Today on PaymentsSource there is an opinion piece by Mehmet Sezgin, the CEO and Founder of myGini, entitled “Issuers and Merchants Need to Rethink Rewards Expense”. He makes the argument, which we also made, in “Five Reward Events That Will Alter the Credit Card Value Proposition,” that:
“When the credit card rewards competition heated up in the early 2010s, financial institutions saw loyalty programs as a great way to compete and attract new customers. But they weren’t the only ones learning. As The Wall Street Journal points out, ‘consumers figured out how to game the system’ and it’s bad news for card issuers.”
Brian Riley, in the Viewpoint cited above, noted that many top card issuers downgraded their rewards programs between 2017 and 2018, and wrote that “One of the challenges faced by issuers of premium travel reward cards is that reward bonuses are front-loaded. Card members receive heavy incentives to apply, with rich bonuses … but the second year is less generous.” In addition, top card issuers are seeing steady declines in return on assets (ROA) going back several years, and projected to continue in the future. This all makes it difficult to sustain the rich reward programs of the past.
Mr. Sezgin’s solution is one that started out as “merchant-funded rewards,” which uncomfortably reminded retailers that the interchange they pay was already funding card issuer rewards; this is behind recent efforts to eliminate “honor all cards” rules that require merchants to accept premium rewards cards with their accompanying higher interchange fees. The modern, more nuanced version of this might be called “merchant-linked offers”. The idea, as Mr. Sezgin states, should be a “win-win-win”:
“Card issuers can offer rewards at a lower cost and retailers can capitalize on the process by reaching a wider range of cardholders through a bank’s loyalty-enabled mobile app.”
Consumers win by getting richer rewards; the 1-2% cash back they get on a typical rewards card is paltry compared to the 10-20% discount that merchants and manufacturers can offer when they want to move merchandise. Merchants win by ensuring that rewards earned through shopping at their stores can only be used at those very same stores, driving repeat traffic and building the customer relationship. Card issuers win by getting out of the rewards arms race and providing a more differentiated set of offers.
What has so far gotten in the way of this happening is deep-seated mistrust between retailers and card issuers, exacerbated by the interchange wars of the last 15 years; the fear that putting offers up on a card issuer’s site or app without any control over who else appears there will get them into their own rewards arms race with their competitors; and the classic fight over “who controls the customer.” In general, most retailers seem to be focusing on their own proprietary rewards programs, their own store cards, and co-branded cards. It makes a lot of sense for issuers, but is less persuasive for merchants.
This is likely to change as more commerce moves online and becomes mediated by digital wallets; in that environment, merchants face a lot more competition and are likely to find more value from partnerships with issuers, especially around data-sharing and fraud reduction. Wallets and mobile apps are a natural place for consumers to receive offers and get data on their purchase behavior; this will drive issuers and merchants together in a way that hasn’t happened in the offline world.
Overview by Aaron McPherson, VP Research Operations at Mercator Advisory Group
