Loyalty programs in financial services: Existing and emerging trends

Financial services are in a brave new world, with technology — and a focus on customer engagement and frictionless services — at the forefront. There used to be days when the financial services industry revolved around two primary activities: intermediation and transformation. The former refers to the intermediary role financial services providers play between stakeholders, depositors, borrowers, tax-payers, etc., while the latter points to their role in turning short-term funds and deposits into long-term, profitable investments. There was no fierce competition and customers had few alternatives to select from. This gave financial organizations the luxury of sitting back and having customers come to them.

Those days are gone. The process of digitization, led by fintechs, has gained momentum. Customers can choose from an expanding roster of alternative players willing to manage or move their money. They have increasingly become more conscious of the quality of the financial services, showing no hesitation to switch to providers with better offers. 

Nurturing loyal customers is now not a nice-to-have but a must-have, a crucial element in the marketing mix of financial organizations. 

Creating loyal customers is only possible through personalization, an attitude that recognizes customers as individuals and knows their interests. Customers of banks and other financial institutions expect companies to deliver personalized interactions. 

“A simple strategy of relentless focus on customers' needs and superior execution. Our aim is more loyal customers, employees and shareholders by being simple, personal and fair in everything we do. Also to the communities we work in.”

Ana Botín

Executive Chair, Banco Santander

The new challenge is then to connect to and retain a new kind of digital customer with demands and expectations totally different from the time when legacy banking dominated the market. 

"All that [legacy banking] revolved around us being at the center of a customer’s life. But now we’re moving from a world where we had dominion over client needs, where we were central because we had built the rails to the economy, to a world where customers broadcast their needs to the world and live on very different platforms. The challenge for us as an industry, and for us as a company, is to connect to a new digital customer living in a very different world."

David I. McKay

President, Royal Bank of Canada

Covid-19 pandemic brought uncertainty to every sector, including financial services. But it also showed how players in this industry can win the trust and loyalty of their customers if they support them in tough times. 

"[N]othing has shaped client loyalty as much as the Covid crisis. Together with our clients – and especially our Corporate clients – we have developed solutions during this time that have allowed them to stabilise their business or even secure their existence."

Christian Sewing

CEO, Deutsche Bank

With the accelerating growth of fintechs, the radical shift in customers’ expectations and the Covid-19 pandemic changing the financial services industry, how can companies nurture loyal customers? How can loyalty program features help this sector?

Financial organizations have realized they have to expand their range of services if they want to stay competitive. The good news is that with the increase in the range of financial services, companies in this industry have multiple options to promote their offerings and focus on loyalty.

Let’s start with a simple but effective solution. Cashback is an attractive type of incentive, giving customers the assurance and excitement that a sum of what they spend will return to them. 

Many banks are using the potential of the cashback feature to meet the expectations of their loyal customers. American Express offers some of the highest cashback rates, at up to 5% if you spend up to £10,000 in a year. Other institutions such as Sainsbury's Bank and Tesco let you collect points that can be redeemed as cash or other rewards.

Loans and mortgages are always serious concerns for people in different countries. Research data on mortgage rates in the UK found that 35% of individuals are apprehensive about higher mortgage payments.

As a financial institution, you can invoke a great sense of loyalty in your customers and increase your revenue if you link the points they collect with each transaction to their rent or mortgage installments. 

Bilt Rewards is a loyalty program and credit card that rewards users for paying rent. With a network of over two million homes, customers can earn points on rent without fees, using their points to travel, pay rent, work out, and — more importantly — build a path towards homeownership.

Another effective tool to create more loyal customers is the digital wallet. Providing digital wallet solutions enables your customers to save, exchange, and manage coupons, credits, or cash. Your digital wallet should be flexible enough to give customers the peace of mind that they can handle all aspects of financial management.

Digital wallets feature offered by Talon.One sets no limits on the amount you can assign and combine for customers. You can also adapt the way your customers use their digital wallet solution to maximize their engagement and spending.

One of the best ways to create loyal customers is to make them feel that they belong to a larger community. The more interaction you create among your customers, the more engagement they will have with your brand.

