The rise of customized credit card rewards programs

Community banks are tailoring their credit card rewards programs to keep more customers loyal.

By Katie Kuehner-Hebert

If your community bank offers credit cards, a rewards program can be an effective way of keeping customers loyal.

“As a community bank, we’ll never be able to compete directly with the big banks, but if we can offer a value to our existing customer base in the form of a rewards program, that gives the customer one more reason to actually carry our bank’s credit card,” says Barbara J. Huhndorf, assistant vice president and credit card officer at $750 million-asset Farmers State Bank in Marion, Iowa.

The community bank’s card processor offers the turnkey rewards program ScoreCard Rewards, in which the processor handles all the back-office functions, such as calculating points earned, marketing and redemption, Huhndorf says.

The ScoreCard Rewards program automatically credits each cardholder with one bonus point per dollar spent and posts that point balance on his or her monthly credit card statement. The processor supports a website where cardholders can log in to view point balances and redeem points. The bank pays a small monthly fee per account to support the administration of the program.

Huhndorf adds that promoting the program is important. “Each year, we determine a marketing plan, develop a schedule of bonus points opportunities and utilize statement messages, as well as internal signage, to draw awareness.”

Relationship benefits
Farmers State Bank automatically rewards new customers with 5,000 bonus points if they activate and use their cards within the first 30 days of account opening. This encourages card activation and “jump-starts their point earnings,” says Huhndorf.

Examples of additional bonus point promotions the bank has offered include double points on all purchases during a certain time period; triple points on flower shop purchases during the spring; and 5,000 points if customers spend $2,000 during the November and December holiday season.

Farmers chose to offer its customers travel points and merchandise/gift cards but not cashback, Huhndorf says. Cashback is an automatic credit back to every cardholder, or 100 percent redemption.

“Many do not know, but the bank is the one that foots the bill on all redemptions, as well as the admin costs to the processor,” she says. “So by choosing travel or merchandise, we pay for that redemption cost, but only if the cardholder cashes in their points.”

“This growth in sales volume generates interchange income, which more than offsets the ScoreCard program costs.”
—Barbara J. Huhndorf, Farmers State Bank

The bank also sets an expiration date for points and discloses that date on customers’ credit card statements. While that does trigger a surge of redemptions close to expiration, it keeps the bank’s liability under control as the program matures, Huhndorf says. Farmers does not charge an annual fee for consumer cards, but it does charge an annual fee to business customers that it waives if they spend $5,000 per year.

Interchange income
The sales volume that Farmers’ card customers generate is growing year on year, and Huhndorf attributes that to the ScoreCard Rewards program and the loyalty of the bank’s card customers.

“This growth in sales volume generates interchange income, which more than offsets the ScoreCard program costs,” Huhndorf says. “Our underwriting is fairly conservative, and the quality of our portfolio remains strong with very low delinquency to outstandings. Customers come to expect getting something back from their card—that is just an industry expectation.”

A community bank’s decision to set up its own card program or engage a third-party vendor depends on the bank’s growth strategy and customer base. It is not one-size-fits-all when it comes to offering reward programs on cards, says Tina Giorgio, president and CEO of ICBA Bancard Inc.

“Customer preference drives the decisions,” Giorgio says. “Banks need to look at their target clients, strategy and risk tolerance, and make a decision that fits the need.”

TCM Bank in Tampa, Fla., owned by ICBA Bancard, has 350,000 cardholders in its rewards program for both consumers and small businesses, says Damon Moorer, president and chief executive. TCM Bank has “multiple flavors of rewards to satisfy varying cardholder desires.”

“For example, baby boomers who are retired prefer a points program that allows them to get hotel stays and travel,” Moorer explains. “Gen X and millennials, on the other hand, tend to prefer cashback. It’s nice and simple, and the cashback can be applied in a multitude of different ways.”

Community banks can also offer rewards to strengthen relationships, such as a lower rate on a commercial loan if a small-business customer opens a card account, he says.

Banks can adjust the cost of a rewards program by adjusting the bonus points, but the value proposition has to fit within the P&L for that program, Moorer says. This is easy to ascertain with adjustments, as rewards programs are one of the “highest forms of measurable marketing.”

“Incremental transactions are occurring, enabling the bank to know exactly what the transaction is and exactly what the return is,” he says.

Some of the higher-rewards programs come with an annual fee in order for the financial mechanisms behind the scenes to work, but Moorer says those customers expect it. “For many affluent customers, an annual fee comes along with a prestige card offering. It’s a status play,” he says. “The entire loyalty space is just that: providing greater value to drive deeper engagement and usage. How do we generate enough perceived opportunity to generate perceived incremental utilization?”


Katie Kuehner-Hebert is a writer in California.

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