BID® Daily Newsletter
Sep 21, 2006

BID® Daily Newsletter

Sep 21, 2006

BANK LOYALTY PROGRAMS


15 miles or $30 per night – this is our "value matrix" when it comes to hotel loyalty programs. That is to say, we will try to stay at our preferred hotel if the price is within $30 per night or within 15 miles of the next best non-loyalty alternative. The points, the potential for upgrades, the free paper and the ability to steal the extra bottle of tea tree shampoo all get factored into our decision. Spending $30 is material when you consider our average hotel cost is $180 (18%). However, it represents our loyalty inelasticity (the extent that we are more loyalty sensitive than price sensitive). At the High Performance Workshop, we will be discussing the role loyalty programs play at banks and their unqualified success in 2006. Deposits, home equity loans, revolving lines of credit, debit cards, online banking and even ACH transactions now all come with loyalty points. These programs give banks an extra tool to influence customer behavior be it consumer or commercial. While the quantitative among our readers would argue that customers value points at some calculated monetary number (each loyalty points equals 3 cents) so it should not matter. The reality is that users love to save points as well as money and in many cases value points more. Loyalty points represent a dream – a vacation, a new set of golf clubs or a free bowl of soup. Over the past several years, banks have been hard at work designing more effective programs and adding tiers of membership (silver, gold, platinum and now, titanium). Many bank programs will give customers a head start (giving away 5,000 points for opening a checking account) and add e-mail notification, updating customers on their current status (and doing some marketing at the same time). For 2007, the new trend will be the use of "split value" payment methodology. This allows clients to pay for bank services using points, balances and dollars. By providing a tiered structure, clients can purchase services using balances, dollars, points or a combination of all three. This has proven effective and is expected to meet widespread acceptance at several large banks next year. At one bank, points have become a form of currency (they even call them "Credit Dollars"), where customers can use up to 100k points to buy down the rate on their commercial loans (up to 50bp). Before you think this is just another way to add cost, think again. Several popular programs at non-banks (such as eBay and Yahoo) track loyalty points without any exchange of services. Customers strive to increase their standings just for pure gamesmanship. While loyalty programs aren't for every bank, financial institutions looking for ways to increase customer retention and find methods other than rate to compete may want to consider them. Starting with "Green Stamps" in the 1930's and evolving through today (where more than 75% of bank customers belong to at least one loyalty program), the concept has a well-worn and successful track record. For banks over $400mm that track relationship profitability (otherwise you may end up rewarding the wrong behavior), a loyalty program is something that should be on the strategic planning agenda for 2007.
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