Considering reward offers to jump-start fee-income gains
Sifting through her mail one morning, a consumer gets an important looking letter from her bank. She assumes it's junk mail-the bank always seems to be sneaking sales pitches into envelopes that appear to be of dire importance- but she opens it anyway.
Inside she finds, to no surprise, a sales pitch. While she would normally toss it in the trash along with her weekly value coupon book of purported savings, this particular pitch catches her fancy-a free rewards program for her existing debit card. No extra costs, rewards like Starbucks gift certificates for making purchases, and she'll get 5,000 free points to start.
Intrigued by the offer, the consumer- who had been wondering what her bank had done for her lately-calls the toll-free number on the mailing and signs up. The bank succeeds in securing her business, including a credit card and a significant savings account, for a while longer.
This anecdote is true, but far from unusual. As many as 15 percent of customers are shopping for a bank at any given time, according to research by Mark Stenson, president of Stenson Management Consulting in Marshall, Minn. Many will be tempted by offers coming through the mail.
Attracting customers and, just as important, attracting them to products that will build a relationship with the bank and increase fee income, is a reality all community banks must contend with. Fee or non-interest income throughout the banking industry totaled $18 billion in 2004, but only a fraction of that money went to community banks. As the squeeze on net interest margins continues, fee income has become more important. It has also grown more competitive as banks expand their reward program offerings, often in ways that help anchor customers to the bank by increasing the number of products they use.
Making an Offer
For years, credit card issuers have offered reward programs allowing cardholders to rack up points toward goodies ranging from cash rebates and free gasoline to free airline tickets, hotel stays and bigscreen TVs-motivating customers to use their credit or debit cards more often and in turn, boosting the bank's interchange fee income. (See related story, page 91.) "Reward programs carry some cost," says Linda Echard, president of ICBA Bancard, ICBA's electronic payments services corporation, "but they're definitely advantageous for community banks. Most of the cost will be covered by increased usage, which also means greater interest income."
But reward programs are evolving to include a broader array of bank products, such as with Citibank's innovative "Thank You" program, which rewards debit cardholders with two or more additional services with the bank, such as a savings account or direct deposit, with extra points. And in March, National City Bank in Cleveland, Ohio, rolled out "points from National City," a program that takes the points concept to a whole new level by permitting individuals in the same household to pool their points and small-business owners to link their business accounts with personal ones to earn bigger rewards. As with credit card points, National City's points can be redeemed for a bevy of gifts. Other banks have followed suit.
While it's too early to tell how National City is faring under its new program, Citibank has earned favorable press and certainly retained and attracted a few customers. The genius behind such programs are their success in fostering cross-selling and loyalty, says James Gresham, CEO of Rennhack Marketing Services Inc., a firm in Grapevine, Texas, specializing in customer incentives.
"The basis of all these rewards programs is that the bank wants more hooks [into its customers], and if it can cross-sell and up-sell the consumer, the sticking power of the relationship is that much stronger," he says. Banks can also encourage customers to migrate to specific products and services by offering bonus points as an incentive to adopt a specific product the bank is pushing. …