While cash-back rewards programs are increasingly essential for financial institutions, they present a complex challenge, especially for smaller banks and credit unions. There is a delicate balance between meeting consumer preferences — with 69% favoring cash-back rewards and demanding seamless digital experiences — and managing the significant costs, where reward redemptions reached $35 billion in 2022.
Consumers love cash-back rewards programs. As a financial institution leader, you know this. Many account holders consider participation in a high-quality rewards program a prerequisite for smart money management. (Indeed, you probably participate in one or two programs yourself!) But if you don’t happen to work for a major player like Capital One, Chase, or Citi, how do you ensure your own institution’s rewards card will actually drive value and growth?
The question is worth asking because reward cards are not silver bullets (or gold or platinum ones, for that matter). If properly designed, they are without doubt one of the best ways to strengthen account-holder engagement and diversify revenue. If not, they can become costly liabilities, draining resources through expenses and inefficiencies without delivering the desired customer loyalty or financial returns. Poorly executed rewards programs may also confuse or frustrate customers, leading to diminished satisfaction, reduced usage, and account attrition. If done poorly, your rewards card becomes an expensive disloyalty program.
It’s no surprise then that striking the right balance between cardholder and issuer needs is critical to running a successful rewards program. This is true perhaps even more so for rewards programs than other financial products because the consumer side of the equation leaves so much room for variation and innovation. A new white paper from Elan Credit Card — Optimizing Your Credit Card Rewards Program — breaks it down.
What Cardholders Are Thinking
Cardholders begin with a simple question — Will the rewards product meet my needs? — and lean on the Internet to compare cards and rewards. Consumers respond well to programs offering perks like bonus points at signup or in return for a certain amount of spending over the first few months of card use.
What type of rewards resonate with cardholders today? The white paper cites a range of third-party research, identifying the key trends: Cash-back is king, preferred by 69% of consumers. Travel rewards are also popular, with many cardholders planning to use card-linked offers for both local and long-distance trips. Gift cards have broad appeal, while younger consumers show interest in crypto rewards and charitable donations. And, though merchandise redemption is waning in popularity, it still appeals to some older customers.
Finally, all generations want their rewards experience—how points are managed and redeemed—to be incorporated into their existing digital banking experience. New cardholders want clear, engaging information about rewards and an immediate connection between their spending and earned benefits, such as mobile alerts tracking accumulated points. They also value quick, flexible redemption options like automatic cashback. Younger consumers overwhelmingly prefer smartphone banking, a preference that influences their expectations for a seamless experience. One study cited by Elan revealed that 72% of rewards are redeemed within 90 days.
What Issuers Are Thinking
Issuers establish rewards programs for a variety of strategic reasons that go beyond simply offering incentives to transact, according to the white paper. To begin with, they drive loyalty and engagement—fostering stronger, long-term relationships with existing customers, while at the same time attracting new ones (if the benefits are appealing enough). They also drive interest income growth by encouraging cardholders to use their cards more frequently and grow revolving balances. And they boost fee income, too, whether through interchange or annual memberships—again with many variations possible.
But here’s the thing: Rewards programs are expensive. According to a 2023 report by the Consumer Financial Protection Bureau, consumers redeemed almost $35 billion in general-purpose card rewards in 2022—an estimate that excludes the “considerable” value of points or miles earned on co-brand cards with separate loyalty programs, like airlines and hotels. Another estimate puts the pool of available loyalty reward points at $100 billion in value.
While 1% cash back was long the norm, aggressive issuers now offer 2% or even 5% on some purchases such as hotels and airlines, raising costs considerably. Today a competitive card will accrue rewards at a rate of at least 70 bps—seven dollars per thousand transaction dollars—according to Elan. However, many institutions don’t calculate accrual rates, or take liability management and reporting into account as they contemplate launching a program.
For banks and credit unions thinking about a rewards program, Elan’s white paper provides a simple rubric:
- ✔ Will the institution’s existing customer base support a rewards program?
- ✔ Is there sufficient projected growth to make such a program viable?
- ✔ Are there diversified product offerings to help fund high-transaction users?
The fact is that the operational costs associated with a rewards product is higher on a per-balance basis than any other loan product. In line with account-holder preferences, Elan’s white paper makes clear that sustaining a worthwhile program requires investment in creating one that works across devices, optimizes engagement, is fully transparent, and highly interactive. Redemption of rewards must be as easy as an everyday online purchase.
All of this makes it essential that a lender partners with the right loyalty program vendor or credit card issuing partner to craft a program that is created with effectiveness and profitability in mind.
Positioning Your Program
As smaller financial institutions, community banks and credit unions would do well to keep the most-popular rewards programs in their sights, especially in a world of continuing interest rate uncertainty and economic transition.
A webinar last September, hosted by Elan and TRK Advisors, provided insights into how the likes of Chase, Citi, and Capital One are managing their offerings. These leading issuers heavily promote upfront benefits, such as low introductory interest rates, to attract customers. They ensure their rewards provide competitive value, typically at least 1.5%, to maintain appeal. Instead of relying on generic, cookie-cutter offers, they focus on creative and adaptable rewards tailored to specific products and market trends.
Notably, beyond introductory rates, large banks do not compete aggressively on ongoing rates, leaving room for community banks and credit unions to differentiate themselves on other attributes. Rewards and offers on all these popular cards were higher this year compared to a year earlier while their interest rates (after introductory offers) were all modestly higher even as the central bank has been lowering rates. That suggests banks are happy to compete by offering higher rewards but that they are balancing that by boosting interest income to pay for those higher rewards. Newcomers to the product should take note!
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Source: THE FINANCIAL BRAND
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