Data-driven guidance for developing a successful program. By Shazia Manus Sponsored by TMG 
The notion that credit card rewards are superfluous generally manifests in one of two positions: Misconception 1: Rewards offer little return when compared to the expense. Misconception 2: Rewards are most beneficial when cardholders don’t redeem points. Credit card experts have long contended these positions to be false. To investigate the validity of their intuition, TMG and strategic partner IQR Consulting, Reston, Va., set out to analyze the data generated by 12 months of activity from 400,000 credit card accounts issued by TMG clients. What follows are the results of that analysis. Rewards Offer High Returns Another preconceived notion popular in the C suite is true: Rewards programs require a significant investment. And most leaders in the community financial institution space are aware of that. What they may not understand is how huge the return on that investment can be. In fact, the TMG-IQR team’s analysis revealed rewards cards are 79 percent more profitable than their no-frills counterparts. Within the study, the effect of rewards cards on engagement levels was evident. Larger ticket sizes and more transactions generated higher purchases and balances, regardless of the size of the issuing financial institution. The higher engagement combined with the increased interchange and fee income associated with rewards cards created high enough yield to more than offset the costs of rewards programs. Rewards Yield Most When Cardholders Redeem The TMG-IQR team of analysts further found cardholders who redeemed their points spent on average roughly $890 per month using their cards, almost double (186 percent) that of their non-redeeming counterparts. Average balances, too, were higher among redeemers, who generally carried a balance around $3,000, or 55 percent more than non-redeemers. What did this mean for the issuing financial institution? Seventy-two percent higher revenue per card among redeemers! What makes this result more surprising is that rewards are typically targeted to transactors—those who tend to use their cards and then pay the balances in full each month. The data showed that redeemers are more profitable than non-redeemers, largely because of the high revenue associated with interchange income. In the TMG-IQR study, redeemers generated nearly 70 percent more interchange income than non-redeemers. Designing the Ideal Rewards Program It can cost a business up to 10 times more to acquire a new customer than to sell to an existing one. This understanding is what drives the development of all manner of loyalty programs, including credit card rewards. To ensure you’re making the most of your program, consider some of the following strategies:
- Make sure rewards are truly rewarding. There are countless types of rewards programs available today. Cash-back programs, however, remain the most popular type of reward.
- Keep rewards personalized. Cardholder segmentation, combined with predictive analytics, will identify those individuals most likely to respond to your promotional offers. This will impress cardholders looking for customized interactions with your financial institution.
- Ensure redemption is easy. The redemption experience can turn good rewards cards into great ones. That being said, studying the user experience from discovery through the delivery of the reward can help ensure simplicity and cardholder satisfaction.
- Enhance your rewards. From automatic redemption for cash-back programs to charitable donation options, there are many ways to enhance the redemption experience. Still worried about the expense? Consumer behavior suggests people may be willing to pay for a loyalty program if it’s good enough.
- Push data analysis to the next level. Data is knowledge. Consider partnering with data scientists who can design models that report on current utilization and also offer predictive analysis.
The addition of rewards takes investment, which can be tough to tackle for owners of a declining portfolio. Yet, that same weak credit card program could become your financial institution’s strongest asset. Listen to the story the data in your portfolio is trying to tell. It can turn even the most pessimistic among us into willing participants in the development of market-leading credit card programs. Shazia Manus, CSE, CCE, is CEO of CUES Supplier member TMG, Des Moines, Iowa. Read a previous post by Manus, “3 Steps to a Solid Data Strategy.” You may also be interested in attending CUES School of IT Leadership, slated for Sept. 27-29 in Charleston, S.C.
