Building a Successful Customer 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 recognizes 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.

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.

It costs at least 5 times as much to acquire a customer as to retain them.

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.

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 the acquisition. The American Banking Association (ABA) researched the Baby Boomer market recently and came up with some figures that give food for thought.

And yet banking loyalty programs are still skewed in 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:

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.

By understanding who your loyal customers are, you will have a good foundation for your loyalty program.

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 personalized 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.

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 catalog 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.

The more complex your loyalty program, the less sustainable it will be.

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.

The need to provide a consistent experience stretches across all the touchpoints and includes contact centers 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.

A loyalty program is not just about an app and rewards; it must be backed by great and consistent service across all channels.

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.

On average, it takes 4.8 years to achieve the transformation of the core system (with many banks taking a lot longer than that).

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.

As noted above, many banks are running loyalty programs for all the wrong reasons, looking for a 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.

Many banks are running loyalty programs for all the wrong reasons, looking for a new business when they should be focussing on the wealth of their existing customers.

Building a Successful Loyalty Program in Retail Banking