Since their introduction in the credit card market in the mid 1980s, loyalty schemes have grown in popularity amongst credit card issuers. For example, the percentage of UK credit card issuers offering a loyalty scheme has grown from just over 15% to 50% in the last 10 years.
Although comprehensive points based reward schemes - like Barclaycard's Nectar scheme and NatWest's Air Miles offering - have grown in popularity among the largest issuers, the recent boom in loyalty scheme popularity has been caused by smaller card issuers jumping on the loyalty bandwagon with cash back loyalty schemes.
These schemes are a direct response to companies' desire to compete in the loyalty market without incurring the considerable expense involved with a points-based scheme. Rather than offering customers points that can be redeemed for a range of rewards including goods, vouchers and discounts, cash back schemes offer their customers a small percentage of their spend back each month.
Expensive, whichever way you go.
However, even these loyalty schemes are expensive to run and pass these costs on to consumers. Indeed, the major weakness of all loyalty schemes, and certainly of points based schemes, is the high set-up costs, high administration costs and potentially high exit costs that any issuer offering a scheme must bear.
For example, Sainsbury's Reward Card, which has now been dropped for the Nectar card, was estimated to cost in excess of GBP100 million to run annually. In addition, with exit potentially difficult, as Sainsbury's and Barclaycard have recently discovered, issuers that launch a new loyalty scheme must be prepared to maintain it for the foreseeable future to avoid upsetting and ultimately losing customers.
Meanwhile, the fact that credit card consumers are becoming more financially savvy, preferring lower prices rather than rewards at a premium price, suggests that they will eventually wake up to the loyalty scheme rip-off of higher rates for rewards that many don't want.
Consumers may well have a right to this opinion, given that those using credit cards that offer a loyalty scheme pay almost 10% more on average to those using a card with no scheme on offer.
In the UK, the average APR for outstanding credit card balances on purchases is currently 16.5%. However, the average APR for cards that offer no loyalty scheme is just 15.9%, compared to those that offer a cash back loyalty scheme at 17.1% and those offering a points based reward scheme at 17.4%.
Retaining, attracting, increasing spending...
Card issuers employ loyalty scheme not only to boost customer retention, but also to improve customer acquisition, to increase card usage and to gain customer intelligence. Judged purely on their retention powers, loyalty schemes are not particularly cost effective as they tend to appeal to the least profitable customers - those that pay their balances off in full every month.
However, loyalty schemes remain an important reason for the choice of a credit card - the third most important behind convenience and cheap rates. Cash back loyalty schemes have also become an important reason for a small, but potentially significant minority of consumers in choosing their credit card.
In terms of demographics, those aged 35 and above attach more importance to such schemes. Conversely, consumers under 35 attach little importance to loyalty schemes, placing far more importance on personal recommendation or the convenience of choosing a card offered by their existing bank or building society.
Increasing card usage is also an important objective of card loyalty schemes and carefully constructed schemes tend to be very good at this. For example, Tesco Clubcard offers customers that spend on average over GBP60 pounds a week a Premium Clubcard points structure that effectively doubles the number of points or Air Miles they receive. Furthermore, many schemes also offer platinum cardholders double points for every pound they spend.
Boots and Tesco are simply the best.
In the UK, credit card issuers could also learn a lot from the Tesco Clubcard and the Boots Advantage card, both amongst the best schemes to found in Europe. Since its launch in September 1997, the Boots Advantage Card has experienced phenomenal success, gaining over 12 million customers in its first five years.
Based on smart card technology that allows real-time redemption of points, this scheme remains is the most advanced in the UK. Furthermore, it is marketed as the most generous loyalty scheme in the UK, and this is arguably true as 4p is redeemed for every pound spent, compared to the standard 1p per pound.
Combined with a range of well-targeted health and leisure rewards, it comes as no surprise that this scheme has become the UK's second largest scheme in terms of active members (approximately 8-9 million).
The Tesco Clubcard has also been a phenomenal success since its introduction in 1995, and now boasts over 14 million customers. It offers a mixture of money off vouchers, rewards, and Air Miles that are well targeted at individual customer groups and represents an excellent example of the strategic fit between a loyalty scheme and the company's overall marketing proposition.
It will be interesting to see if the launch of Nectar, a scheme that has already had a number of embarrassing problems such as the failure of its online registration site, will ever manage to compete with Clubcard's success.
If you found this article useful, you may be interested in Datamonitor's new executive report, "Card Loyalty Schemes" (BFFS0193). The report, which covers all major European card markets, examines the current trends in card loyalty schemes and whether they still add value to a card product.
