The Staying Power of Referral Programs

When Catherine Middleton, the Princess of Wales, steps out in public, people take notice of what she is wearing. Dubbed the “Kate effect” by the media, countless items, from a jacket costing more than $1K to a simple dress available for as little as $50, are among the many pieces of clothing and accessories that have rapidly sold out after video footage or photographs have shown Princess Kate wearing them. Not surprisingly, fashion designers and clothing brands are eager to dress Princess Kate, and there is no shortage of imitation items that pop up whenever something she has worn has generated global interest.Endorsements from Princess Kate may be unlikely within the banking industry, but community financial institutions (CFIs) should not overlook the power of referrals — particularly when they come from high-profile individuals or close friends and family members whose opinions people respect and value.Word of Mouth WorksThere’s a reason that referrals have been a staple piece of marketing within the banking industry for years. Quite simply, when done right, they work. Research has repeatedly found that consumers give more credence to business referrals that come from people they trust and respect, such as family members and close friends. Plus, with online reviews having lost roughly 30% of their effectiveness between 2020 and 2024, referrals from acquaintances are more important than ever. Additionally, research has found that people not only expect financial institutions and businesses to offer referral programs, but they also view those organizations more positively when such programs are in place.One reason that referrals tend to be more effective is that people typically socialize with individuals who have similar values and lifestyles, making them far more successful at targeting their own “lookalike” potential customers than general marketing campaigns usually are. This is particularly true among younger generations. According to the results of a Forbes Advisor survey, members of Gen Z place a higher value on recommendations for where to bank and save money than older generations — 37%, compared to 26% of Generation X and 20% of baby boomers.The Influence of Social MediaYet, referrals aren’t only effective when they come from close friends. With people relying more and more on social media for information, one of the most effective things that CFIs can do to promote referral programs is to align campaigns targeting specific demographic groups with their preferred social platforms, such as TikTok for Gen Z. Another important place for CFIs to market referral programs is LinkedIn, which reaches a broad demographic. To do this, CFIs should promote links that lead to referral programs. Blog posts about referral programs are another effective way to get attention and should direct readers to a referral program with a unique link or code that can easily track the activity of all parties involved, from the initial referrer to the person they refer. Likewise, rewards for referrals should be automated so that customers are able to track both referrals they have made and their reward status.The Psychology Behind Referral ProgramsReferrals also have longevity, with people who have been referred to an organization more likely to go on to refer others. Similarly, when new customers join a bank based on a referral, existing customers who made the referral are likely to stick around because they feel more invested in the reputation and success of their CFI. A study from UC San Diego and the University of Pennsylvania found that failing to recognize the fact that referred-in customers have a higher likelihood of referring additional customers could leave organizations underestimating the value of such customers by roughly one-third. The same study found that referred-in customers tend to add further value because they will typically seek out additional people to refer. Referred customers are more than likely to discuss the benefits of an organization prior to making any referral. Referral Programs in BankingNone of this has been missed by the banking industry. According to estimates from the Financial Brand, roughly one-third of all financial institutions have refer-a-friend programs. One such example is SoFi’s referral program, where customers who refer a friend through a link can earn rewards, depending on the type of account the referred customer opens. The person they referred can also receive a bonus. The program has been running since late 2014, and has resulted in $54MM worth of rewards for customers over the past decade.Chase has taken a similar approach, but with a focus on soliciting referrals for business customers, where customers who refer a business that opens a business checking account receive $100. There are multiple types of referral programs CFIs can offer, with the cash rewards and benefits varying significantly. The one thing that research seems to agree on is the fact that referral programs work and have multiple benefits, from the ability to better target specific demographics to greater stickiness among existing customers who feel a sense of loyalty to their CFI when friends and family have accounts there as well.