VRL hosted its largest round table
to date in London on 26 November. Representatives from some of the
leading banking, payments and loyalty agencies in the UK and Europe
met to discuss and debate loyalty in financial services – and the
overall conclusion was that customer ‘stickiness’ is more important
than ever.


In an age of operational cost cutting and
greater efficiencies, what place does loyalty – and the expanding
range of loyalty schemes – have in retail financial services and

Keeping the customers you have got is much
cheaper than finding new ones, but well-run loyalty schemes can be
expensive to run – is it better to invest in customer service,
competitive product pricing and promotional activity instead, for
instance? If a bank or other financial institution is to invest in
a loyalty programme, what type is the best?

It was these sorts of questions, and a host of
others, that were analysed and debated in detail at VRL’s recent
round table on loyalty. Representatives from 14 leading banks,
payments firms and loyalty specialists, including HSBC,
Barclaycard, Visa, Tesco, Citigroup’s UK subsidiary Egg, PayPal,
Nectar and Deloitte, came together to break down the key issues
both from a specific UK perspective and a wider, global view.

The event was sponsored by Private Label
Promotion (PLP), a South African firm which has recently opened a
London office and focuses on loyalty, acquisition and retention
programmes as well as direct marketing.

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The UK is an excellent example of a rapidly
changing banking and payments market, and one, it seems, in which
loyalty and related disciplines will play an increasing role in the
fight for customers.

Destabilised by the financial crisis perhaps
more than other leading global economies (nationalised banking
assets account for around 30 percent of the total), a number of new
entrants are moving into the retail banking market. These include
new retail banks but also banking retailers, lead by loyalty expert

Barclays, the UK’s third-largest retail bank,
has also been rumoured to be rolling out what it describes as the
country’s largest coalition loyalty scheme (confirmed officially
for the first time at the VRL round table) while HSBC is pushing
ahead with its successful Premier branded mass affluent programme
as well as its Marks & Spencer card portfolio.

The following is an edited version of the
discussion that took place.

Question to
Isobel Thacker, senior manager new deal setup, business
development, Barclaycard UK:
How can banks use loyalty programmes to recruit,
retain and cross-sell to customers? What experience do you have of
how a successful strategy can deliver cost savings, increase
transaction volumes and reduce customer

Isobel Thacker: There are a number
of levels where financial services providers can play, and banks in
particular. We have customers who have a broad retail product set
with us – and we have lots of data about those customers.

In Barclays’ and Barclaycard’s experience,
what we have done is partner with known loyalty providers, so we
can reach customers through their channels, becoming a joint data
controller, and then operating a card programme where you have the
ability to offer loyalty. That is clearly an attractive cost model
around acquisition.

We are now planning to launch a coalition
programme. It will be in 2010, though I can’t say specifically
when. Something we are really thinking about is what a bank can do
with the data it has about its customers. By partnering up with
retailers, a bank can actually offer a coalition programme that can
span across their whole customer base.

So yes, you can get access via your credit
card customers, your debit card holders, your investment
product-holders and your mortgage holders. You can get to those who
may have had a long tenure with you and wonder what value they can
get from you. So for debit card holders, you may offer some more
value in the future.

We all know that as banks we have lots of data
on our customers. And we know what retailers have is lots of data
about spending at stock keeping unit level or category level.
Bringing those two sets of data together, you can talk to your
customers instantly and offer them an immediate reward, which is a
very powerful thing to do.

And that is what we are planning from a
coalition perspective. We want to bring millions of customers and
thousands of retailers together and give them instant value which
the customer might be able to do on a contactless piece of plastic,
or through a mobile phone or online.

In terms of a worldwide scheme, you can’t span
the benefits globally because people don’t shop that way yet. But I
do think spanning channel more instantly and effectively is going
to be a benefit for providers of loyalty programmes. We are looking
at data analysis and spend analysis, what the customer buys and
where they choose to buy it. What we want to be smart about is
management and how we talk to our customers in a way that
recognises that they are a customer.

Victoria Conroy, editor of Cards
Which merchant categories are you
focusing on – smaller chains, larger chains?

Isobel Thacker: Smaller and larger.
Thousands of retailers, millions of customers, a number of sectors
and across an expansive scale.

