By Allen Pettis
Canadians love their credit cards. In TSYS’s most recent Canadian Consumer Payment Study, consumers ranked credit cards as their number one favourite payment method for the fourth year in a row. And for the first time since the study began, Canadians across age groups and income levels said they prefer paying for purchases with them.
These findings are good news for credit card issuers and the strength of their products. But the same study also has potentially cautionary findings for the industry. For the fifth year in a row, loyalty or rewards programmes came in as the top factor driving consumers to select particular credit cards, with 90 per cent of respondents selecting rewards as a feature that causes them to use one credit card over another.
This data suggests that consumers aren’t necessarily committed to credit cards. Instead they’re committed to rewards. And the companies that offer the most attractive rewards programmes are best positioned to take market share from competitors: even if they are not traditional credit card issuers.
Digital wallets, merchant apps competition
Enter digital wallets and merchant apps, which represent growing forms of competition for issuers. Amazon, for example, has a credit card that seamlessly integrates with its e-commerce platform, allowing customers to apply points they earn toward purchases (Alipay has the same type of programme). Venmo recently introduced a debit card, positioning it to launch a loyalty programme in the future, although it has not done so yet.
Scores of other merchants have rewards programmes that encourage customers to pay for purchases within mobile apps. For example, Starbucks customers earn rewards by ordering through its app, which can be set to automatically reload a customer’s prepaid card once the balance falls below a certain level.
The threat that each of these companies pose to traditional credit card issuers, notably the larger banks and credit unions, and risking eroding their market positions, is that customers could take more of their business to other companies with whom they have relationships, such as Amazon and Venmo. Even when these issuers provide the infrastructure for the cards—as is the case with the Amazon credit card, which is issued by Chase—customers are being trained to view e-commerce retailers and other non-bank entities as viable financial partners. Long-term, this could exert new competitive pressures on the banks and credit unions.
Bank, credit union advantages
Bank (or credit union) credit card issuers still have major advantages over non-traditional competitors. In most cases, banks and credit unions offer a broader range of rewards programmes. A retailer that encourages customers to link a store card directly to their checking account, for example, might reward those customers with cash back, discounts at the register or points that could be used for future purchases. However, the benefits are typically limited to the products sold by that retailer. In contrast, banks and credit unions can offer various products that appeal to clients’ specific areas of interest, such as travel, restaurants, entertainment, groceries or cash back.
Banks and credit unions know more about an individual’s broader spending habits than any single merchant. They should leverage this information to target customers with rewards programmes that are most likely to appeal to them.
Finding new ways of segmenting customers and understanding their purchase patterns will enable banks and credit unions to develop new and creative rewards programmes. They can play leadership roles in curating new experiences for customers based on in-depth knowledge of their interests.
Learn from the retailers and innovators
The innovation that’s currently happening in the loyalty and rewards space is focused on making the process of redeeming rewards easier and faster. The push toward the seamless customer experience is driven by companies such as Amazon, Apple and PayPal that have excelled at simplifying various tasks, from buying music to ordering things online or paying a friend. Consumers now expect their payment card(s) to deliver the same kind of experience.
The frictionless rewards experience has already gained relatively widespread adoption. Most anyone with a mobile banking application has seen special offers from various merchants appear at the bottom of their screen. All they need to do is accept the offer within the app and the discount is applied whenever the purchase is made. FinTech players across the industry are working to bring this same type of immediate redemption opportunity to other types of transactions.
Embracing the innovator role
The banking industry, along with credit unions are well-positioned to invest in loyalty programmes that provide new ways of giving consumers the instant gratification they desire instead of waiting for retailers and other technology startups to bring these types of solutions to market. Banks and credit unions can and should play a leadership role in this space because nobody understands consumer purchase patterns better than them. And in today’s data-driven world, the companies that understand the consumer are in a much stronger position to win them over.
Allen Pettis is executive vice president and chief customer officer of Issuer Solutions at TSYS (www.tsys.com), responsible for all global account management and sales.