[Dave Birch] I was in a meeting that touched on loyalty and payments today.  It reminded me that the Wise Marketer had a story about payments and loyalty report that readers might find interesting.  The report, called Making Loyalty Pay: The Relationship Between Rewards and Payments, talks about new models for loyalty with their roots in the web, mobile, biometrics and other technologies. It’s very positive about them, saying that they have the potential to boost revenues for merchants, technology providers and payment providers alike, while also minimising the issuer payment revenue cannibalisation. Judging from the priorities of some of our clients, I would say that this bullish perspective is probably correct. As Aneace often points out, while banks (in particular) have yet to really take advantage of the migration to chip, the retailers are looking to banks to deliver more value and better loyalty and rewards platforms seems to be a reasonable way to create that value.  Contactless, for example, should mean that customers are using cards in places where they used to use cash and so loyalty schemes had to be often-forgotten bits of cardboard and the like.  With the chip, they can be automated.

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Some of the report’s main findings should influence the design of new payment products:

  • Credit card rewards programmes have lowered overall credit card churn from 33% in 2000 to 24% in 2006. Moving forward, churn rates are likely to remain flat with the introduction of new loyalty and payment technologies and increased competition.
  • More than 60% of banks will offer rewards by 2010, up from 31% in 2005, as banks take advantage of shifting consumer payment preferences and the growing commoditisation of credit card rewards programmes.
  • Loyalty programme economics, traditionally centred on low redemption rates (averaging 21%) will begin to increase. Automatic redemption will increasingly be offered by loyalty programmes that leverage low cost internet, mobile, and local advertising channels.
  • Blended and cashback programmes will account for 86% of all credit card rewards programmes by 2010. Experiential rewards programmes will also grow for the high net-worth segments of the population.
  • Merchant discount fees associated with card issuer interchange currently account for up to 74% of payment processing costs for a small grocer or convenience store, up from 47% in 2000. The tension over interchange is leading to new business models that address merchant payment processing costs and loyalty programme shortcomings in new and effective ways.

Banks will undoubtedly have to work harder for their money at the retail POS, but it seems to me that new technology is coming to their aid because chip and PIN, mobile, contactless and other new payment methods all have the potential to provide more and better services to both the customers and the merchants.  As always, technological change means  both threats and opportunities.

My opinions are my own (I think) and are presented solely in my capacity as an interested member of the general public. [posted with ecto]

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