Will consumers pay for their loyalty to credit cards?

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By: Wise Marketer Staff |

Posted on November 5, 2002

As loyalty schemes grow in popularity with credit card issuers, the costs of those programmes are being passed on to consumers, many of whom are now paying up to 10% more than those whose cards offer no loyalty scheme, according to Datamonitor's new report, 'Card Loyalty Schemes'.

Loyalty schemes do, however, remain an important marketing tool for customer retention and acquisition, as demonstrated by the Boots Advantage Card and Tesco Clubcard which are among Europe's most successful and innovative programmes.

Since their introduction to the credit card market in the mid-1980's, loyalty programmes have grown in popularity among UK credit card issuers. In the past ten years the percentage of UK credit card issuers offering a loyalty scheme has grown from 15% to 50%.

Although comprehensive points-based reward schemes (such as Nectar and Air Miles) are popular with bigger issuers, Datamonitor's report suggests that the recent boom in loyalty scheme popularity has been largely caused by smaller card issuers joining in with cash back schemes. In so doing, they hope to compete in the loyalty market without incurring the expense of a full points-based scheme.

Pass the buck
Points-based loyalty schemes are expensive to run, and these costs must often be passed directly on to the consumer. For example, Sainsbury's Reward Card (now replaced by the Nectar coalition loyalty programme), was estimated to cost over 100 million every year to run. And, with exit from such schemes being potentially difficult, issuers must be prepared to maintain their programmes for the foreseeable future to avoid upsetting and losing customers.

The fact that credit card consumers are becoming more financially aware, preferring lower prices rather than rewards, suggests that they may eventually turn against those offering loyalty programmes that cost them more in passed-on costs.

According to Edward Ripley, the author of the report, the average APR for outstanding credit card balances in the UK is currently 16.5%. However, the average APR for cards that offer no loyalty programme is 15.9%, compared to those that offer a cash back loyalty scheme at 17.1%, and those offering a points-based reward scheme at 17.4%.

Consumer influences
Card issuers current employ loyalty programmes to boost customer acquisition and retention, and to increase card usage and gain customer intelligence data. If judged purely by their retention power, they are not particularly cost effective because they often appeal to the least profitable customers - those that pay their cards off in full every month.

However, loyalty schemes are still a big influence in the consumer's choice of credit card, being the third most important factor behind convenience and cheap rates. Cash-back schemes have also become an important factor for a small, but potentially significant, minority of consumers. Demographically, those aged 35 and above attach more importance to such schemes.

Conversely, those under 35 generally attach little importance to loyalty schemes, placing more importance on personal recommendation, or the convenience of a card offered by their existing bank or building society.

Increasing card usage
Increasing credit card usage is also an important objective, and carefully constructed loyalty programmes are often very effective. For example, Tesco Clubcard offers customers whose average spend is over 60 a week a Premium Clubcard points structure that effectively doubles the number of points or Air Miles they receive. Many programmes also offer platinum card holders double points for every pound they spend.

According to Datamonitor, UK credit card issuers could learn a lot from the Tesco Clubcard and the Boots Advantage Card. The Advantage Card, based on smart card technology that allows real-time redemption of points, gained over 12 million customers in its first five years. The Clubcard has also been successful, currently boasting around 14 million members. It offers a mixture of money off vouchers, rewards, and Air Miles that are well targeted at individual customer groups.

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