Retail banking is often portrayed as a static environment, stifled by regulation and rigid procedure. Many banks are perceived as offering the same dull products without offering their customers anything of value.Of course, security will always be paramount in keeping customers' funds safe.
But recently, there's reason to believe that the sector will soon undergo a makeover, and a little of the stardust from the high street's most innovative brands will be sprinkled over the banks. It should make this conservative sector just a little less staid and may just persuade more customers that they really want to use the services that banks offer.
During Temenos Community Forum in May, the overarching theme was Experience-Driven Banking and that concept is particularly pertinent to retail banks, where change is being powered by a combination of factors including fiercely-competitive technology companies, the advent of the cloud and digitisation. Rather than focusing on how digitisation will revolutionise retail banking in general, I am here looking at how banks are poised to immerse themselves in the rapidly evolving world of loyalty and reward schemes.
Why banks, why now?
Much of the rest of the retail, leisure and service world has already embraced the concept of rewards, and there's no shortage of innovation. It's worth mentioning schemes in Britain such as Sainsbury's Nectar and Tesco Clubcard, from the grocers, as well as Avios, which has successfully blended airline miles with credit card points. In the United States, commentators praise the varied and innovative loyalty efforts of companies such as Starbucks, Bloomingdale's, Nordstrom and Macy's.
Where are the banks?
Just around the corner. Banks are in a unique position as they have relationships with both corporates and their customers, allowing them to offer a marketplace every bit as comprehensive as Tesco or Starbucks, in a way that can be far more tailored to the individual. Many banks are now starting to consider their own loyalty schemes, much in the way that supermarkets, telecom companies and airlines have been doing for years. These could be directly linked to debit and credit cards or after using certain bank services.
Banks need to learn from best practice in the retail, transport and telecoms sectors. Companies typically tailor benefits to different tiers of customers, depending on their importance. This encourages spending and engagement, and drives clients to move up the corporate value chain. Recent research in Britain on the retail sector from IGD showed that 43% of shoppers said loyalty schemes were an important factor when choosing between stores. There's no reason why similar trends will not soon emerge in the banking sector. Emily Collins at Forrester Research has an interesting blog on the subject.
Big or small
When looking at loyalty schemes, scale is not crucial. Take Secure Trust Bank, a niche player in the Britain's Midlands region, which enrols current account customers into its rewards scheme so they earn cash rewards of up to 4 per cent of the value of their purchases at more than 35 major high street retailers on prepaid card purchases. The bank listed on the Alternative Investment Market in 2011.
Moving up in size, Santander has successfully made use of cashback rewards on selected household bills with its 123 current account, which also ties in customers with preferential rates and special deals on other Santander products in Britain including insurance, savings and loans.
Moving on from cashback
While simple cashback schemes are now commonplace, receiving a free retail item via a QR code or even a discount on banking fees could make life more interesting and is a useful means of generating long-term loyalty – and hence profit – from potentially lower-value added services like current accounts. It's also another means of extracting greater returns in our ultra-low interest rate environment.
For young adults, dubbed Generation Y or Millennials, who may never have had the luxury of a decent return from their bank account, it can be a real draw. It might even help them to start seeing banking as less dull.
A recent study by KPMG in Australia found that loyalty to a bank has become more transient and this demographic expects a seamless digital experience from their bank, as well cost and fee-related benefits. Competitive interest rates ranked below internet banking services, account fees, mobile banking services and ATM fees as the most important offerings. One conclusion was that banks will increasingly need to design and tailor advice on a collaborative basis. Rewards programmes were cited by some as a part of that picture.
Everyone is set to benefit: the bank defines the behaviour it wants to encourage and wins repeat business; the reward or voucher provider gets wider reach; and the consumer gets a product he or she wants.
A 2013 report by Datamonitor – Customer Loyalty in Retail Banking: Strategies for Success – found that tiered reward schemes and contextual offers encourage consumers to deepen relationships. It cited the example of HDFC Bank in India that has won plaudits (and growth in acquisition and retention rates) for its reward plans, which include a catalogue, links to airline miles, gift vouchers, conversion to Diners Club rewards or cashback. Datamonitor also noted that American Express had successfully integrated its rewards scheme with social media to better engage its customers.
The report concluded that "contextualised rewards based on customers' spending history will enhance the customer experience, and banks can form partnerships with retailers to gain access to in-depth transactional data".
And it's not just individuals who can benefit from a roll-out of banking loyalty schemes. Increasingly important corporate customers, especially SMEs, will benefit from schemes where they can pass on the rewards they have gained for the benefit of their own customers.
There's room to go even further. For example, by offering points for virtual interactions (rather than physical meetings), for taking out a certain number of products such as direct debits or keeping a positive balance on a current account.
All this activity needs to be tailored, relevant and flexible. And that's where data mining comes in, gathering the transactional details and creating the right product for the right person when they want it via a channel that suits them. In particular, smartphone apps take the strain off customers in dealing with the rewards, providing balance details and instant access.
"Banks with strong customer loyalty have an open door to win more of their customers' business," Bain and Co said in a report titled "Customer Loyalty in Retail Banking: What it Takes to Make Loyalty Pay Off" from 2013.
Reward schemes offer banks a new and exciting way to engage with their clients and to leverage the potential of the data revolution. The availability of new digital channels has made it far easier to integrate loyalty programmes into banks' CRMs, allowing them to exploit their unique position as the payment facilitator between consumer and businesses and offer real value to both parties. The steady expansion of the middle class in emerging markets, the demands of younger consumers and the cross-selling of financial products mean banks have to do everything they can to win and retain custom. In that sense, loyalty schemes should be viewed as an essential tool for the bank of tomorrow.