliance platform is not the hundreds of brands already registered on our global B2B marketplace for loyalty collaboration, but how easy it is for any additional partners to be up and running within hours or days. Everyone benefits from the value-added services that enable the management of partnerships at scale – including partner discovery, automated workflows to establish the commercial agreement, consistent reporting, as well as facilitated reconciliation and settlement.

The API-first solution makes integration easy with both legacy and modern loyalty systems. If a partner does not have the capacity to integrate directly into the API for real-time reporting of transactions, we can accept batch files, spot the transactions in the payment network, rely on mobile wallets, or even allow transactions to be entered manually via the Management Portal – so onboarding is easy and low cost.

Furthermore, for partners who don’t have the desire to control the customer-facing platforms and experience, they can customize and deploy our white label screens in a matter of hours. These engaging customer touchpoints are powerful tools in gaining new members, increasing frequency, and growing the average basket size.

For the merchants, this means a lower-cost pathway to profits and reduced dependency on discounting – which as explained above, discourages loyalty.

For the customer, this creates an exciting shopping ecosystem where they will always discover new places to earn and burn their favorite loyalty currencies.

And since Currency Alliance works with major banks, airlines, hotel groups, and other loyalty program operators, merchants and banks alike can issue whichever brands’ currencies they feel will be most valued by their customers.

Get in touch with Currency Alliance to find out more.