Big Data Provides Big Opportunity for Bank Loyalty

In a new regulatory environment, banks are faced with changing the foundation of rewards programs that were previously funded by interchange income from credit and debit cards. With debit interchange funding gone, FIs still need to continue to find ways to improve bank loyalty and drive the desired card behavior. In addition, banks need to leverage “big data” and mobile payments in the hope that they can replace some of the revenue lost as a result of Reg E and the Durbin Amendment.

Optimally, the future of rewards and loyalty will allow banks and credit unions to take advantage of the “Loyalty Trifecta” (my term for bringing together the benefits of 1) payment and transactional insight, 2) targeted offers and personalized communication as well as 3) mobile offers and payments).

To get an insider view of the challenges and opportunities available to banks today in the area of rewards and loyalty, I reached out to the leaders of four companies that provide unique solutions to the banking industry and who also will be co-panelists with me at the upcoming BAI Payments Connect 2012 Conference & Expo in a session entitled “Rewards in a Mobile Banking Environment.” 

Thanks to Tom Beecher, CEO, Cartera Commerce Inc.; Rob Heiser, President and CEO, Segmint; Schwark Satyavolu, CEO, Truaxis; and Rod Witmond, senior vice president, Product Management & Marketing, Cardlytics Inc who agreed to participate in the panel and contribute to this interview.

Note: An abridged version of this interview is also located as a BAI Banking Strategies article entitled, Big Data Drives 'Loyalty Trifecta' for Banks.

Revenue Replacement in a New Regulatory Environment

In my travels over the past 18-24 months, a single unifying theme seems to be of primary importance for all of the banks I visit . . . the need to find new sources of revenue to help offset the impact of environmental, competitive and regulatory changes that have occurred in our industry. With the potential of the Durbin Interchange Amendment hanging over our heads, lost overdraft fees from Reg E in our rear view mirror, the ability to pay interest on business deposits and the implications of the Card Act just 18 months ago, bank earnings are being squeezed from all directions.

According to Novantas, the regulatory changes alone have slashed retail banking revenues by more than $50 billion per year compared to pre-crisis levels. To make this number even more staggering, Novantas estimates that the equivalent cost savings needed to offset these lost revenues would entail closing 50,000 branches or would require a 1500% increase in maintenance fees. Neither of these options are feasible.

DDA Under Siege

As part of the planning committee for this year's BAI PaymentsConnect 2011, I would love to take credit for the great title of this program track, but I am not sure even the great minds at the BAI could have foreseen how apropos "DDA Under Siege" would be for bankers attending this year's conference that wraped up today in Phoenix.

If there was a unifying theme from the many sessions I participated in this week, it was that revenue lost from last year's Reg. E and this year's Durbin amendment can not be completely recaptured through repricing. Instead there needs to be a stronger focus on targeted customer acquisition, share of wallet growth strategies, retention, product innovation and cost containment. While everyone at the event seemed to be interested in what others were going to do around checking repricing, the energy was definitely focused on building a stronger platform for the future.

Checking Changes Make Onboarding and Cross-Selling More Important

Over the past several weeks, many of the larger banks across the country have announced significant changes to their checking account continuum, including elimination of traditional Free Checking, discontinuation of rewards programs, ceasing reimbursement of foreign ATM fees, as well as potential fees and transaction limits on debit cards.

While each of these strategies are intended to reduce costs or generate revenue in response to Reg E and the Durbin Amendment, these changes could also present a challenge to banks as they seek to increase engagement and gain share of wallet. This is because debit card use and rewards program enrollment were two of the more important account engagement criteria and basis for a broader relationship growth.

What's Next for Debit Rewards?

At a time when banks are trying to catch their breath from the reduced fee income impact of Reg E, the government has proposed a cap on interchange income that could equate to a 70%-80% reduction in fees that a bank can collect as part of debit card transactions. In travels across the country, it is clear one of the first casualties of these regulatory changes has been the reconfiguring or elimination of Free Checking at the largest banks.

Will these changes also eliminate debit card rewards programs that are funded by interchange fees?

Mobile Banking Summit Illustrates Topic is Hot

You don't need to look any further than the attendee list to realize the importance of mobile banking to our industry. Not only is almost every major institution in attendance at this year's Mobile Banking and Emerging Applications Summit, but the number of participants has increased by more than 50% according to officials from SourceMedia.

The program kicked off Sunday with a workshop by David Eads, Founder & CEO of Mobile Strategy Partners LLC where he discussed the basics of getting a Mobile Banking strategy off the ground. He also shared the first of a wave of industry statistics that made it clear to the SRO attendees that this year and next will be pivotal to the mobile banking industry. He also shared keys to developing a business case for introducing mobile banking. He emphasized that while cost reduction (mainly from offloaded balance inquiry calls) could many time justify the investment in mobile banking by itself. a drop in attrition and an increase in revenue from increased interchange and cross-sales will also improve the ROI.

Interchange Amendment Could Change Reward Programs

As if we haven't seen enough regulatory changes over the past 12 months with the Card Act and Reg E, now there is the possibility that Washington will limit interchange fees for debit transactions.

As noted in a recent Client Briefing from Celent Research, part of the proposed legislation requires the Fed to determine a “reasonable and proportional” interchange fee, which is no easy task given that interchange fees are there to balance the incentives in the payment system and tend to cover such difficult-to-quantify items as the payment guarantee and convenience.

In other words, the government can't look at just the operational and fraud prevention costs. In addition, current interchange fees differ by sector and are not standardized currently.

Seven Predictions for the Future of Banking

Today, Susan Wolfe, Vice President of Financial Services from Mintel Comperemedia, presented a webinar entitled, "Seven Predictions for the Future of Banking" where she explored trends in the industry based on the research and direct marketing examples from their custom consumer surveys and mail panel. Each of these trends correlate with what I have seen in the marketplace even though many trends have been impacted by the massive influence Reg E has had on the focus of many bank marketing departments over the past few months.

The predictions presented in the Webinar were:

Chase Uses Safety Message to Promote Signature Debit

Chase Bank has recently reached out to their converted WAMU customers who are receiving a newly branded debit card asking them to "always select 'credit'" when paying for their debit card transactions, stating that the transaction is actually safer than entering a PIN.

The slightly confusing message has not gone unnoticed by industry experts who have come out on both sides of the argument around safety. According to an article in the April 21 edition of American Banker, consultants from Gartner and Aite believe that the PIN provides an added level of security, and that the Chase message may be driven more by the opportunity to generate the higher interchange income associated with a signature based transaction as opposed to a PIN transaction.

Mintel Comperemedia Looks at Financial Service Mega-Trends

In a Mintel Comperemedia presentation recently, Economic Psychologist, Susan Menke, PhD. presented the trends that are expected to have the greatest impact on consumer financial behavior and the banking industry during 2010. Based on tracking of direct marketing programs during the last half of 2009, the following predictions were made:

• The end of Free Checking: Banks such as Fifth Third and BBVA have already eliminated the account while Free Checking leader TCF announced the end of their Free Checking program at their investor meeting this week.
• Explosion of reward banking: The decline in Free Checking will most likely result in an increase in checking programs with rewards, especially in light of the increased importance of direct deposit, online bill payment and debit card interchange.