New technology and business models are changing the reward and payments landscape, and will soon begin to alter the traditional relationship between payment providers, merchants, and technology providers, according to a new report from strategy consultancy Celent.
According to the report, entitled Making Loyalty Pay: The Relationship Between Rewards and Payments, some of these new models have emerged on the internet and they are now making their way to the bricks-and-mortar world. Other models have their roots in mobile, biometric, coalition-oriented, and merchant-sponsored payment networks.
In all cases, however, the very technologies and businesses that have been forming have the potential to boost revenues for merchants, technology providers and payment providers alike, while also minimising the issuer payment revenue cannibalisation that Celent expects to occur as consumers gradually change their payment and reward preferences.
Among the report's main findings:
- Credit card rewards programmes have lowered overall credit card churn from 33% in 2000 to 24% in 2006. Moving forward, churn rates are likely to remain flat with the introduction of new loyalty and payment technologies and increased competition.
- More than 60% of banks will offer rewards by 2010, up from 31% in 2005, as banks take advantage of shifting consumer payment preferences and the growing commoditisation of credit card rewards programmes.
- Loyalty programme economics, traditionally centred on low redemption rates (averaging 21%) will begin to increase. Automatic redemption will increasingly be offered by loyalty programmes that leverage low cost internet, mobile, and local advertising channels.
- Blended and cashback programmes will account for 86% of all credit card rewards programmes by 2010. Experiential rewards programmes will also grow for the high net-worth segments of the population.
- Merchant discount fees associated with card issuer interchange currently account for up to 74% of payment processing costs for a small grocer or convenience store, up from 47% in 2000. The tension over interchange is leading to new business models that address merchant payment processing costs and loyalty programme shortcomings in new and effective ways.
According to Celent, as consumers continue to shift their spending onto cards instead of using cheques and cash, the tensions noted in the report have led many to question whether banks and merchants have any common ground, given their different sets of loyalty objectives. But the company believes these loyalty objectives do not have to result in a "zero sum game" and that there are opportunities for banks and merchants to come together on the loyalty front. However, their loyalty and rewards efforts will not necessarily revolve around the credit card itself, as has traditionally been the case.