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THE LUMIN LAB

How To Set Up a Digital Bank Rewards Program To Improve User Loyalty

by Pamela Michaels Fay

While customer loyalty programs in the banking industry are far from new, they’ve certainly evolved.

Today’s customers are too young to remember the late ’60s when receiving a toaster for depositing money into a checking account was quite the incentive for a new customer (toasters were a popular wedding gift back then). But most customers are familiar with the sign-up bonus, or cash gift, for opening a new account that many banks have employed recently. While the cash incentive is undoubtedly better than a toaster, it’s not really how banks and credit unions keep users loyal and satisfied today.

In the past, the philosophy around customer loyalty was two-fold: one, get a potential new customer’s attention using a promotion or giveaway, then two, lock them down with direct deposit, bounce protection, and a line of credit. That may have been all you needed to establish a loyal customer back then — but times have changed. And with the multitude of options available to customers in today’s modern banking world, establishing bank customer loyalty programs are more critical than ever.

During the 1990s, as a young marketing manager, I worked on Citibank’s co-branded credit card venture with American Airlines. The AAdvantage program was one of the first of its kind and has grown to include millions of loyal users. Since then, customer loyalty programs have exploded and are more popular than ever for one simple reason: they work. But, they certainly are not without their challenges. Today’s modern banking users are savvier than ever; a simple “me-too” bank loyalty program isn’t going to cut it any longer. But make no mistake: a well-designed rewards program remains essential to a holistic approach to banking user loyalty.

User Loyalty Matters More Than Ever

According to a 2021 Deloitte report, 72% of users are satisfied or very satisfied with their banks or credit unions. That’s not bad, considering the unprecedented pace of changes banks (like many industries) were forced into because of the pandemic. Just 6% of baby boomers, who still hold a significant majority of most financial institutions’ assets, are likely or somewhat likely to switch to a new bank or credit union.

But it’s not all good news on the loyalty front. Although baby boomers are most likely staying put, younger folks are considerably more open to change. Some 28% of millennials and 20% of Gen Z have a wandering eye when it comes to their financial institution of choice, and are driven by distinctively different factors than their predecessors.

For boomers and Generation X, the costs associated with moving to a different bank or credit union are much higher given the length of time they’ve had to acquire numerous assets. As they say, “it’s still cheaper to keep ‘er.” Younger generations, on the other hand, typically have fewer accounts and entanglements simply because of their early stages in life.

Additionally, young people today lack financial security compared to older generations at a similar age. It’s no surprise, but millennials and Gen Z want to be, and probably need to be, smarter with their money now more than ever. Lastly, millennials and Gen Z want services that are personalized and relevant to their everyday lives. Born in the digital era, they’re much more accustomed to customization than previous generations. But, despite the differing needs and expectations between the two generations, one thing remains the same: your most valuable users, at every age, demand more than just a transactional relationship.

Digital Banking Rewards Programs

Bank rewards programs are a tried and true marketing tactic that offer the ability to both reward and incentivize customers. From providing incentives for customers to use their credit cards to other bank services such as acquiring loans or mortgages, bank rewards programs can run the gamut. But a well-designed bank loyalty program has more than just financial implications; it can humanize the banking experience by providing critical touchpoints and a series of feel-good moments that keep users engaged with the banking experience.

Back in the ‘90s, as hard as we tried, we could only guess what our users wanted and needed based on their demographics and their assets on deposit. Today, banks and credit unions have extensive resources at their fingertips through aggregated data. And it’s this data that should inform how rewards programs are designed to provide value to each user.

The goal of any loyalty program is threefold:

  1. Generate user loyalty and deepen user relationships.
  2. Enhance service offerings and expand online presence.
  3. Provide genuine user value that flows to the bottom line.

Types of Reward Programs

While the types of rewards programs are as diverse as they are plenty, typical examples of programs that are in use in today’s banking climate are below:

  • Net purchases: Customers earn points based on overall spending or in certain spending categories—for example, travel points on partner airlines.
  • Tiered: Rewards are based on the user’s bank balance. In addition to earning points on credit card spending, the member may enjoy benefits such as an interest rate reduction, a booster on saving account interest, and fees waived. The rate of points earned grows with the account balance.
  • Fee-based: British-based Barclays Bank charges its reward program participants £5 monthly, but users earn £5 with their monthly direct deposit. Users earn cashback when they make their Barclay’s mortgage and life insurance payments.
  • Young Savers: Zions Bank pays $1 for each A-grade a student receives, and the money is deposited directly into a Young Savers Account. Each A-grade also wins an entry into a scholarship savings account.

