• by Kelly Shermach , March 18, 2008

For decades, consumers have taken to VIP programs, cashing in for discounts, flights, hotel rooms and generally desirable stuff, whether extraordinary experiences or everyday necessities.

Because consumers developed such a taste for treating themselves based on their usual purchases and incremental spending, nearly all consumer-facing businesses have adopted points or recognition programs.

A recent study by Mercator Advisory Group, Boston, contends that retail bank marketers--chiefly those selling checking accounts--do wrong by consumers in offering template programs with even the lowest award thresholds out of reach. Positioned along with (and perhaps as a distraction to) rising account fees and questionable check-clearing practices, many newer reward programs in retail banking do little to make their sponsors stand apart from the competition, finds Elizabeth Rowe, Mercator's Bank Advisory Services group director.

If banks are taking shortcuts where they aren't truly thinking through the uniqueness of their rewards offerings or the earn velocity customers can receive, their competitive advantage will be short-lived, says Kelly Hlavinka, senior director of the Colloquy Group, a frequency marketing consultancy.

It's not too late for banks to pull away from this double whammy of consumer disappointment. And, fortunately, their mistakes in loyalty marketing haven't hurt the reputations of other rewards program providers in the travel, hospitality and retail sectors, the women say.

Deposit Account Relations A Real Downer

Even before the subprime loan crisis, increasingly diversified banks sought to even out the performance of lines of business by boosting the fee income from consumer checking accounts.

"Banks have been leaning on the retail side of the bank for years for profit generation, and thin rewards programs and huge overdraft/insufficient fees are all a piece of it," Rowe says.

Overdraft fees have multiplied, especially as some banks have started to process checks days after they are received as deposits and from highest dollar amount to lowest dollar amount as they are presented for payment from customer accounts. Both policies maximize bounced checks.

Mercator's research discloses that $17.5 billion is made industrywide from overdraft fees. The figure represents 6% of the U.S. banking industry's total non-interest income, but accounts for a disproportionate share of customer disenchantment.

"All of the pressures that any of these businesses feel are certainly encouraging banks to charge fees, but it's going to come back at them," Hlavinka warns.

To add insult to injury, Rowe says, bank rewards programs dole out an iPod only after a customer spends hundreds of thousands of dollars through his debit card.

Banking's Equivalent Of Beer Goggles

Turnkey loyalty programs look good to consumers who are intoxicated with travel and retail rewards. But that impression wears off rather quickly as the programs reveal repetitive rules and benefits.

"That whole white-labeling phenomenon makes a world of sense for banks," Rowe says. But banks that try to pass the programs off as anything but commodities will lose customer trust.

"They have to take time to do more due diligence upfront in strategic design," Hlavinka says. "It's going to pay off to differentiate a brand from competitors." And to capture the loyalty consumers are willing to give; 58% of Americans surveyed by Colloquy have positive perceptions of financial services loyalty programs.

However, Rowe believes that these numbers may drop off if banks continue the loyalty strategies they have launched.

"Banks don't seem to have their hearts in it," she says of rewards programs, and possibly their marketers felt defeated before they even started pushing points.

"The world is rife with airline mile/grocery/other frequent-buyer programs, so how's a bank to compete against those for the hearts/wallet share of their customers?" Rowe asks.

"It seems that checking rewards programs have become placeholders on the home pages of major banks," she says, imagining banker thought: "'Oh, our customers expect us to offer rewards for transactions? Well, sure, we'll throw a little marketing package up on our Web site, and then we'll be done with that.'"

The Party Is Still On With Loyalty Programs

"The 900-pound gorillas in this space are airlines and American Express, and banks want to seem to be competing with them in the rewards space," Rowe says, "but they're really not."

Banks' shortcomings in special treatment of customers have not had a negative impact on loyalty in other business sectors, however. "If anything, the bank programs make everyone else look pretty great," she says.

Hlavinka believes that successful rewards programs and policies that retain customers and grow their financial value will evolve across industries.

The number of financial services' loyalty programs grew 163% between 2000 and 2006, according to Colloquy. "The amount of growth in programs and members has been astounding and is adding pressure to any bank to evolve its program, to keep it fresh and make sure it's engaging and competitively viable," Hlavinka says.

Rowe agrees that banks can recover goodwill with more transparency about their practices.

"Young boomers and Generation X have a lot of needs and a lot of years for those needs to be met," she says. "That's a lot of years to get off the non-interest fee bandwagon and get back to the good old-fashioned banking profitability generation of account service charges and interest spreads."