2020 Foresight: Retail Bank Loyalty Programs Product Code: VR0930MR Published Date: June 2013 www.timetric.com
TABLE OF CONTENTS TABLE OF CONTENTS 1 Executive Summary... 6 2 Introduction to Retail Bank Loyalty Programs... 7 2.1 Loyalty Programs Snapshot... 7 2.2 Key Drivers of Loyalty Programs... 9 2.3 Regulatory Trends and Challenges... 10 3 Key Operational Challenges and Opportunities... 12 3.1 Loyalty Program Design and Operational Frameworks... 12 3.2 Multi-Channel Banking Experience... 14 3.3 Localization and Product Differentiation... 15 3.4 Merchant-Funded Loyalty Programs... 17 4 Loyalty Program Product and Marketing Strategies... 19 4.1 Loyalty Program Implementation Dynamics... 19 4.1.1 Loyalty program framework... 19 4.1.2 Revenue generation and cost reduction strategies... 20 4.2 Loyalty Program Strategies through Emerging Channels... 22 4.2.1 Social media strategies... 22 4.2.2 Mobile strategies... 23 4.3 Key Technology Trends and Impact Assessment on Loyalty Programs... 24 5 Customer Targeting Strategies... 25 5.1 Targeting Based on Income Level... 26 5.1.1 Mass market... 26 5.1.2 HNWIs... 27 5.2 Targeting Based on Demographics... 28 5.2.1 Students... 28 5.2.2 Female customers... 28 5.3 Targeting Based on Psychographics... 29 5.3.1 Customer lifestyle... 29 5.3.2 Professionals and entrepreneurs... 30 5.3.3 Rewards based on purchasing behavior... 30 6 Best Practices in Retail Bank Loyalty Programs... 31 6.1 Best Practice... 31 6.1.1 Using analytics to understand consumer behavior and offer customized loyalty programs... 31 6.1.2 Expansion of reward programs across territories and new channels to cater new customers... 32 6.1.3 Introduction of higher margin reward programs to improve profitability... 32 6.1.4 Targeting young population through social media... 32 6.2 Case Studies... 33 6.2.1 Russian Standard Bank (RSB) benefited from an analytics platform... 33 6.2.2 Citi teams up with Best Buy to launch a mobile-based loyalty program in the US... 35 6.2.3 Union First Market s loyalty program to scale-up business... 38 6.2.4 Alpha Bank s instant rewards through POS terminals... 40 6.2.5 Barclays Bank s reward program through low-cost banking channels... 42 2020 Foresight: Retail Bank Loyalty Programs Page 2
TABLE OF CONTENTS 7 Appendix... 44 7.1 Methodology... 44 7.1 Contact Us... 44 7.2 About Timetric... 44 7.3 Disclaimer... 45 2020 Foresight: Retail Bank Loyalty Programs Page 3
LIST OF FIGURES LIST OF FIGURES Figure 1: Total Card Spending in Developed Economies (US$ Billion), 2008 2012... 7 Figure 2: Total Card Spending in Emerging Economies (US$ Billion), 2008 2012... 8 Figure 3: Key Growth Drivers of Loyalty Programs... 9 Figure 4: Regulatory Trends and Developments in Retail Banking Loyalty Programs... 10 Figure 5: Operational Challenges and Opportunities in Loyalty Programs... 12 Figure 6: Snapshot of Changing Consumer Preferences... 13 Figure 7: Loyal Program Framework in Multichannel Banking... 14 Figure 8: Loyalty Program Design by Customer Segment... 16 Figure 9: Merchant-Funded Loyalty Program Adoption by Country... 17 Figure 10: The Merchant-Funded Loyalty Program Value Chain and the Role of the Service Provider... 18 Figure 11: Loyalty Program Framework... 19 Figure 12: Revenue Generation and Cost Reduction Strategies... 20 Figure 13: Key Technological Trends and Impact Assessment on Loyalty Programs... 24 Figure 14: Customer Targeting Strategies Framework... 25 Figure 15: Challenges Faced and Best Practices Adopted by Retail Banks... 31 Figure 16: Loyalty Program Offerings by RSB, 2011... 33 Figure 17: Snapshot of Citi s Loyalty Program Mobile Application... 35 Figure 18: Loyalty Program Offerings by Citi in Collaboration with Best Buy, 2011... 36 Figure 19: Total Relationship Banking Loyalty Program Offered by Union First Market Bank... 38 Figure 20: Alpha Bank s Loyalty Program Through POS... 40 Figure 21: Barclays Bank s Reward Program Through Low Cost Banking Channels, 2009... 42 2020 Foresight: Retail Bank Loyalty Programs Page 4
LIST OF TABLES LIST OF TABLES Table 1: Loyalty Program Strategies Through Emerging Channels... 22 2020 Foresight: Retail Bank Loyalty Programs Page 5
EXECUTIVE SUMMARY 1 Executive Summary Loyalty programs have emerged as one of the key marketing tools in the global retail banking industry. Retail banks offer a number of loyalty programs in developed economies, however many of these are commoditized. This has compelled banks to introduce innovative programs in order to remain both competitive and profitable. There is also an increased pressure on costs due to new regulatory trends in last five years. Loyalty programs are being viewed as an important revenue-driving tool and have been proven to reduce customer acquisition costs. Retail banking in emerging economies is still in its developmental stages, as illustrated by its relatively low loyalty program penetration rates. Adoption of analytical tools to offer customized reward programs Traditionally, banks and other card issuers have offered reward programs based on a customers income level and demographic profile. Banks are now segmenting customers based on their lifestyle choices and purchasing behavior. The use of analytical tools to better understand consumer spending patterns and offer personalized reward programs has increased in terms of adoption rates. The approach allows card issuers to launch customized rather than blanket programs to all customers. This approach also helps to target and isolate the most profitable customers and phase out the programs that do not offer significant value to a banks overall business. Moreover, analytics are enabling banks to provide location-based, real-time discounts in collaboration with merchants. The successful implementation of analytic-based reward programs has become a key differentiating factor for banks. Stringent regulations across key markets to put pressure on loyalty programs In developed markets such as North America and Europe, governments have enacted a number of banking operation regulations. In the US, the Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) and the Durbin Amendment were both introduced. These regulations have added to compliance costs for credit and debit issuers due to stricter disclosure practices and a decline in interchange fees. The European card industry has been impacted by regulations such as the Retail Distribution Review in the UK, which has imposed stringent regulations on selling cards through financial advisors. Asian banks have been less affected but international regulatory developments such as Basel III continue to monitor their practice. Banks have been adopting marketing and distribution strategies to remain profitable To remain profitable, banks have been making changes to their strategies and operational models such as evaluating their existing loyalty program design frameworks with an aim to implementing effective loyalty programs. This includes finding the optimum mix of funding options and reward offerings to achieve greater levels of customer loyalty and profitability. A number of banks have collaborated with merchants and retailers to offer merchant-funded loyalty programs. Furthermore, banks are assessing cost-effective alternative channels such as mobile platforms and social media. Offering programs across low-cost channels helps to achieve operational efficiency The global financial crisis adversely affected the global banking industry. In order to improve their financial performance, banks implemented cost-saving initiatives. As part of such initiatives, banks launched loyalty programs through low-cost channels such as mobile platforms and social media sites. In order to encourage participation, banks have been offering rewards and promotional benefits when banking transactions are enacted through these channels. Such initiatives resulted in achieving operational efficiency and improving financial performance. 2020 Foresight: Retail Bank Loyalty Programs Page 6
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