Regulatory pressure on interchange and merchant service fees on debit card transactions has increased across the world. The US, the European Union, Australia, India and China, among others, have capped interchange fees for debit card transactions. This has limited banks’ ability to fund loyalty programmes, and clouded the future of loyalty and reward programmes offered to debit card customers. The Durbin Amendment which lowered interchange revenue on debit cards in the US prompted a number of large banks, including Bank of America, JPMorgan Chase and Wells Fargo, to retract their loyalty programmes for debit card customers. Some banks introduced a monthly maintenance fee on debit card transactions, which were later withdrawn due to rising customer dissatisfaction.
Consumers are becoming increasingly value-driven, seeking extras beyond traditional products, services or benefits. This has led to increased pressure on profitability, forcing card issuers to reassess their product offerings’ costs and revenue streams.
Debit card loyalty programmes may flourish or disappear gradually, but, for the time being at least, they continue to survive and grow. However, the structure and dynamics of debt card loyalty programmes are changing: banks finding themselves with squeezing interchange revenues are switching to merchant-funded loyalty and reward programmes. Bank of America and Chase were quick to change strategies in favour of merchant-funded loyalty programmes for debit card users. There is also increased focus on lowering the programme costs through the use of mobile apps, online banking and social media.
Banks are expanding the scope of their loyalty programmes; during the review period, focus changed from transactions through debit cards, to the overall activity of a customer’s current account. For example, customers are being encouraged to use other fee-generating services such as overdrafts, utility payments and priority payments to generate revenue to offset income lost through lower interchange fees.
Banks are also adjusting loyalty programmes to adapt to the changing market environment. This includes the discontinuation of expensive product lines such as airline affinity programmes on debit cards, restructuring the number of reward points that can be earned per transaction, and the points required to redeem rewards.
In addition, current account switching is rising in markets such as the UK, while the number of fee-free current accounts is falling. Banks have increased their focus on merchant-funded programmes to retain existing customers and attract new ones. Scope for the development of debit card-related loyalty programmes has increased in the UK, with large banks such as Lloyds, Royal Bank of Scotland and Halifax introducing new loyalty programmes. Customers have become highly value-driven, and banks lagging behind this trend are likely to face reduced customer retention.
In the US, while a cap on interchange fees reduced the number of debit card loyalty programmes offered by large banks, it created an opportunity for banks with assets of less than $10bn to attract new accounts by offering loyalty and reward programmes on debit cards to differentiate themselves from the competition. As smaller banks are more likely to lack the proper infrastructure, expertise and scale of operations to support their own programmes, they are outsourcing them to white-label providers such as Vantiv, Fiserv and Cardlytics.
As banking facilities expand in emerging markets, competition will intensify to retain customers and encourage them to use debit cards, encouraging banks to offer loyalty programmes, despite rising pressure on interchange fee revenues over the forecast period. Changing business models and offering new loyalty programs are expected to improve customer retention and encourage debit card spending. According to the 2014 Colloquy FanXchange Customer Engagement Survey, loyalty programs encouraged 43% customers in the US to purchase more frequently, while 53% of customers in Canada indicates more frequent purchases when offered loyalty or reward programmes.
The following table outlines the current and future industry dynamics for debit card issuers targeting various customer segments through reward and loyalty programmes:
Changes in regulations supporting easy current account switching and increased competition have forced financial providers to change from product-centric to consumer-centric pricing, meaning products and services are also increasingly becoming more consumer-centric.
Banks have increased their focus on adopting technology and analytical tools to understand consumer purchasing behavior through analysis of their purchase history, enabling banks to evaluate their offerings and bring them in line with customer expectations. The following figure outlines a customer-centric loyalty programme framework for debit card issuers, highlighting key factors that determine the successful implementation of a debit card loyalty programme.
Increased use of analytics to improve loyalty programmes
Analytics is increasingly used to design efficient loyalty programmes and improve marketing. With advancements in technology that allow real-time analytics, merchants and financial institutions are using data to attract consumers and encourage them to spend more. A number of leading banks are using analytical tools to extensively analyse consumer buying behavior to build customised reward programmes or campaigns for specific customer groups. Modelling purchasing patterns enables them to identify and phase out reward programmes that do not generate significant value for the bank’s overall business.
Analytics is enabling banks to provide location-based, real-time discounts in collaboration with merchants, helping them achieve greater levels of customer loyalty and profitability. The successful implementation of analytics-based reward programmes has become a key differentiating factor for banks.
Banks traditionally offered products and services based on customers’ income level and demographic profile. Banks now also segment customers based on their lifestyle choices and purchasing behaviour. The use of analytical tools to better understand consumer spending patterns and offer personalised products and services has enhanced the opportunity for repeat business. This approach also helps to target and isolate the most profitable customers. Bank of America, Halifax, and Royal Bank of Scotland are using analytics to offer customers relevant deals based on spending patterns.
