NYPAY hosted a panel of senior rewards and loyalty experts to discuss “The Future of Loyalty and Rewards” at a gathering of senior payment industry executives on June 13 at the offices of AllianceBernstein.  The insights provided by the gathering of senior industry leaders proved to be as interesting as those of the rewards and loyalty leaders sitting on the panel.

The capacity crowd of payments industry professionals that filled the meeting space represented firms coming from all aspects of the industry, including loyalty companies, startups, advisory firms, issuers, program managers, networks, and merchants.  Among the senior executives attending and providing perspectives on the changing business of the loyalty industry were Charlie Kim, CEO of NextJump, Joe Salesky, Founder and Chief Strategy Officer for FreeMonee and Schwark Satyavolu, CEO of BillShrink. The high turnout and broad array of attendees reflected the rapid and dramatic changes sweeping the payments industry.

Panelists included a banker, a merchant, a reward and loyalty vendor and a leading industry analyst:

• Jason Brooks, SVP, Cardlytics
• Arnold Lewis, VP Customer Loyalty and Rewards, Macy’s
• Patricia Hewitt, Director / Analyst, Mercator Advisory Group
• Amy Harris, SVP, Loyalty Marketing and ThankYou, Citi

The panel provided their own perspectives of the trends and future of the rewards and loyalty business, and a healthy back and forth exchange ensued between the panel and attendees, resulting in a lively discussion.  With long-held assumptions being challenged, expert opinions vary widely; given the quality of both panel and attendees, a wide variety of insightful views were aired.

The major observations highlighted during the session included:

1. The speed at which the loyalty space is evolving is breathtaking.  Merchants have seen their choice of merchant-funded rewards options grow from the classic loyalty programs (buy 10 coffees, get one free) to incentive programs (such as 50% discounts from Groupon). For merchants, the cost of loyalty programs used to be 1%; as a result of new reward models from companies like Groupon/LivingSocial, consumers are now expecting 30-50% off purchases.
2. How shoppers see and value rewards programs are beginning to negatively impact their view of the brand. Loyalty programs grew in importance during the economic downturn as brands used loyalty to gain much needed increases in sales.  But “flash deals” have begun to erode brand value as consumers have start valuing brands at 50% less. Is a better strategy to offer point-based rewards that doesn’t reduce the value of the product or brand?
3. It has become increasingly difficult to differentiate one reward program from another. The average consumer now subscribes to 11 reward programs compared to 3 just a handful of years ago. One senior executive referred to recent studies showing that points have become currency and many consumers build rewards into their own personal financial management.



4. Panelists agreed that consumers have increasingly shown less tolerance in lag time and demand more choices and interactivity with merchant discounts.  Consumers are interested in merchant incentives that have moved from being cumulative, redemption-oriented to real time interactive.
5. Loyalty programs have evolved from being transaction and payment focused, to being behavior and activity (merchant) focused.  Sending a non-targeted offer to all prospects leads to costly behaviors or negative goodwill (sending a vegetarian a free ticket to the local meat market).  However, providing targeted, local rewards that deliver a high level of value to consumers benefits all parties to the program.

The consensus was that the industry will continue to see more loyalty and rewards models develop in the near-term before the “consumer speaks.”  We are still in the “wild west” days of rewards and loyalty where new, innovative models are being tested, and a few clear winners will emerge.  It is clear that targeted, immediate rewards that incent the desired purchase behavior will be highly valued by merchants and issuers.  The remaining question is which loyalty model will win the consumers’ hearts and minds long-term.

About NYPAY

NYPAY is a New York area industry group whose primary goal is to provide face-to-face networking and idea exchange for payments professionals.  NYPAY consists of hundreds of senior-level payment industry professionals. NYPAY continues to bring together some of payment’s leading forward thinking minds to advance the conversation and stimulate innovation within the payments industry. For information on future events and to join NYPAY, visit NYPAY on LinkedIn.

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Regulation is making banks react in different ways. One big bank is looking to trim costs by cutting jobs in the consumer and small business units. While others majors are looking to find alternate sources of revenue. Almost all national banks have started to take away free checking while a few others are starting to charge a $5 ATM fee for use by non consumers. Trouble is that consumers have gotten used to everything for free (online, mobile, bill pay, remote deposit capture) and it will take a while before they realize they have to pay for using the bank’s services.

At the same time, there is an opportunity to increase pricing/charge more by making things simpler and making it easier for consumers to manage their financial lives.

According to Siegel+Gale, which surveyed 6,000 consumers in seven countries to gauge perceptions of brand simplicity, U.S. consumers would be willing to pay 4% more for bank products and services if only they came with clearer rules, streamlined options and fewer hassles.