We will go big and go different in our
approach. I have worked for Barclays for 22 years and I have seen a
lot of changes. We have done a lot and this is going to be
different. I think what a bank knows about its customers and how
you work with your partners going forward and how you take
capability going forward as well will help you reshape the way
financial services providers work around loyalty programmes.

I see that as an emotional play for the banks
– why do I have a current account that has got a will writing
service in it? Concierge service, travel insurance household
protection, that sort of stuff. Because it is my bank giving me
security and it is my bank that I trust.

Question to
Charles Humphreys, client development director, Nectar:

Barclays has announced its engagement
with Welcome Real-Time and the rolling out of a huge retailer
coalition loyalty programme. So, with Tesco becoming a bank, how
can a financial services company combine successfully with a retail
loyalty offer? What are the key features that would make this work
and what are the potential difficulties?

Charles Humphreys: We think there
are four ways in which retailers and financial services players can
partner to deliver a loyalty offer. The two main ones are, firstly,
being a private-label co-brand relationship – such as Sainsbury’s
Finance [with Lloyds Banking Group] and Marks & Spencer [via
HSBC]. The second is the coalition model – Nectar, Air Miles in the
UK and, in terms of our parent company, Aeroplan in Canada.

There are two other niche relationships. There
is a conversion relationship, such as Amex Membership Rewards, and
there are more tactical relationships which individual card
companies form. From the coalition relationship point of view, we
are watching with interest what is happening at Barclaycard,
especially as they are a former partner with Nectar – it is good to
see them returning to loyalty.

There are five key benefits of a coalition
loyalty programme: it enables low-cost marketing for retail
partners and financial services partners because they are clubbing
together to deliver messages to their customer base; it also gives
more data and insight because each partner can understand the
aggregated transactional behaviour and attitudes of the customers
across the coalition. It gives acquisition opportunities for both
retailer and financial services partners in that they are able to
use the coalition currency and marketing channels to make
acquisition offers in a very cost effective way to other customers
in the coalition.

Fourthly, it delivers more value to the
customers, as they are adding the rewards they earn from financial
services to the rewards earned from other partners; I think this is
the key point which we’ll see driving coalitions forward as
financial services interchange limits the available reward.

And it really does deliver a sustainable
competitive advantage. The reason for that is the coalition
programme generally operates on a category exclusive basis and
there are a limited number of slots available for partners and
therefore particularly from a first mover point of view, the
partners have the ability to drive considerable benefit.

It is important for a successful, mass market
coalition to have high-frequency retail partners, with a grocer
being the most important. So looking at the UK, Tesco has a
successful programme of its own, and we don’t see it going into
coalition. Tesco stuck its toe in a few years ago, and is now
focusing very much on its own brand. Sainsbury’s is a key partner
in Nectar. So that only leaves a couple of other players.

That fundamentally limits the market for other
players to form true coalition loyalty programmes in this country
and for other banks to get a meaningful number of retail partners
to participate in a coalition.

Paul McNea, business development
manager, Private Label Promotion: So from that, do you see
one or two super-coalitions where with exclusivity, you will have
key brands like yourself, and the rest of the market will have to
find some other players?

Charles Humphreys: Yes. On average, globally,
each market is quite specific. Canada has very advanced loyalty
programme offerings. Our parent Aeroplan is one of the major
players and Air Miles is the second. Tesco, having such a
significant market share in this country, creates a slightly
different dynamic here.

I agree there is a fundamental, limited market
for mass market coalition programmes in each territory. I would not
expect to see multiple coalition programmes there.

Francesco Burelli, director,
payments, Deloitte: Do you expect to see polarisation
developing on a national or regional basis in terms of brands
facing the public?

Charles Humphreys: I think it is
going to be difficult for an individual coalition programme to
operate on a truly multi-country basis but we do see the emergence
of global groups of coalition loyalty – and what we will see is a
real race to grab the key territories.

We announced we would be launching a
coalition loyalty programme in Italy early next year. The Loyalty
One business based in Canada has recently acquired 29 percent of
the Brazilian programme, Dotz. The main loyalty programme in
Germany, PayBack, recently launched a programme in Poland which has
very quickly acquired two million households there.

