Building a Successful Loyalty Program in Retail Banking

Building a Successful Loyalty Program in Retail Banking

Loyalty programs are not new to retail banking. While there are still banks who have to take the plunge, even banks with established programs are busy overhauling them to make them more responsive to their customers’ needs. Millions of dollars are spent crafting these programs, with marketers eagerly anticipating radical growth in sales, decreased customer churn and other KPIs that will make their executives smile. The truth is, many of these initiatives hardly create a ripple, or cause more activity without additional profitability, because the customers who take advantage of the program are not the loyal ones but bargain-hunters, who are as likely as not to move to another bank if they see a more attractive offer.

One of the key reasons for this is that, while everyone recognises that loyalty programs are about retaining customers, a great deal of the focus is on acquisition when it comes to design and execution. This dichotomy has been observed by Forrester in a report commissioned by Deluxe in 2015. Although the survey included respondents from other industries, 33% of the respondents were from financial institutions. Although all agreed that  loyalty was about increased retention, 66% of the focus was on new business.

Loyalty Program Objectives (%)

Data Source: Forrester Study on Loyalty Programs for Deluxe, Jan 2015 – How 150 US decision makers see their loyalty programs

Clearly there is something amiss with a strategy for rewarding and engaging loyal customers that pays more attention to the customers it wants than those it already has. The saying “A bird in the hand is worth two in the bush” applies here; it is commonly understood that it costs at least 5 times as much to acquire a customer as to retain them. There is nothing wrong with attracting customers with an appealing loyalty program; just understand that a new customer is not (yet) a loyal customer.

Strangely enough, 81% of the metrics for success in these very programs focus on retention, a clear mismatch with the objectives stated above. Needless to say, most respondents were disappointed with the outcomes of their programs.

Loyalty Metrics (%)

Data Source: Forrester Study on Loyalty Programs for Deluxe, Jan 2015 – How 150 US decision makers measure the success of their loyalty programs

New Business is Not Really New

The sad truth is that new customers are not your loyal customers. US banks experience a customer churn of around 20% within the first year of on-boarding a customer, and 17% of new customers will register dissatisfaction with service in their first year. What is worse, of the 20% who leave, half of those very expensive acquisitions will leave in the first 90 days. It is also important to remember that, unless your customer belongs to Generation Z, they are some other bank’s old customer, and they may even have kept that account and are just testing the waters with you. The graph below, from Bain and Co, is from 2013, but the situation has not changed for the better. You will see that genuine new accounts are the minority; the majority are “switchers” moving from one bank to another.

Percentage of responders forming new primiry relationships with banks in the last year

Click to enlarge

Sources: Bain/Research Now and Bain/GMI NPS surveys, 2013

In contrast, a customer who has been with you for 10 or 20 years is less likely to leave and will still bring in revenue without all the costs associated with acquisition. The American Banking Association (ABA) researched the Baby Boomer market recently and came up with some figures that give food for thought.

Banking the Boomers Infographic

Source: ABA Foundation

And yet banking loyalty programs are still skewed in the favor of acquisitions. So what makes for a successful loyalty program?

Revisit your Customer Profiles and Profitability

Take a new look at your customer base and start seeing them through the loyalty lens. It’s not about high net worth (they can move banks at the flick of a wrist) or even lifetime value, it is about understanding the customer who transacts regularly and is responsive to new product offerings.

It is not even age-related; a lot of noise is generated about Millennials; the older Millennials are in their mid-30s, they have families and mortgages, they have a lot of banking ahead of them and are probably too busy with their careers and children to consider moving banks. Here is some more information from the ABA on Millennials:

Millennials are not that different

Source: ABA Foundation

By understanding who your loyal customers are, you will have a good foundation for your program. You can also differentiate your program according to your new understanding.

Manage and Mine your Valuable Data

Make sure that your basic customer data is clean and accurate (yes, this could take a very long time, but start now). It’s quite possible to automate data cleansing, either in-house or by turning to business intelligence consulting for custom solutions. It is not a once-off exercise, but it should be done on an ongoing basis.

You want to avoid the situation where you make offers that are not relevant to your customer – it erodes trust, as it indicates that you have no clue with whom you are engaging. You also want to get your basic data right before you start enriching it with the additional data you have gathered from social media, in order to build a personalised customer experience. Banks in general are struggling to get their data clean: Temenos reports that managing data is one of the bigger challenges in banking globally, closely following customer satisfaction; the two are inextricably interlinked.

Biggest corporate challenges cited by responders (%)

Source: Temenos/CapGemini report “Open for Business”, the 9th Annual Temenos Banking Survey

Keep it Simple and Transparent

There are many approaches to take in structuring a loyalty initiative, and what offerings would fit best are unique for each bank. Some banks run a point-based system, where customers can accumulate points and then exchange them for a catalogue of gifts and services.

Other options include discounts or preferential rates on certain products, based on the customer’s current loyalty to the bank, number of purchased products, value of transactions or some similar assessment. Other products offer cashback which is credited immediately. This is probably the most easily understandable reward. Other options are discounts that are made available by using a product to purchase from a retailer, for instance, cashback or bonus points for filling up at a specific gas station. Sometimes the choice can be a little overwhelming, especially when there is a different reward program for banking, credit cards, customer segment and a few other criteria.

