Frequent flyer credit cards are increasingly being used by banks to maintain relationships with their top-end customers. Premium experiences, such as lounge access or preferential hotel treatment, keep their mass affluent customers happy and loyal. But does anyone else benefit? Patrick Brusnahan reports
Consumers, particularly in the mass affluent sector, are travelling more than ever. Forecasts predict that this will continue in key economies for the next five years.
As a consequence, the majority of card issuers that offer cards for frequent flyers have begun to streamline their frequent flyer offerings.
Countries such as the United States, Canada and South Korea have a strong preference towards frequent flyer cards, while issuers in the United Kingdom and Australia have less of a preference, instead focusing on shopping reward points and cashback in line with consumer habits.
Issuers in Spain have shown a relatively low focus on frequent flyer credit cards, due to a customer preference for debit cards and direct debit over credit cards. This is a trend seen in most of Europe, with the exception of the UK.
A problem for the financial sector is the increasing commoditisation of frequent flyer rewards. It is merely expected by consumers now- every institution and their mother seems to be offering the service. The trick is to differentiate oneself in the market, while still, somehow, turning over a profit.
Merchants providing funds and reducing costsCard issuers have started making changes with regards to their strategies and operational models.
One part of this is evaluating their rewards frameworks to strengthen customer loyalty. This includes finding the right balance of funding options and reward offerings to maintain a customer’s loyalty and increase profitability.
Previously, banks had been at the forefront of issuing cards with benefits and features through loyalty programmes. However, it became apparent that bank-funded reward and loyalty programmes came at a cost for card issuers.
Consequently, issuers are moving towards a more merchant-funded model.
Issuers and card schemes are partnering with airlines, hotels and other brands to offer merchant funded-rewards. This allows card issuers to improve the value of their frequent flyer credit cards without adding any major cost.
Merchant-funded loyalty programmes help banks and card issuers differentiate themselves in the marketplace and increase member engagement.
The benefits for issuers are multiple. Merchants fund offers and rewards, reducing the burden on banks and card issuers. It also encourages spending on cards by existing consumers so they can gain these rewards, while attracting new consumers to do the same.
There is also ample opportunity to increase customer engagement across different channels and improve the chances of cross-selling.
Merchants are, in general, willing to participate in these agreements as the programmes usually follow a pay-per-performance principle where merchants only incur a cost when cardholders use their services. This leads to a reduced overhead cost for merchants’ advertising.
One example of this partnership is American Express. It has global deals with AEG (owners of the O2 Arena) and Live Nation, allowing consumers to purchase early-sale tickets to events and concerts. Its partnerships with other providers also allow cardholders to, for example, gain access to the Grammy Museum, meet world-famous chefs and gain backstage access to London Fashion Week.
However, to gain certain high-quality rewards requires a huge amount of spending, cutting off certain parts of the market. This is something that card issuers have noticed.
Customer segmentation Card issuers are increasing their efforts in customer segmentation in an attempt to attract a wider customer base.
The needs of travelling professionals and emerging entrepreneurs are likely to differ from a family travelling for leisure. Card companies are now customising their products to target each segment by offering different cards and suing multi-tier reward options.
This is leading to an increased focus on non-flight rewards. This can include the redemption of miles/points for merchandise, event tickets, discounts on retail purchases and charity.
Despite being crucial for customer loyalty, frequent flyer programmes result in an increased cost burden for airlines. Some airlines manage this by adding fuel surcharges and other fees, while others limit the amount of seats booked through miles/points.
In addition, the limiting validity of accumulated miles is a key strategy used by frequent flyer programmes.
Increasing competition and rising customer expectations, however, make it difficult to utilise this strategy.
Furthermore, a significant amount of customers do not actually spend enough to earn free flight tickets and their accumulated miles remain unused, rendering the entire service useless.
Offering the option to redeem accumulated miles/points on other expenses provides customers with flexibility and decreases costs burdening airlines as miles are not exchanged for free flight access. A number of third-party programmes have also emerged to help consumers exchange their points for gift cards, vouchers and other benefits.
The race to attract the mass affluentDue to inability for certain segments of the market to redeem their points effectively, banks and other card issuers are increasingly focused on reward programmes for the mass affluent (individuals with wealth between $100,000 and $1m).
