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Share Loyalty Marketing Risks and Rewards With Competitive Cooperation

By Michael Howe

As the credit pendulum swings from high credit spending to a more balanced level of spending disposable income from current and saved income, the debit card is maturing as a product. Consider this: In 2006 alone, 26 billion debit card transactions resulted in a total of $1 trillion being spent. In fact, debit card use now accounts for two-thirds of Visa’s total transactions and half of its total dollar value.
In the past, banks relied on issuing credit to customers in their local markets to generate profits and gain value through obtaining information associated with these customers’ credit histories. Then, as certain banks experienced steady growth, they began acquiring other local banks to gain access to an even larger customer base. And, as larger banks created systems to track customers’ behaviors and to reward them for specific behaviors, these banks became even more valuable. The net result? A buying frenzy in the late 1990s and early 2000s that left 10 of the largest national retail banks possessing more than 90 percent of the credit card customers in the United States.
What does this piece of history mean in the current day of debit? Banks have the opportunity to repeat the value creation of the past and grow their bottom line through loyalty programs for debit products. However, as community banks are holding their own with high-touch service and the convenience of Main Street banking, your bank is very likely among those still not maximizing your profits by tapping into the fee-income potential of debit cards. Yet, you recognize that a loyalty program can play a critical role by linking rewards to behavior that makes a customer more profitable.
But loyalty tracking and reward systems are far from inexpensive. These complicated systems require compatibility with other bank systems if they are to integrate further down the value-creation chain. And typically a community bank with the best opportunity to collect local customer debit and checking accounts has few resources to invest. So what’s a bank to do?
The answer lies in competitive cooperation, an idea not unfamiliar to community banks, which have a long history of pioneering new opportunities by banding together. In fact, in the 1970s, cooperation among these banks resulted in the first regional ATM networks for what today has become Star, Honor and, yes, Pulse. A risk- and cost-sharing model has always paid off and experts agree that banks make smarter credit decisions because they rely on scores that aggregate individual bank credit files.
Additionally, two compelling reasons exist for banks to work cooperatively in creating a loyalty system. First, all loyalty systems are essentially the same, awarding points and rewards (for frequency, threshold, event, cross-sell, etc.) with the same functionality, regardless of the technology or process design. In other words, each bank reinvents the same wheel – sparing no expense in cost or labor. This brings us to our second reason: cost-sharing. If 400 community banks were to create 400 separate systems to track and reward customers, the cost would be monumental for each. On the other hand, the same 400 banks could share a single system – thus paying a fraction of the cost of that single system – with access confined to each individual bank and branding on user interfaces developed individually. That way, one system services 400 banks while appearing to be 400 separate systems. The result: research becomes richer, showing customers’ activities compared to other like groups of banks, or the community of bank customers.
Of course, this model does present the need for an independent operator to separate these functions. Building, maintaining and upgrading a loyalty system requires specific technology and expertise. Deriving and creating value from the information captured requires analytical and modeling specialists. The former requires no access to the intelligence stored in the database; the latter requires non-competing, exclusive access to the data. By separating the functions, operators can manage the data capture and flow, while specific marketing management can take sole ownership for each individual bank connected to the system.
Bank marketing partners are in a unique position to serve as third-party operators. Ultimately, you must examine your bottom line. If you could increase income consistently by better leveraging existing customers, what would that mean to your bank?

Michael Howe is CEO of Rennhack Marketing Services (, which develops and implements incentive-based customer acquisition programs for the financial services sector.

Posted on Friday, April 04, 2008 (Archive on Thursday, July 03, 2008)
Posted by Scott  Contributed by Scott


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