The more complex your loyalty program, the less sustainable it will be. While you might get a good initial take-off, especially if the customer sees value in the special offers, in case the program is unwieldy and difficult to operate, you will get a lot of customers dropping out, or just not using it. If you are using gamification, do not make the journey to rewards too long and difficult; ensure that there are lots of levels and minor rewards along the route. Simplicity is also about ease of use, which leads us to the need for digital.

Be Digital, yet also Physical

First of all, you should be looking at a loyalty app which can be uploaded to the customer’s smartphone. Development of mobile apps is an agile experience these days and will not break the bank. The average consumer has about 20 loyalty products, which makes for a very full wallet if a plastic card is needed for each of them. This is why loyalty programs that can be uploaded to an e-wallet are increasingly finding favor – some of the e-wallets can hold up to 1500 cards.

But a loyalty program is not just about an app and rewards; it must be backed by great and consistent service across all channels. Branches are not dead, and will be around for some time, even if customers are using them less. They are also an important factor in keeping a customer’s trust and loyalty. Banks that have embarked on closing branches have experienced customer attrition as a result of such closures. If customers haven’t actually switched, there is still a drop in loyalty, as reported by Bain and Co.

Branch closures correlate with lower loyaly scores

Click to enlarge

Source: Bain/Research Now Retail Banking NPS Survey, 2016

The need to provide a consistent experience stretches across all the touchpoints and includes contact centres and ATMs. Most customers are happy to conduct straightforward transactions electronically from their mobile, tablet or computer, but when it comes to complex issues, even Millennials prefer to speak to a person, whether in a branch or by phone.

Achieving the Consistent Experience

The biggest obstacle for most banks when it comes to offering a “seamless” experience is their hugely expensive legacy software. Such software was designed one to four decades ago, is costly to maintain, and is as nimble as an oil supertanker.

Finextra, the financial research company, in conjunction with SAP Hybris found that many banks need to attend to their core banking systems, which is impacting them in their advances in other areas of modernization. New banks, especially in the online and fintech space, can get a loyalty program in place very swiftly, and it will be backed by a uniform omnichannel experience. For many banks saddled with a cumbersome and expensive legacy system in need of replacement, the best option is either to partner with a fintech company or to invest in a completely new omnichannel platform for digital products, while the dismantling of the legacy system goes on in the background.

On average, it takes 4.8 years to achieve the transformation of the core system (with many banks taking a lot longer than that). No bank has the luxury of doing this first and then getting to grips with competitive digital products, which is why they need to find a way to fast-track their move to a new core that will support omnichannel.

Source: Survey on banking core systems from “Engaging the Unengaged Customer”- Finextra and SAP Hybris

Customers Want Your Loyalty Program

While there are many things to consider when starting or refining your loyalty program, banking customers are generally quite receptive to them. Accenture found that the take-up and use of bank loyalty programs is second only to retail.


Source: Accenture’s report “Banking Customer 2020”, customer response to loyalty offerings

As noted above, many banks are running loyalty programs for all the wrong reasons, looking for new business when they should be focussing on the wealth of their existing customers. If you take some time to understand your current customer base and tailor your loyalty program around them, you will still attract new business. The advantage in working with what you know is that you are catering for a stable and loyal segment. If your program does happen to attract new customers, they will probably have the same profile as your most valuable ones, which cannot be a bad thing.

Kate Prohorchik

Kate combines business development, marketing and sales backgrounds in the retail IT industry. For the last 8 years, she’s been helping brick-and-mortar as well as digital retailers embrace disruptive technologies and adapt to the new customer-centric reality. Now her expert voice finds its way into her articles on transformative effects of digital innovations in the retail industry.

Building a Successful Loyalty Program in Retail Banking
Kate Prohorchik July 25, 2017
  • I’d like to add to the “Manage and Mine your Valuable Data” paragraph that it’s also important to properly analyze the data. Simply visualizing data could be an additional layer that could uncover some hidden propensities and correlations.

    Taking it a step further would be to actually apply data science and AI to the data. Tons of banks use AI to analyze purchasing behavior. This data could be used to either upsell loyalty program features or to discover new services that the customers might be interested in.

    And this is where banks are lagging – customer satisfaction is essential to any loyalty program and while banks fail to digitalize their services, fintech companies are taking over not being bound by the same regulations as banks. Yes, this looks like taxi vs. Uber kind of thing, but the customers don’t care, as long as they can get better services in the end…

  • Micheline Logan

    One of the most important aspects to creating loyal customers is often overlooked by banks (and other retailers in all sectors), namely employee engagement. If your employees drag themselves to work each day to get their paycheck at the end of the month, you do not have a winning formula, no matter how attractive and well-constructed your loyalty program is. If, on the other hand, most of your employees love their jobs, their enthusiasm is infectious and they are your best advertising. A bright smile and a genuine empathy with the customer erases the pain-point of a long queue at the inquiries counter. In the case where a bank has a policy that all employees must hold banking accounts with them, there is a tendency to forget that there is a whole bunch of customers who actually work for you. Some banks recognize the value of having these captive customers, who better to use to prototype new products and services? If you ensure that your employee/customer has a brilliant customer experience, they will be your best advocates.We know from Gallup’s findings on the US workforce that employee engagement is at an all-time low of 33%. If this is the case i your own organization, strive to double it. This will really boost productivity, but more importantly, it will win you customers -everyone likes to frequent a business with happy employees.