Not surprisingly, in the survey, the lower the income bracket of respondents, the less willing they would be to pay more for simpler products, services and communications from banks. Among respondents with household income of at least $150,000, 17% said they would pay a simplicity premium, versus 5.9% among respondents with household incomes under $20,000.

Below is the ranking from the American Banker article.

I love PayPal- they are smart, they are innovative. PayPal has made it easy for the customer to pay merchants without sharing sensitive financial information. For online merchants, they have an easy to set up, all-in-one payment processing solution that is competitively priced. They have made it easy and safe to do cross-border transactions. They have made P2P payments a breeze- the Bump application is really cool. I thought opening up their platform to outside developers was a brilliant move. For a company that is a little more than a decade old, they have made great strides and are probably the only real competition to Visa/MC/Amex. And with more than 75 million accounts, they are by far the leader in the alternative payments space.  Oh wait, did I say “alternative“?

What makes a payment provider have to bear the stigma (or advantage) of being labeled as an alternative? Just 25 or so years ago, anything other than cash or check would have been considered an alternative payment, so things have really changed in a relatively short period of time.

When I shop online as a customer, I have the option of paying using my Visa/MC/Amex and in some cases PayPal. And if I am okay sharing my card info with the merchant, there is really not much incentive for me to use PayPal. I use my American Express Starwoods Credit Card wherever I can so I get reward points that can be converted into free hotel stays or flights. And that is where lies PayPal’s problem. I was told that the average PayPal customer transacts only once per year using the PayPal platform. PayPal needs to incent its customers to use PayPal more often.

For PayPal to truly become mainstream and not being labeled as an alternative payments provider, it needs to give me more reasons to use PayPal as the payment method.

Before we look into some of the possible solutions, let us look at how PayPal makes money.

PayPal charges $0.30 plus 1.9%-2.9% of the transaction fee to the merchant (the fee structure is very competitive with what Visa/MC/Amex charge as interchange)

However, PayPal is uniquely positioned in terms of methods it can use to fund its transactions.

• PayPal balance – as these funds are flowing within the PayPal platform, there is not a cost of funds as there is with other methods of payment. This method of funding a transaction is the most desirable to PayPal, as it can charge its standard transaction fee, but incur almost no cost of funds.
• ACH (Automated Clearing House) – these transactions are funded by a direct transfer from a bank account and generally carry a flat fee of about $0.25. So the same $100 transaction costs PayPal a quarter, but they’re able to pocket most of the $3.20 transaction fee. Absent a PayPal account with funds available, ACH is next on the list of preferred payment methods.
• Debit card – debit cards utilize the payment networks of the leading card brands, and therefore carry higher fees. Fees for funding a debit card transaction are about $1.50 – $2.00 for a $100 transaction. PayPal still sees some revenue from this transaction, but the margins are rapidly evaporating. Because the transaction must utilize third-party debit networks (Visa or MasterCard), the cost to PayPal is greater and therefore the margins are lower.
• Credit cards – credit cards are the most expensive funding option for PayPal (as they are for all merchants). Fees can range from 2.2% to 2.5% for card transactions, so PayPal benefits least from this method of payment.

By now, you would have already guessed what PayPal ought to do.

PayPal needs to incent the customers that fund through PayPal balance or ACH to use the platform by offering some kind of rewards/loyalty program. This way, it is rewarding its most profitable customers.

By offering rewards for ACH funded accounts only, PayPal is urging more customers to fund their transactions through their bank accounts, thus generating more profit for PayPal. Agreed, they will reduce their profit per transaction by about 1% (the cost of funding the rewards program). But they will increase their overall profitability by building loyalty and providing customers reasons to increase their transaction activity using the PayPal platform.

What else do you think PayPal can do to become a mainstream payments provider?

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Use of Mobile Banking is projected to grow three fold in the next three years (Source: TowerGroup). The data traffic at AT&T (courtesy the iPhone) has grown 50X in the last 3 years. Mobile will become a key channel for customers to transact with the bank.

That said, most banks are still tip-toeing their way into mobile banking and many others view mobile banking as a subset of online banking (think about where mobile banking resides within your organizational structure. Often, I have seen this as a subset of the responsibilities of the person/team responsible for the online channel).

I have heard bankers complain that it is very difficult to get funding and prove ROI for the mobile channel. I have also heard the argument that customers don’t really want mobile banking. And finally, some say that they will evaluate the mobile channel once they are “done” with online.

Well, the truth is, that customers have been slow to adopt to mobile banking. Let us first look at some of the issues with the mobile banking adoption rate:

• Service is not differentiated: most banks offer a subset or similar range of services on the mobile as they do on the online channel. Most mobile banking applications today offer transaction viewing, bill payment, funds transfer and ATM locater features.
• Mobile browsing costs: customers had to watch out for how much data they downloaded on their mobile devices as telcos were charging for data usage by the drink. Flat fee unlimited data usage plans are becoming common now.
• Platform Usability: Until the iPhone existed, accessing bank websites through the mobile web browser was a pain in the neck. The iPhone and now the Android powered phones have made the user experience more enjoyable. Add to that, the bank specific phone apps has made the experience faster, feature rich, secure and with a better UI.
• Lack of awareness: many a times, customers are not aware that their bank offers mobile banking either through text, web or applications.