You can encourage your customers to collect their points in shared pools. Once the target is met, everybody in the pool will be rewarded. You can focus on members of a family, workers in a union, people in the same industry, fans of a particular club, etc. This way you can create not only loyal individuals but also loyal communities.

If you wish to increase your engagement with your customers, you need to respect both their financial and non-financial concerns. Adding insurance to your services can serve this purpose because it

TK health insurance, for example, rewards customers through its app if they accomplish a certain walking challenge. The points they collect can then be redeemed as a discount on purchases from a wide range of brands. 

A recent New York Times article shows that the banking industry, once adamantly opposed to cryptocurrencies, is now racing to catch up. Some banks are now weighing trading desks for digital currencies and JPMorgan even started its own digital currency in 2019.

In an earlier blog post, we showed that within this new arena, there are potentially limitless possibilities for loyalty. It’s not only about awarding NFTs to high value customers. Blockchain and other ecommerce platforms and microserves could promise the emergence of rich loyalty and promotion strategies, with crypto underpinning it all.

Buy now, pay later also known as point of sale (POS) installment loans has grown tremendously over the past year primarily due to the rise of ecommerce and fintechs. BNPL is a kind of short-term financing that allows customers to buy purchases immediately and pay for them later, often without incurring interest.

According to McKinsey’s Consumer Lending Pools data, BNPL is turning into a strong competitor for banks, to the point of diverting $8 billion to $10 billion in annual revenues away from them.

The Swedish company Klarna is a major fintech company that offers BNPL services. Klarna’s Vibe is a simple program that gives you one “vibe” for every $1 you spend with Klarna. You can trade vibes for discounts or gift cards when you purchase from Klarna’s participating brands. 

The other major BNPL service provider is the US company Affirm. Focusing on transparency, Affirm guarantees no interest or fees, no impact on the customer’s credit score and an easy and automatic payment set-up. 

The Australian fintech company, Afterpay, also launched its BNPL service, Pulse, in 2020. It has a referral promotion feature where you invite a friend, and after they make their first purchase through Afterpay, you each get $10.

BNPL payment method is seeing a boom, with %215 YoY growth in the first two months (Jan-Feb) of 2021. Different reports indicate that consumers using this service are also placing larger orders.

BNPL allows consumers to have more control over their budget. The transparency of transaction assures customers that there are no hidden fees which will endanger their budgeting. This is particularly important for millennials and Gen Z consumers, so it is no surprise that these age groups make up almost %75 of BNPL users in the US. 

Millennials and Gen Z shoppers are comparatively more concerned about sustainability. They want to buy quality products and BNPL allows them not to compromise for cheaper, less sustainable ones. 

BNPL is gaining popularity among brands too. It is an effective tool for their omnichannel marketing strategy because it drives online shoppers to brick and mortar stores and vice versa. 

With BNPL, brands have more time to nurture loyalty among their customers. BNPL establishes a relationship between consumers and brands which is based on trust and transparency, two essential elements for creating loyalty. 

BNPL is a great opportunity for banks and other financial institutions to create partnerships with fintechs. As numbers show, ecommerce will continue to grow and draw more customers.

Financial institutions are now aware that millennials and Gen Z are turning into a large segment of their market. According to Brian Moynihan, CEO of Bank of America, 

“We are having a much higher growth rate among millennials and Gen Zs than we do in our [customer] population generally. We have higher market shares in those groups of customers. We can see what they do; we keep looking on it to make us more and more relevant to them.”

Incorporating BNPL features into their services will link financial organizations to the growing fintech industry and its loyal users. 

As the financial services sector develops rapidly, different companies turn to digital to maintain their competitive edge. Banks and other financial institutions need to embrace digital transformation and depart from long-standing processes and systems that worked in an era bygone. 

The software component of digital transformation, and implementation of enterprise architecture/information, is fundamental to financial businesses as they equip their tech stacks. The backbone of the software side of digital transformation is headless, a model that makes your marketing measures including your loyalty programs more flexible and scalable. 

A headless approach to your promotion marketing enables you to create seamless experiences for your customers, no matter through which channel they decide to interact with you.