How digital wallets can bolster loyalty programs

24 September 2019 4 min. read
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Instant redemption of loyalty rewards through digital payments is driving new opportunities for financial institutions, unlocking increased loyalty program use and attracting key demographics, according to a new report from consulting firm Capco and Bridge2Solutions.

The new loyalty economy is one where loyalty points can be used at point-of-sale (POS), through digital mobile wallets – superceding the old annual or bi-annual process of looking through some catalogue that outlines which narrow line of products or benefits can be redeemed. The new process can also enable customized, location-based instant offers to create exciting new customer experiences.

By 2020, 450 million people are expected to use mobile payments, taking up 15% of POS transactions, according to Juniper Research. Apple Pay is projected to lead by next year, accounting for half of OEM Pay users globally. By 2020, more than half of the US is projected to try mobile wallets, and 94% say they would use mobile wallets more frequently if loyalty points were earned with every transaction.

The loyalty market is also becoming more competitive, with more companies offering large sign-up bonuses and cash-back rewards. Many of the reward chasers, however, aren’t particularly loyal, while non-redeemers are 2.3 times more likely to defect. Engaging, digital payments-based reward programs could help financial institutions attract and retain customers in this environment, according to the report.

Loyalty programs based on digital payments, meanwhile, can help attract millennials, who are heavy smartphone users and early adopters of digital payments.

The mobile pay process

The new loyalty economy, with point ubiquity unlocking the use of rewards currencies at point of purchase applied to a much wider variety of items, delivers new opportunities, according to the Capco report. Institutions can partner with merchants to create new experiences and offers: for example, American Express can partner with Best Buy to give 10% off when customers use their reward points at Best Buy.

Companies can also drive stronger branding with digital wallet-linked rewards, leveraging unique visual program branding and personalized messaging to make sure customers associate the “golden moment of loyalty” redemption event with the financial institution. And with more frequent POS redemptions, companies can get more of the “brand halo” effect associated with redemption, building up a more favorable view of the brand and hopefully reinforcing loyalty.

Finally, digital payment-linked rewards can attract millennials and Gen Z's, who represent future growth. The cohorts are digital natives, accustomed to smartphone use, and fixated on convenience and ease of access to their rewards. Eighty-three percent of millennials said they were more likely to use mobile payments if rewards and discounts were automatically applied, according to The State of Mobile Wallet Marketing study.

As such, if institutions can provide a seamless, relevant, and personalized digital rewards experience, customers will be more likely to keep their digital cards at the top of their digital wallets.

Pathways to success

The Capco report recommends a few pathways to help differentiate rewards programs. A streamlined, point-ubiquitous redemption process is the first step, with an easy-to-use experience that triggers emotional attachment from the customer. It should have simple design, straightforward policies for earning and use, frictionless redemption, and should eliminate old-style rewards like cash and gift cards.

Companies should also integrate digital payments into existing rewards programs to give consumers what they want, and drive adoption of the new mobile payment platforms. They should also strive to deliver new personalized experiences, such as geo-location-based special offers tagged to previous online shopping cart histories. Capital One, for example, has partnered with Foursquare to push offers to shoppers via mobile phone apps when phones indicate customers are in partner stores.

Finally, institutions need to find ways to shape consumer behavior to prefer their cards in their mobile wallets – whether that’s the move from plastic to mobile, or their digital card over a competitor’s. American Express, for example, is enticing corporate cardholders to pay with smartphones via a partnership with Apple Pay, and is also creating offers tied to Uber usage in order to make it the payment card of choice for the ride-sharing service.

“As the momentum accelerates and use of digital wallet-linked rewards become universal, digital-forward financial institutions can substantially increase loyalty-program use, attract millennials and other young customers who represent future growth, strengthen their brands, and secure top of wallet status in both the physical and mobile wallets,” the Capco report concludes. “The opportunity is particularly promising for early adopters of digital wallet-linked rewards, setting the stage to acquire new customers from late and nonadopters, and retain those customers as rewards redemption become part of their everyday payments.”