There is a strong case for Mobile Banking ROI. On the costs side, a call center transaction costs the bank $3.75, an IVR transaction costs $1.25. A transaction through the mobile channel costs the bank $0.08. So more frequent use of the mobile channel will reduce calls to the call center and IVR thereby reducing costs.

On the revenue side, mobile banking appears to cause an increase in profitability. Banking customers who use the mobile channel are more frequent users of the banking channels and are less likely to attrite. They have more Checking accounts and fewer Borrowing accounts. They are higher income levels and carry higher checking balances but lower savings balances.

And the good news is that things are changing FAST. I recently attended an ABA Mobile Banking Webcast and the ROI numbers are striking:

MOBILE BANKING ROI

Bank of America announced in Fall 2009 that it is planning to close 10% of its branches due to increased customer usage of online and mobile banking

• BoA has about 3.5 million mobile banking customers, equating to about 12% of their online banking customer base
• BoA added 150,000 new checking accounts due to mobile offering

Huntington Bank has seen

• Text bankers are 13% more profitable than the average checking client
• Mobile browser bankers are 38% more profitable than the average checking client
• DDA related inquiries to the call center have dropped by 21%

USAA has over 1 million Mobile Banking users, representing about 14% of its total clients

• 23 million logins in 2009
• Over $300 million deposited via iPhone since launch (they have the remote deposit check capture feature through the iPhone)
• Handling more contacts than IVR

What banks need to do while evaluating the mobile channel:

• Don’t Jump Into It: Do not consider the mobile channel because of the hype and it is the “cool thing to do”. Think how the mobile can add value to the customer and to the other channels.
• Think Multichannel: Some banks still consider mobile banking as being isolated from other channels or their overall multichannel strategy. The mobile can serve as an additional authentication/security channel when you login online or you get a code on your iPhone bank app that you need to enter as soon as you swipe your card and enter the PIN at the ATM.
• Don’t Think Online Banking: My needs as a customer may be different when I login through the mobile device vis-a-vis my computer or the ATM channel. The mobile is the most personal channel available yet to marketers. The layout, design and features (example remote deposit check capture) available on the mobile must be different than what is available online.
• Don’t Think Mobile Banking: Don’t think of mobile as mobile banking alone. Think of mobile as the platform for mobile financial services. The mobile will eventually evolve into a channel for funds transfers (P2P and other domestic transfers), NFC solutions like contactless payments; and eWallets that store all the cards/rewards info with integrated marketing/payment.
• It Is Never About Technology: One thing I have learnt working during my career with technology consulting firms is that it is never really about the technology. Initiatives fail not because they did not have the latest and best technology, but because they were too technology focused and failed to get buy-in or sponsorship from a business side executive.

This morning I went to my bank to deposit a stack of checks. Not only the ATM didn’t require me to use an envelope, it took all the 6 checks in one go, recognized the check amounts and gave me a receipt at the end of the transaction with the check images. I was pretty impressed. That made me think what would the ATM in 2012 look like:

• Touch screen for easier navigation: Let’s do away with the navigation buttoms on the right hand side. The ATM of the future will have a touch screen interface that allows for easier navigation. Plus, for a consistent customer experience, the design and layout is very similar to the online banking interface.
• Carry out all banking transactions: Rather than just being the means of dispensing cash and depositing checks, ATMs should be able to carry out all banking transactions like consolidated account view, bill payments, funds transfers etc. This will allow the bank branch associates to focus exclusively on delivering a personalized differentiated experience to the customers and discuss their needs.
• Targeted offers: Marketing over the ATM occurs during four operational phases: the idle phase, the welcome phase, the “please wait” phase and the farewell phase. ATM users see direct response video commercials or display ads promoting the bank products. Customers are targeted with a personalized, sales-oriented advertising campaign. The target group is defined by criteria such as age, activity, interests and account balance.
  For a high income level customer (determined based on spend analysis and employer direct deposit of salary) who visits the ATM once a week to withdraw cash, offer financial planning advice or brokerage products or insurance products. For another small business customer who writes employee salary checks, show offer for the payroll service with electronic deposit of salary to employee accounts.
  The ad should end with a simple call to action: “would you like to discuss your financial planning needs with our Bank Associate? Click Yes or No”. If the customer clicks “yes”, she is directed to the branch banking associate (if customer is at branch location) or can receive call from associate (if banking outside of branch). The associate already has the customer’s financial profile available and can discuss insurance, mortgage and other financial needs with the customer.
• Ads on receipt: Some of the offers can be printed (both sides) on the transaction receipt that is handed out to the customer. The customer can SMS the code to the bank’s calling number to receive a call from the banking associate.
• Location based services: The customer can print offers and discount coupons for stores in the vicinity of the ATM location. Say I visit a mall and withdraw money from the ATM. The bank can provide me a list of stores in the mall that are offering discounts and then allow me to print coupons based on my selection. A lot of this can be achieved during the “please wait” and “thank you” phases of the transaction thus not significantly increasing the overall transaction time.