Offering value added services to improve customer loyalty
In addition to targeting customers with reward points, discounts and cashback, debit card issuers also offer value-added services, including travel and accident insurance, extended warranties, and purchase and price protection. These services are usually offered to top-end customers with premium banking relationships with the bank. Fifth Third bank offers the World Debit MasterCard, a premium brand from MasterCard that entitles customers to services such as extended product warranties, purchase protection if a product is damaged or lost within a set period, and even refunds if the customer is not happy with a product and the merchant refuses to take it back.
Gamification is gaining prominence for improving customer loyalty
Financial institutions also launch games on social networking sites to increase consumer engagement. Debit card issuers are likely to increase focus on gamification to increase customer engagement over the forecast period. For instance, Spanish Bank BBVA introduced the online BBVA Game in 2012, allowing customers to earn points which can be redeemed for products and services such as music downloads, movie streaming, and tickets to football matches. The platform has more than 110,000 registered users. With the rising popularity of its game, BBVA extended rewards to debit card customers as well: customers who apply for the BBVA Ahora Card are offered 2,500 BBVA game points.
Globally, digital marketing is becoming highly competitive, with companies developing marketing campaigns in the form of emails, newsletters and banner advertising, among others, making it difficult for a new campaign to stay in the consumer’s mind. Banks are subsequently trying to position campaigns in a way that keeps customers engaged.
The rising adoption of social media and interest in games provides opportunities for banks to promote brands and products, moving away from commoditised campaigns. Consequently, banks focus on developing interactive games that appeal to customers and encourage repeat visits to social media profiles. The games look to combine banking elements with fun activities to both increase customer engagement, and spread awareness of a financial product or service. Simulations of life events with financial requirements such as hospitalisation, wedding, childbirth, or payment for a university education have been helpful in generating awareness of how banking products can help people plan for these events.
Evolving competitive landscape will further increase pressure on banks
Banks are under pressure to offer loyalty programmes due to the changing competitive landscape. Competition has not only increased between banks, but also due to entry of non-bank payment companies. This has resulted in enhanced focus by card issuers on reward programmes specific to niche consumer groups, moving beyond simple discount or reward schemes to more sophisticated experience-based offerings.
The banking industry’s competitive landscape is continuously evolving. A key challenge for banks is to defend their positions in the cards and payments industry from new market entrants and alternative payment solutions. Technological advancements, changes in consumer tastes and preferences, and the emergence of new concepts have led to the development of non-bank payment companies and innovative mobile payment solutions.
Telecommunication firms such as T-Mobile, NTT Docomo, Vodafone and Airtel have also developed payment solutions that bypass banks and use mobile technology, often taking advantage of telecoms operators’ well-developed customer bases. Banks are at risk of losing significant revenues from the growing popularity of mobile wallets, cloud-based payments, in-stream social media payments and virtual currencies over the forecast period.
Smart mobile devices, low transaction costs and the expansion of the internet’s reach have the potential to disrupt the whole payment ecosystem. As awareness of their benefits increases, consumers are increasingly likely to prefer these alternative systems over traditional modes of payment.
Increased commoditization of benefits offered on debit cards
With the increased proliferation of programmes and rising consumer expectations, banks are finding it difficult to offer services that provide a competitive edge over their peers. The rising commoditisation of benefits creates confusion for customers, and requires additional effort to attract and retain clients. Organisations are required to invest in new branding strategies and product features to overcome this, despite falling profit margins.
The effectiveness of merchant-funded programmes adopted by several debit card issuers is also in question, as similar offers and discounts are available to customers from other sources such as group buying websites, or direct deals with customers. This erodes exclusivity, until debit card issuers are able to negotiate deals which can only be offered to customers.
Debit cards face increased challenge from growing popularity for prepaid cards
Debit cards are facing competition from the rising popularity of prepaid cards in key markets. Lower risk profiles, low or no charges, extended market reach, the potential to target the unbanked population, and convenience of use have propelled prepaid cards’ use. The development of online payments and the increasing popularity of gift cards and transit payments through prepaid cards are also driving their growth. Consequently, card issuers with business models centered on debit cards will need to increase focus on customer loyalty to defend their market position.
The growth of prepaid cards has outstripped the growth in debit cards in circulation in key markets such as the US, the UK and Australia. In the US, the number of prepaid cards in circulation registered a review-period CAGR of 9.30%, as compared to a CAGR of 3.53% for debit cards. In other key markets also, the growth of prepaid cards in circulation was well ahead of the growth registered for debit cards.
The growing popularity of prepaid cards is likely to increase challenges for debit cards. Average transaction values on debit cards are unlikely to rise quickly, due to the cannibalisation of products, and new competitors in the prepaid segment claiming a share of the total card market.