This can include equities, bonds, cash and deposits, fixed-income products, real estate, alternative assets and business interests.While the mass affluent sector represents a small percentage of the overall customer base, the revenue generated from them is high, mainly due to deeper banking relationships.
According to MasterCard, mass affluent customers in the US spend over $1,000 per active credit card per month and carry a revolving credit balance of over $6,000. This is compared to $550 in spending and a revolving credit balance of $3,600 for non-affluent customers.
Similarly, mass affluent customers in the UK spend over £1,500 ($2,330) and carry a revolving balance of £6,000 per month, compared with spending of £480 and a revolving credit balance of £2,700 for non-affluent customers.
In addition, mass affluent customers spend more while shopping, travelling and purchasing services than mass market consumers.
Moreover, the spending patterns of mass affluent consumers are, in general, less affected by economically difficult times. According to the Economic Tracking Survey (published by MasterCard in 2010), 54% of mass affluent consumers reported that the state of the economy has no impact on their spending behaviour, while 55% of non-affluent customers stated that it has a negative effect.
This difference in spending habits has led to a renewed focus on the mass affluent. Card networks are also developing brands with value-added services and reward specifically targeted at the mass affluent. MasterCard and Visa are investing in building brands such as MasterCard World Elite, Visa Infinite and Signature as premium products.
As many issuers have realised the potential growth that can be achieved in the mass affluent segment, the market is being flooded with cards that contain very similar features. This has increased the risk of commoditisation in the premium card sector, which will, in turn, increase marketing costs and reduce profit. Customer engagement is set to be the crucial differentiator.
Social mediaLeading banks and card issuers have introduced marketing campaigns, heavily utilising mobile phones and social media, to promote and share commercial content. For example, American Express cardholders in the US and UK can gain access to Foursquare offers by syncing their credit cards with the Foursquare app.
These forms of marketing are the only ones likely to gain momentum over the next five years, with the rising popularity of smartphone apps such as Facebook and Foursquare, while allowing merchants to track customer locations and offer personalised mobile vouchers.
In addition, mobile campaigns enable marketers to send personalised messages, reach customers in remote locations and offer customised propositions. The propensity of commercial content receivers to forward information onto friends and family members is expected to result in viral marketing, thus helping companies to expand their reach.
Misgivings over social media’s worth are no longer relevant. Facebook recorded a continual rise in its mobile advertisement revenue since 2012. The company attributed 59% of its total revenue to mobile advertising in the first quarter of 2014; a 72% rise compared to the same period in 2013. Ninety per cent of all internet users in North America, Europe and the Asia-Pacific are social media users.
Financial institutions are expanding their operations on social networks, providing opportunities to involve customers through additional content, offers and discounts without incurring an additional cost of alternative mediums, such as advertisement on television and banners.
For issuers, consumer engagement is the key to improving brand loyalty, leading to higher revenues. Companies are establishing entire teams dedicated to social media, focusing on interaction with consumers on a range of subjects, which go beyond product-specific information.
SponsorshipBanks have adopted various non-banking approaches, such as sponsorship of events or sports teams, community programmes and cultural events.
One example of a financial institution with a huge social media presence is Wells Fargo with a number of Twitter handles, including one set aside for customer service.
Chase Bank, meanwhile, focuses on crowdsourcing, as well as a community giving programme that has attracted 3.7 million likes on Facebook. Since its launch in 2009, it has distributed over $30m in grants to charities in the US and Puerto Rico.
GamificationAnother option is gamification. Launching games on social networking sites to increase customer engagement is becoming a fairly frequent option from banks.
The rising affinity for games is providing an opportunity for banks to promote their brand in a non-obvious way while also moving away from commoditised campaigns. The games usually combine elements of banking with gameplay to increase both engagement and awareness.
One example of this is BBVA’s online game. This allows customers to earn points which can be redeemed for products and services; such as music downloads, movie streams and tickets to football matches.
The platform now has more than 110,000 registered users and the rewards have been extended to all card customers. When applying for a card, users are automatically given 2,500 BBVA game points.
Frequent flyer programmes are a tricky and expensive path. Financial institutions need to discover the benefits for consumers before they begin to take flight.