I think we will see the growth of coalition
loyalty programmes driven by two or three significant global
groups. For those to operate on a multi-country basis I think it
becomes more difficult as there are few true global retailers and I
think the frequent flyer programmes will remain country specific
but operated by global groups.

Steve McArdle,
head of customer development and interim marketing director, Tesco
I think the scope for new large loyalty schemes in the
UK is fairly limited as you do need those partners.

It is all about value on those cards
and the ability to collect quickly what the reward is at the end of
it before customers lose interest. I agree taking it worldwide is
difficult – Tesco’s Clubcard is in a number of countries but they
aren’t really interchangeable.

What you can use, to Charlie’s
point, is the knowledge from the data and that is focused by
Dunnhumby [a marketing data specialist firm majority owned by
Tesco]. Dunnhumby helps us understand the data we get and to make
use of it. And they have taken that skill set around the world and
are actually now more multinational than Tesco.

Question to
Francesco Burelli:
We are
seeing increasing pressure on interchange downwards. One
consultancy reported a few weeks ago that we are likely to see fees
on credit cards become more widespread and increase in scope and
size. Do you agree with this view and does it mean that we will
also see more loyalty programmes developed to try to justify these
card fees?

There are two distinctive concepts here: the
correlation between interchange and card fees, and the connection
between interchange and loyalty programmes.

In Australia, the Reserve Bank of Australia
diminished interchange to about half of its original value by an
arbitrary ruling on 1 November 2003 based on the expectation that a
reduced cost of payment acceptance would have resulted in a lower
retail prices to the consumers.

As a consequence of the reduction there has
been a negative impact to the revenues of Australian card

These have reacted to falling revenues by
slashing costs and increasing card fees. The costs that were
reduced mostly were discretionary, including value-added services
(e.g. insurance), loyalty programmes and payment innovation

Different markets have different kinds of
set-up in terms of fees applied to cards and banks’ approach to
markets. For example in the UK, we are not used to seeing fees on
cards while this is not the case in the majority of Continental

I do believe that if interchange goes down, we
are going to see card fees up. This would be the case in any
country and it would be interesting to see how these would be
introduced in countries like the UK.

The typical approach to leading consumers to
accept fees is by product bundling, offering a bundle of financial
services products (e.g. current account, debit card, overdraft,
travel insurance, card insurance, etc) with a monthly fee

While this is a relatively new trend in the
UK, in Continental Europe a number of banks have taken such an
approach with the aim of taking away some products from the
investigative attentions of the European Commission and single
product charges (e.g. current account monthly fees, debit card
annual fees, etc).

US banks were one of the first to introduce
loyalty on cards and current accounts while their European
counterparts are in the early stages of developing current account
centric loyalty programmes.

What I fail to see is the direct correlation
between the introduction of fees and loyalty programmes. I do not
think the two are automatically bound together as loyalty
programmes are developed with the aim of attracting and retaining
customers and facilitating cross-selling and not to justify the
existence of fees.

This does not discount the fact it is obvious
that some premium services with added benefits are likely to carry
a higher fee. I think the introduction of loyalty initiatives in
Europe and the UK will be driven by the objective of increasing
customer stickiness.

Hugh Fasken,
editor of Retail Banker International:
In the UK,
the packaged account market is quite large. I was quite surprised
how large it is. Something like 10 million customers in the UK have
packaged accounts. The average fee is £160 [$266] a year, meaning
fee income is £1.6 billion annually, and they are growing current
account market share.

Duncan Olby,
director of financial products, PayPal:
There is a misnomer
that loyalty needs to be funded by interchange. Even without
interchange in the UK, the financial services and the card industry
should still be able to economically fund good strong loyalty, for
certain segments.

I think that it is incredibly dangerous to link the
concepts of loyalty and interchange.

Retailers and industry players arguing against
interchange have taken the chance of accusing the card payments
industry of funding loyalty programmes by taxing merchants with the
application of high interchange fees, after the Australian issuing
industry cut cards’ loyalty programmes after the reduction of
interchange rates. This argument is based on false assumptions and
it is wrong.

Interchange is a fee aimed to cover a cost
imbalance between the issuer and the acquirer due to a differential
in processing costs and in the cost of the payment guarantee
without which a merchant would not accept lightly a payment by
card. The interchange rate is not related in any way to loyalty or
added value services offered with a payment card product.

