Banks cannot expect customers to be loyal purely for the sake of convenience. Customers know that they are doing their bank a service and expect to be rewarded. In this article, the authors explore loyalty schemes for banks to employ that will help them both retain higher levels of customers and also increase the revenue from this customer base. This industry specific example provides pricing strategies that can be employed in multiple industries. Dr. Jan Engelke, based in Switzerland, is Partner in Simon Kucher’s Banking Competence Center. Matthew Jackson is Manager in the consultancy’s Banking Competence Center and located in Simon Kucher’s office in Dubai.

The Pricing Advisor, May 2016

Banks are continually frustrated as they try to develop new methods for retaining customers, selling them more products, and

increasing their satisfaction. Looking outside, they perceive a hoard of cutthroat competitors; within, they see a fickle customer base that will switch to a competitor at the mere hint of a better rate.

The data would seem to support this pessimistic conclusion, as findings of a study by Simon-Kucher & Partners in association with the market research company GMI show. A sample of approximately 1,000 UAE banking customers were asked to identify their main bank, and then say which products they held with other banks (see figure 1).

Clearly, there are certain products that customers are more likely to shop around for, e.g. insurance, mortgages, investments, auto loans and remittances.

Put into perspective, however, the situation does not look that bleak. Although many customers shop around for these products, very few would actively choose it as a pastime compared with, say, gardening or shopping for clothes. Moreover, no customer relishes the prospect of juggling multiple banking relationships, multiple PINs, and an avalanche of paper work.

The survey revealed that when it comes to purchasing banking products only 29 percent of customers were concerned solely with getting the best price. The remainder were primarily concerned with fairness and value for money (29 percent), convenience (20 percent) and brand and service quality (22 percent).

So the question arises, if having one bank is simpler and more convenient for customers, and if banks themselves also prefer loyal customers, why are their rates of loyal customers not higher?

Loyalty schemes increase customer satisfaction

Banks cannot expect customers to be loyal purely for the sake of convenience. Customers know that they are doing their bank a service and expect to be rewarded. This is where loyalty schemes come into play.

Customers appreciate good loyalty schemes. According to the survey, 90 percent of loyalty program participants profess either basic or total satisfaction with their bank. And what is even more, the average product holdings of such customers is 25 percent higher than non-scheme members. In other words, they are 25 percent more loyal. On the other hand, 59 percent of the customers surveyed did not even participate in their bank’s loyalty scheme (see figure 2).

Ostensibly, the banking market is awash with rewards of every shape and hue. Is it that the right rewards are not being offered? We received informative answers when asking customers what kind of rewards would lead them to want more products with one bank. However, answers did not highlight a ‘killer’ benefit of appeal to all customers. The root of the problem must lie elsewhere.

If we take a second glance (see figure 3), we see that for all their apparent variety, current loyalty schemes are generally quite limited. Most schemes revolve largely around credit cards. This means that points are not used to incentivize customers to want other products. Meanwhile, the bank incurs the full cost and burden of an air miles scheme or cashback program, which makes little commercial sense.

New approach needed

Banks need a new approach – specifically one that makes customer programs more appealing, more extensive, and less expensive at the same time.

Banks that have made the transition to ‘Loyalty 2.0’ have seen radical improvements in loyalty and cross-selling by proceeding along the following three principles:

1. Reward loyalty

The irony of many so-called loyalty schemes is that they do not reward loyalty at all. Go into any bank in the Middle East and ask, “Suppose I have four or five products with you – do I receive any benefits for this?” Almost without exception, the answer will be “No.”

Any true loyalty scheme should reward customers the more they use the bank. This cannot be done if multiple-product holdings are not explicitly rewarded. Banks need to develop a more customer-centric approach, and those that do will find themselves at a great competitive advantage.

2. Make it clear

A bank that has successfully realized the first principle will devise a cross-product scheme, incrementally rewarding customers for increased business across products. The rewards will be sufficiently appealing to the diverse customer segments without turning out to be too expensive and thus unprofitable. Ideally, customers will be rewarded for desirable behaviors, such as carrying out transactions online.

However, all of this good work can be lost if the customer does not understand the scheme and the benefits it offers.

Benefits need to be self-explanatory – to customers and sales staff alike. The easiest way to achieve this is through effective visualization, which brings us to the final principle.

3. Make it fun

Gabe Zichermann, one of the foremost proponents of game mechanics in business, once observed that airline loyalty schemes are not really about redeeming miles. The most successful loyalty schemes reward users in non-tangible ways, utilizing the incentives of status or achievement. Gamification of financial services is one such approach, and banks that have taken the first steps already find themselves in a field with virtually no competition.

Customers do not tend to see bank products as particularly exciting, so upping the amusement factor will have immediate positive effects; and non-tangible rewards of a game situation are often much cheaper for a bank than tangible rewards such as cashback. A German bank, for example, worked to gamify the financial needs of its customers in a computer puzzle. The customer can add and remove product puzzle pieces, while a status bar provides an instant score (see figure 4).

If this and other examples of banks moving to more compelling forms of cross product incentives are any indication of the future, then the goal of customer loyalty may finally be within reach. Banks have a lot to gain from assuming a more holistic approach. It would be a welcome change for everyday users, weary of shopping around in a one-dimensional marketplace focused on price competition. Even though the road to success might be stony, the time for ‘Loyalty 2.0’ is ripe. Game on!