Threats to survival of credit card rewards
Imminent legislation on interchange fess and turmoil in the financial industry are posing major threats to US credit card rewards programmes.
Those are among the findings in a new report from the Mercator Advisory Group.
The report found that the weak economy and financial upheaval are making it harder for issuers to deal with the soaring costs of their reward programmes.
Rewards have become a key driver of card acquisition, usage, and retention. Mercator says the pressure from the uncertainty surrounding the disputation and pending bill about interchange fees, which is the main funding source of card rewards, poses a significant threat to the survival of credit rewards programmes.
At the same time, consumers’ needs and expectations are also changing, calling for credit card issuers to offer more attractive and relevant products and services. Merchants, while pushing for more regulation on interchange fees, also face their own problems to attract and retain customers and encourage spending.
Terry Xie, Mercator’s principal analyst on the report, commented: “The credit card industry needs to think about rewards programs in a new way. No longer can they take the old funding mechanisms for granted and hope to survive and prosper by just doing what everyone else is doing.”
He added that there is an urgent need for taking a new look at the relationships between merchants, consumers, and issuers to rethink the value proposition for each party involved.
With insights into customers’ needs, innovative thinking, and the help of new technology solutions, Xie says that some players will gain a significant competitive advantage over others that fail to adapt.
With limited upsides (and potentially a deep dive) on the revenue side on the horizon, Xie adds that credit card issuers need to rethink how they design and structure rewards offerings. It is possible that this mandate will drive innovations that revolutionize credit card reward programs, perhaps more so than we have seen in a long time.
Other findings from the report include:
• The card industry is seeking solutions to reinvigorate credit card rewards programs in response to the soft economy, regulation, fuel prices, and consumer behavior.
• Gas cards and miles cards both have their challenges in today’s economy.
• Merchant-funded rewards programs have a tremendous amount of potential to revolutionize credit card rewards programs due to new value propositions to different parties.
• Premium merchants might become a scarce resource as they are heavily sought after by card networks, issuers, processors, and independent merchant discount networks.
• Data analytics offer a new level of targeted marketing and promotions but their full potential will not be realized until combined with merchants’ involvement, likely in the format of a merchant-funded discount network.
• New innovative rewards programs such as non-transactional rewards and programs combined with non-traditional rewards components are emerging.