Aside from that, based on current data, it
would appear that interchange reductions have gone to the advantage
of merchants and there is a lack of evidence of any reduction of
interchange resulting into lower retail prices to the consumer.

The Report to Congressional Addresses
published by the United States Government Accountability Office in
November 2009 deemed that “if these measures [interchange reduction
by regulatory intervention] were adopted here [US], merchants would
benefit from lower interchange fee. Consumers also might face
higher card use cost if issuers raised other fees or interest rates
to compensate for lost interchange fee income”.

The possible consequences mentioned are
limited to increased cost to consumers and do not mention loyalty

I would advise caution in linking together two
very different topics like interchange and loyalty programmes as
their erroneous association could be hijacked by those parties
arguing against interchange rates on the basis of common lack of
understanding of the mechanics of the card payments industry.

Question to
Darren Oddie, senior vice-president, customer loyalty and rewards,
Visa Europe:
Loyalty schemes
are usually associated with credit cards. In many European markets,
debit is more widely used than credit. Given how we are seeing
growth in debit on a pan-European basis, will we see banks start to
introduce loyalty programmes into debit

Loyalty programmes can and should be independent of
interchange and the European Commission is quite clear on that. So
in terms of interchange and debit, it is going to have to be

We would like to see more programmes
on debit. It is quite interesting because I have had a debit card
for 15 years, and I have never had anything for that, no gratitude,
no rewards, nothing.

With the points programme attached to it, I
get about 1 percent value from my credit card. When I look at
financial services products, they offer me poor value in terms of
reward. If I walked down the high street and I saw all these stores
with signs saying ‘Mad January sale, 1 percent off!’, would I be
tempted to go in and buy something? No, I wouldn’t.

From a card perspective we have to start
looking at this differently. For Visa Europe, we have had to do
this in the debit space. The new model really starts moving away
from the known programmes.

So people do buy M&S, and Air Miles. They
do buy these known programmes but they are very, very expensive to
start them and to run them.

So if we are looking for good deals as
financial services customers, we have to work with merchants
because actually merchants and card providers and card holders are
looking for something similar. They are saying: ‘Give me a reason
to use my card’.

To get that model working together is going to
be quite difficult because financial services, merchants and card
issuers have a financial relationship and it needs to move to a
marketing relationship because actually it is about finding the
right customer with the right offer at the right time.

We need to start using our database properly.
And I think that is where the debit loyalty market will move. All
other payment models could be moving in that direction because we
have to engage with merchants on a different basis. It is not just
about interchange.

Loyalty is about understanding your customers
and making it relevant. You can’t have one product for everybody.
Otherwise it becomes too diluted and then each different segment
does not understand what they are getting. So we do want to see
rewards on debit cards and it has to be independent of

In terms of new debit
payment technologies like contactless, what role can loyalty play?
Can it help get the word out about these new forms of payment, help
push them forward?

How does the merchant drive spending on the card? By
working with the issuer to give the customer an incentive to use
it. We are not seeing any incentivisation to do that. What we are
seeing is: ‘This is really sexy, why don’t you try it?’ As a
consumer I expect to be rewarded for transacting with the

Contactless is typically plastic but it is not just
going to be plastic, it will be in mobiles going forward.

What contactless will provide in 2010 and
2011, between banks, merchants and mobiles is the ability to talk
to your customers much more smartly about the loyalty offers you
want to provide them. And that is where Barclaycard is very
interested in playing and you will see a lot more of that going

Patrick Muir,
head of marketing, Egg:
When you go to a shop, you get to a
point where you want to be recognised above and beyond people who
pop in there once every four or five years.

I was coming back from America on a trip with
a group of people, and clearly one of them was in the air a lot for
his job. So when we asked for an upgrade, we were told there were
no seats available. When we looked at his ticket, he had been
upgraded to first class.

With recognition, there is an emotional
element which we haven’t talked about. If I have got 16 products
with a bank, it would be really nice if, somewhere in that service,
that was recognised.

Chris Paul,
senior managing consultant, Insight Consultancy:
There is a
tendency to use the terms ‘loyalty programmes’ and ‘reward
programmes’ interchangeably.

