Credit card loyalty must adapt, experts warn

Although rewards programmes have been effective tools for credit card issuers for almost 25 years, drastic changes to the US economy have made many current programmes less relevant to consumers, according to a 'ViewPoint' report from Tower Group.

The report recommends that credit card issuers should begin to carefully examine their rewards and loyalty programme offerings, and include more strategies that focus on the fundamentals of good credit management instead of simply rewarding consumer spending.

New strategy plans
Over the years, payment reward programmes have proved highly successful with consumers embracing well-designed programmes enthusiastically. Card issuers have repeatedly proved that these programmes can alter consumer preferences, purchase activity, and even create 'top of wallet' status for their cards. In fact, Tower Group estimates that reward programmes are now a factor in nearly 70% of all card transactions in the US.

But, as increasing numbers of consumers begin to lose confidence in the economy, as well as a general reduction in household wealth and less secure employment prospects, Tower Group advises card issuers to ensure that their loyalty programmes not only encourage consumers to aspire to rewards (such as a luxury holiday) but also inspire them to keep their credit in good standing.

Credit management trends
The ViewPoint report suggests that card issuers should consider focusing on using card rewards to improve credit management rather than to attain aspirational rewards. This approach could, for example, include reward options such as cash-based credits that can be applied to an outstanding balance, which would be likely to stimulate better credit behaviour and could even help motivate consumers to pay off their outstanding balances.

Tower Group believes that rewards-based card issuers will be impacted by four main consumer trends in 2008:

1. Credit quality deterioration;
2. Revenue pressure;
3. A fragile economy;
4. Vulnerable consumers.

The report, entitled 'Pointing in the right direction: Rethinking card payment rewards in a challenged economy', was compiled by Brian Riley, senior research analyst for Tower Group's bank cards practice, and examines existing reward and loyalty programmes and explores how credit card issuers could rework their programmes to inspire customers to stay in line with the terms of their credit accounts.