For many rewards programs, points earned can be redeemed for cash, merchandise, gift cards, travel discounts, charity donations, online auctions, Amazon or PayPal purchases, and more. A few programs even allow users to share rewards with others who would prefer to gift them to someone else. But regardless of the method used, the end goal for every bank rewards program is to maximize customer loyalty value and, of course, provide value for the bank.

5 Tips for Success

When it comes to implementing successful rewards programs, it’s nearly a perfect storm. Digital technologies are creating new opportunities for banks and credit unions while lowering the barriers of entry for customers to join. New generational influences are disrupting the industry with greater expectations and a need for personalization. And to top it all off, a 2019 KPMG survey shows that 96% of respondents agree that customer loyalty programs can be improved, and 75% of all consumers say that they would switch brands for a better loyalty program. Simply put, banks and credit unions have work to do regarding customer retention.

And while loyalty programs are table stakes for banks and credit unions today, there’s no question you should have them. Instead, recognize that not just any program will do. So why then are banks and credit unions struggling to convert their customers into loyal users through rewards programs? The answer lies in program awareness and usability.

Fortunately, though, banks and credit unions can stem the tide of attrition before it gets to a critical point through holistic rewards programs that generate user loyalty. Here are five essential tips for a successful bank rewards program.

1. Identify the Target

First, you need to understand your users to understand the products and services they actually want and need. Knowing that not all of your rewards programs will appeal to your entire customer base, you should first start with a program that’s most relevant to your high-value users.

2. Personalize the Rewards

By leveraging your user data, you can start understanding their habits and predict their needs. Beyond the basic information, it’s time to figure out who they are, what appeals to them, how they spend their time and money, and how to best connect with them so that you can offer rewards that attract and retain them for the long haul. Your loyalty program should complement your marketing efforts and reward program participants as they capitalize on the program and grow their assets with your financial institution. This structure, for example, is the premise of Bank of America’s tiered reward structure.

3. Refine the Digital Experience

To truly create a loyal user, ensure that your onboarding process for enrollment into the program is flawless. An invitation for a user to join your rewards program should make them feel like you’re rolling out the red carpet to a premier event. It should be a smooth and seamless experience, with the user feeling like they got the VIP treatment. And after the initial rollout, further refine the digital experience by making the program transparent and easy to use. Promote the program’s value to your users with personalized messages and identify the touchpoints for ongoing communication.

4. Optimize for Online

And to add to refining the digital experience, ensure your website is optimized to offer an intuitive and user-friendly experience. Most of those who prefer to do things online do not want to go into the branch or make a phone call. Let your users solve their own problems online. CapitalOne gets it right with its Purchase Erasure program: If users forget to use points on an airline ticket, they can easily submit the purchase for up to 90 days.

5. Gamify the Program

To gamify is to amplify the program to be more visually appealing and enticing to broader audiences. Gamification integrates game mechanics to motivate participation and engagement. Gaming elements might include bonus points, levels of achievement, leaderboards, avatars, bots, badges, and progress charts or prizes. For example, game elements commonly use awarding a badge for switching to paperless statements, meeting a savings goal, or other often neglected tasks that are the basis of sound financial management. Plus, game elements help build customer loyalty by helping customers find more manageable and consistent ways to do things they’d typically avoid. It’s easier to stay with a bank that helps them bank better.

Keep Your Best Users

In the end, you have to ask yourself: do you have the right strategies in place to retain your best users? Your best users are your loyal users who typically buy more, cost less to serve, pay premium prices, and refer your services to others. To retain these high-value users, be sure you’re employing the above strategies to optimize your rewards program. And to ensure your program stays relevant, revisit the program periodically to make necessary tweaks to ensure you continue to meet your goals and best serve your users. But above all, remember that the bank rewards program is just one part of a holistic marketing strategy.

Want to bring the best solutions to your users? You’ll need a strong digital partner. Lumin Digital helps banks and credit unions across all banking functions (including rewards program support!) by deploying cloud-based next-generation digital solutions that scale with your user base. Contact Lumin Digital today.

Pamela Michaels Fay is a business, financial, technology, legal, and lifestyle writer whose work is informed by over 20 years of strategy, leadership, and organizational development consulting for Fortune 500 companies.

Sources:

Deloitte – Building on the digital banking momentum

KPMG – The truth about customer loyalty