High Noon

How card issuers can rally support and regain loyalty-program trust

If the most frequent question posed to COLLOQUY this year is any indication, the clock seems to be ticking toward a financial services high noon. "What’s the future of credit and debit card rewards programs?" we hear over and over. "Are they living on borrowed time?"

Several factors are converging to prompt this persistent question. And, the underlying question is if issuers can continue happily doling out rewards and benefits to loyal cardholders given the dramatic standoff between issuers and consumer interests. Those factors include:

1. The Credit CARD Act of 2009—largely in place effective Feb. 22, 2010—has changed how the industry goes about its business. Some issuers are turning to additional fees not covered by the Act, including charging for account dormancy. The final two phases of the Act, requiring clearer, shorter disclosures and consumer notifications—as well as new protections for retail gift cards—will be in place by the third quarter of 2010. In the coming months, the media will naturally continue to scrutinize how the banks react, particularly with the speculation that more cards–especially rewards cards—will institute an annual fee. After all, such fees will certainly subdue interest in the affected cards.

2. Recent populist uproar has portrayed banks as conniving tricksters that must be put in their place. At the very least, such sentiment can lead to skepticism about the motivations behind rewards programs. But the uproar is also leading to calls for regulation beyond the CARD Act—regulation that will further suppress credit-card income and the ability to fund such programs. In some cases, the uproar takes the form of consumer-led movements like that of creditcardrevolt.com, which claims that the entire credit card model is immoral and calls for reforms such as capping credit card interest rates at 15%. In other cases, there are corporate movements aimed at garnering popular support—take, for instance, 7-Eleven’s drive to entice a million customers to sign a petition calling for Congressional action against "unfair and excessive credit card transaction fees."

3. The gnashing of teeth about whether Congress should regulate interchange fees won’t go away. Calls for governmental intervention on aspects of the "merchant discount fee" (or interchange fee) charged when a retailer or service provider accepts a credit or debit card as payment have been loud lately. Congressman Barney Frank, chairman of the House Financial Services Committee, claims that such regulation "is not on the agenda this year," and Senator Arlen Specter responds by saying he’s "seriously considering" introducing a bill for such regulation. If such legislation were seriously pursued, the underlying business model of using a loyalty program to attract and retain cardholders would be demolished.

We’ve already seen such impact, in Australia when regulators imposed interchange fee limits in 2003. As Todd J. Zywicki, a law professor at George Mason University, noted in The Wall Street Journal: " Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users."

The concern over borrowed time also arises because loyalty initiatives within the banking space have recently enjoyed an astronomical growth trajectory and overall economic resilience. Despite the deep recession that began in 2008, rewards program memberships on credit cards, debit cards and other banking products have grown 77% in a two-year period. And now, the number of memberships in this sector rivals even that of the travel and hospitality sector. For now. But, will the trajectory begin a precipitous decline?

Darkest before the dawn?
To me, however, the question of the survival of loyalty programs for cards and banking services assumes that banking executives will take a purely reactive stance to these market pressures. I wouldn’t presume to underestimate the leaders in the financial services space quite so quickly, though.

While pontificating about the threatened credit card legislation is a fine, fun sport for the media, it’s time for financial services marketing leaders to use these distractions as an opportunity to go on the offensive. Consider Discover as one example. In early February, Discover introduced CardBuilder, an online tool allowing customers to design a card with the terms, design and rewards most relevant to their needs. As with previous initiatives such as Garanti’s FlexiCard or CapitalOne’s CardLab, Discover is providing customers with a flexible way to manage their finances and customize the card they carry. This is but one way to change the tone of the dialogue about credit card practices and place more emphasis on transparency and control.

Perhaps the greater opportunity for banks lies in grabbing the reigns and finally embracing the Total Relationship Banking opportunity. Let’s face it. Payment delinquency rates are still uncomfortably high. And, the pressure on the credit card business model isn’t likely to subside. Rather than use the marketplace pressure as rationale for ratcheting down credit card rewards value propositions, why not finally pursue a holistic rewards strategy that rewards customers for all of their banking relationships with your company? After all, that’s where the real "win-win" resides: customers accumulate rewards for their loyal business even faster; and, banks can underwrite the cost of more rewards across a broader breadth of their product portfolio.

Ultimately, the real question isn’t whether card-based rewards are living on borrowed time as consumers and issuers listen to the clock ticking down to high noon. The real question is whether the factors gaining momentum along main street will be the catalyst for leading banks to build a holistic value proposition that borrows value from the smaller bottom-lines of each of their business units. If financial institutions rally internal support for a customer-centric Total Relationship Banking strategy, then high noon can be a time of bright enlightenment and transparency—not a stark and menacing shadow.