To be clear, we are talking about
reward programmes – the extent to which they can ever drive true
customer loyalty is debatable. For that matter, what is true
customer loyalty? I support Newcastle United Football Club and that
is true loyalty with no rational justification or logic for it. In
the same way, somebody might be loyal to a political party or to
the monarch.

The question we all need to consider
is whether a customer is ever going to be truly loyal in the same
way to a bank or a retailer?

In reality, we need to accept that there is
little or no true customer loyalty in financial services. You can
have the best product or rewards programme in town, but as soon as
somebody comes along with something better, customers will show
their true allegiance and many will simply move their business

Don’t get me wrong, I do believe that rewards
programmes are a tool to drive customer loyalty, but organisations
also need to think about engagement on different levels through
things such as lifecycle management, customer servicing and
experiential marketing. The ultimate goal is to drive emotional as
well as rational engagement – this is what will lead to the
customer stickiness we are all hoping for.

There is a fundamental problem here that loyalty is
not the most effective way to drive acquisition. And many
organisations are quite short-term focused and sales focused. The
packaged account market is a very large mature business but it is
very focused on sales activity.

There is probably not a strong pull
from the banks for a branded loyalty scheme in those packages. In
some segments there may be a play for retention or upsell, but I
think there is a reality that the loyalty industry has to be very
cognisant of.

There is a difference between using
a branded scheme in your own channels and using a loyalty
proposition to acquire new distribution channels.

Loyalty schemes drive enormous value
in terms of delivering changes in behaviour of existing customers,
but typically a loyalty scheme is not the most effective way to
drive sales.

Vincent Reboul,
head of cards, HSBC:
I disagree with that. The M&S card
programme – people take it because of loyalty. If it is a focused
loyalty scheme where people really identify with the brand, I
believe you can use loyalty to acquire. And use loyalty for
managing the scheme going forward.

All of the work I have done on the subject over the
years, the biggest single determinant of a customer’s behaviour
when they are on your books is their attitude or expectation of
when they join you in the first place.

So, I am joining the M&S scheme because I
want to be part of that scheme. This looks like a really good thing
– I am going to be loyal.

Whereas if I join just as a general customer
and now you are offering me an M&S Rewards Scheme to try and
make me loyal, you are very reliant on my context when I joined the
company in the first place.

Now we have been working in an industry where
for a number of years we have just been giving stuff away. We can’t
expect much in the way of loyalty from those customers. So it is
how you acquire the customer in the first place and the context
they come in on because you are acquiring them on a loyalty

Loyalty does not have to mean giving a product
away. It can be service differentiation.

If you have a successful loyalty programme, and
that is what the customer is buying, you can acquire new recruits
in that way. We have got partner programmes where Barclaycard
reaches more customers because they are buying those loyalty

If the customer perception is that those benefits are
relevant to their lifestyles and then they engage from a very early
stage and they see you as an organisation providing something they
want, that can affect and increase sales rather than just engaging
customer loyalty.

And a converse example. If someone came to you via
a balance transfer, guess what, they will do anything after it has
expired because that is what they bought in for.

On the coalition programme, we see that Nectar is
a very effective currency and vehicle for all of our partners,
including financial services, to acquire customers. But absolutely,
the people who take out the product because they are engaged in the
loyalty programme, will go on to become great customers.

If they are only joining because
there is a great balance transfer offer, then less so. Where you
have a loyalty programme of sufficient scale, and you also have a
good enough understanding of your customers, you can use that
programme to drive retention among credit cardholders who didn’t
originally take the card because of the loyalty programme but who
subsequently opt to earn the currency.

In my experience, a loyalty programme has to be core
to the proposition. Half the time the customer does not understand
every detail of what they are buying into. Clearly loyalty must be
a prominent feature of your proposition, but it cannot be traded
with price. It should be ‘icing on the cake’ of a strong underlying
proposition. If you do an economic trade-off between price and
loyalty at the point of acquisition, generally price wins.

If my end result is 100,000 active, engaged mainly
profitable, but value-detrimental customers, I can either go and
acquire them on proposition A, which may be harder work or more
expensive, or proposition B, which is price-led. It is a balance
transfer where I acquire 300,000 for 100,000 at the end. It is a