Bank cards to depend on loyalty offerings soon?

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By: Wise Marketer Staff |

Posted on October 12, 2006

The customer loyalty reward programmes offered to bank card users in the US will need to be re-examined due to an overall decline in bank card offer response rates, according to new research from TowerGroup.

Since 2000, the bank card industry's dependence on rewards programmes to attract and retain customers has increased significantly. But while rewards have become an essential aspect of bank card business strategy and help increase card usage, customer retention and margins, they come with a cost to the institution in terms of overall profitability.

Evolution needed?
TowerGroup's research found that although credit cards remain the most profitable product for banks, an overall decline in bank cards is signalling the need for banks to evolve their rewards strategies.

In 2005, general-purpose cards (GPC) produced 75% of the bank card industry's sales volume. Yet even with a greater number of solicitations mailed by bank card issuers in 2005, only 0.3% of target consumers responded, yielding the industry's lowest historic response rate. This downward trend in response rates has increased the cost of acquiring new customers.

Response rates declining
The following graph shows consumer's declining interest in bank card offers, and the deterioration of response rates:

Figure 1: US banks' credit card solicitations & response rates
Source: TowerGroup

Dependence on loyalty rewards
So, TowerGroup believes, as customer acquisition costs continue to rise, the industry's dependence on card designs that include a rewards feature will increase.

In fact, TowerGroup expects that within five years, 90% of consumers holding GPC will have some form of rewards. Yet these rewards undoubtedly place increased financial burdens on the profitability of bank card programmes.

More careful evaluation
TowerGroup warns that 2006 marks a transition year for banks in terms of moving from using rewards programmes as a tool simply to attract and retain customers, to being more careful in evaluating the effect of rewards on the bottom line as well as how rewards are delivered.

The report, Card Rewards: Profits, Pitfalls, and Promises, written by Dennis Moroney, senior research analyst in the Bank Cards practice at TowerGroup, also analyses how such rewards impact US banks' card programmes and overall bank profitability. Moroney's research covers the bank card industry including credit cards, gift and other prepaid cards, debit cards, and health savings accounts.

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