Most traditional loyalty programs are built around a basic concept that rewards consumers for using a bank credit card. Unfortunately, the majority of financial institutions (FIs) offer similar loyalty programs and the costs associated with these programs have become serious constraints. The commodity nature of traditional rewards programs has made FI loyalty programs ineffective in driving desired changes in customer behavior.

It is becoming increasingly obvious that outdated bank-funded loyalty programs have lost value. The market is beginning to recognize the value of merchant-funded programs as supplements and even replacements to traditional loyalty programs, but not all such programs are created equally.

For several decades, FIs have used traditional point-based or cash-back reward incentives as a way to build customer loyalty and increase usage of their bankcard products. According to a 2008 First Data study, 76 percent of consumers belong to a credit card loyalty program. Unfortunately, over time these programs have become increasingly less effective in helping FIs retain customers and influence their purchasing behavior.

The proliferation of nearly identical loyalty programs throughout the marketplace has diminished the ability of companies to differentiate themselves through these programs. In its 2007 report, Sizing Up the U.S. Loyalty Marketing Industry, Colloquy estimates that each household belongs to an average of 12 different loyalty programs—and that less than half of these programs are actively participated in.

Loyalty programs have become commodity items that are ubiquitous and nearly indistinguishable from each other, forcing FIs to undertake costly (and often ineffective) promotional tactics, like temporarily boosting reward percentages, to set themselves apart. Escalating resource constraints have also contributed to the decline in the overall effectiveness of traditional loyalty programs.

Because of the deteriorating value of these programs, many FIs have diverted marketing resources—resulting in lackluster programs with decreased appeal and even less relevance to customers. As a result of today’s slowing economy, consumers are becoming more financially savvy and demanding better terms and rewards from their bankcard loyalty programs.

As a condition of their participation in a program, consumers are constantly looking for a broader range of rewards, as well as new ways to accelerate their earnings and reward fulfillment. On the other hand, FIs want more potent reward programs that add greater value to their marketing portfolios, create genuine differentiation in the marketplace and provide higher returns on their marketing investments. Merchants, in turn, seek to participate in bankcard loyalty programs that increase brand awareness, drive traffic to their stores and offer a unique but cost-effective promotional tactic that avoids the problem—discussed later in this paper—of “triple-dipping,” often associated with registered-card programs.

Each of these goals can be addressed with a premier merchant-funded loyalty program—an alternative to traditional loyalty programs that combines a bank-sponsored program with merchant-funded rewards. The premier model allows financial institutions to develop customized, highly effective bankcard loyalty campaigns that meet critical marketing objectives, including:

  • Increased card usage
  • Improved customer acquisition and retention
  • Strengthened relationships with consumers and merchant partners

Premier merchant-funded loyalty programs also give merchants the opportunity to focus their marketing efforts and dollars on relevant, valuable customers, making marketing dollars work harder.

The purpose of this white paper is to provide a better understanding of premier merchant-funded loyalty programs and why they provide a competitive edge. In addition, this paper provides an overview of current loyalty programs in the market and guidance on successfully implementing a premier merchant-funded loyalty program.