Do you think ATMs are poised to change? Or do you think branch banking and cash are on their way out and we will be writing an obituary of the ATMs 20 years from now?

What exactly is self-actualization? Located at the peak of Maslow’s hierarchy, he described this high-level need in the following way:

“What a man can be, he must be. This need we may call self-actualization…It refers to the desire for self-fulfillment, namely, to the tendency for him to become actualized in what he is potentially. This tendency might be phrased as the desire to become more and more what one is, to become everything that one is capable of becoming.”

In the previous 4 posts, we discussed how banks can fulfill the physiological, security, psychological, individualization and self-esteem needs. In this last post, I will talk about my wish-list in how a bank can help in the greater good for the society.

• Where to invest: Currently I have no transparency on how where my deposit money gets investment. I want to know and “choose” where my bank can invest my money: arts, developing countries, green sector, infrastructure. The rates may differ based on the return and risk associated with each sector.

• Where to earn: I want to do business with a bank that cares about me and the planet we live in. So I want to know the energy impact my bank is having on the environment. GreenChoice Bank is leading the way in this sector with LEED certified buildings, near paperless back office, employee incentives on environmentally friendly choices.
• Who to give: Banks are in the business of making money. But I want my bank to earmark a certain percentage to offer loans and deposits at more attractive rates to customers and businesses who are investing in Green or community development projects.
• Where to spend: Last but not the least, I want my bank to be engaged in community development and spend part of their profits to give to non-profits and the disadvantaged.

That said, banks will think about all of this if it means more customers and more profits. Do you think a bank can create sustainable advantage over its competition by focusing on our self-actualization needs?

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How can Banks influence Self Esteem? Aren’t they too far away from the consumer and passive to influence them?

Then I came across the work of Nathaniel Branden and my thinking became clearer. Our self-evaluation is the basic context in which we act and react, choose our values, set our goals, meet the challenges that confront us. Our responses to events are shaped in part by whom and what we think we are — our self-esteem.

This is the fourth post in the series to discuss online banking transformation.

Banks can spur self esteem by offering customers innovation, self-management and personal responsibility.

• Innovation: Innovation can either be on WHAT banks sell to the customers or HOW they sell it or WHERE they sell it. If banks truly understand the needs and timing of the customer, they can provide the customer a full range of service from savings to credit cards to financial planning to insurance (auto, home, personal) to investment and brokerage services. Banks need to view the customer from a “transaction” to a “series of interactions” to make this possible.

• Self Management: Currently Bank of America offers me alerts post event or in a reactive manner. It tells me I have hit a low balance AFTER I hit a low balance or when I am going over-limit on my credit card. What if banks were to predict and prevent the event from happening. Say the bank looks at all my scheduled bills and realizes I am $1000 short for my upcoming mortgage payment, it sends me an alert asking me to transfer funds into the account.

  Or taking this even further, what if the bank (based on a set of rules and my pre-authorization) automatically withdraws money from my external ING savings account. The bank should at all times keep track of all bills I need to pay either through the online bill pay suite or by checks or by electronic debits or credit cards so I am never hit by overdraft charges.

  And why should the bank forego the precious fee earned from overdraft charges? Well, if I have taken the pain to link all my external accounts with BOA for automatic debits, they can be certain I will not be leaving them for any other bank.

• Personal Responsibility: Through the use of online communities and offering financial planning advice, banks can educate their customers to become more financially responsible. Furthermore, through personalized products and services, banks can help their customers achieve their financial and personal goals.
  Paypal recently launched an initiative where you can track if your kids are being responsible with their spending habits.
  

I would be interested in hearing your comments

Previous Posts in this series
Part 1. Online Banking and Maslow’s Hierarchy of Needs
Part 2. Online Banking: Communities Help Meet Psychological Needs
Part 3: Banking for the myPOD Generation

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According to a study by Javelin Strategy & Research, eight out of ten US households now bank online, with 60 per cent using such services weekly and seven in ten utilizing them to pay their bills on a monthly basis. For banks, the opportunity is huge. Online banking customers are more profitable, carry more balances and have a lower probability to move to a competitor bank.

Firms like Zopa, Smartypig, Mint and Wesabe are pushing the envelope of what a traditional bank can or is expected to do.