There are some things that people just can’t live without these days. The mobile phone tops the list and, depending on your age and demographic, is closely followed by the Blackberry, iPod, Instant Messaging service, or Xbox 360.

Fortunately for bankers, the 7.16 square inches of plastic known as a credit or debit card is high on the list as well. Each of the associations has contributed to reinforce the importance of payment plastic in our lives. American Express implanted the enduring message “don’t leave home without it”. MasterCard successfully reminds us that their card is “Priceless”, while Visa punctuates the importance of cards by shouting “Life takes Visa”.

Once universal acceptance was established and association brands gained global recognition, it was the rewards business that propelled cards to their next phase of development. Though there is a card for everyone, reward cards continue to capture the highest levels of consumer attention and drive profitability for issuers.

Don’t believe me? Then hear what Visa, Tower Group and McKinsey have to say:

• A 2005 Visa study reported that 50% of all general purpose cards offered rewards in the US market and accounted for 77% of all purchases.

• The Tower Group reported that ““Reward programs may be a lifesaver for an industry experiencing a 0.3% response rate to card-acquisition letters and long-term threats from new technology such as cell-phone payments”

• McKinsey provided more evidence with this comment: “Loyal customers typically generate 30 – 70% more value than run-of-the-mill clients do”

This body of evidence for card rewards has a dark side. It exists in the strong sense of entitlement for rewards by most cardholders and the lack of differentiation in card reward program structure in the market today. The question is, where do we go from here?

To establish leadership in the issuing business, 4 key questions must be answered:

• How can the rewards game be played at lower cost?

• How can program liability be better managed?

• Can rewards currency be used to achieve multiple goals beyond retention?

• Is there life after “points”, and how will the next wave of innovation take form?

Answers to these questions are complex. To merely focus on cost control may jeopardize cardholder perception of the value proposition. The industry is in desperate need of true innovation and fortunately some answers are in sight. Current attention getting trends include Relationship Banking and Merchant Funded rewards programs. Successful examples of each concept are in evidence though relationship banking has yet to promulgate through the industry and merchant funded rewards programs need further evolution.

Not yet on the radar is a rewards structure that will solidly engage the 80 million Americans known as Generation Y (the Millennials). Social networking and viral concepts including the patent pending “Xcelerator” might hold answers for the industry to break the code with younger consumers, but market trial is needed for validation.

One key to creating true innovation might be to set aside the traditional “product launch” mindset and approach the business from a consumer/cardholder viewpoint. Granted that many card marketers might discard this comment as dated, but if that’s so, why don’t we see the tree bearing fruit?

As example, I was on the ground in 2002 when the first Relationship Banking program was launched in North America. Despite the success of that program, I have not seen independent research indicating that offering rewards across multiple products will significantly change consumer opinion of their financial institution. In other words, are we creating products that enamor industry practitioners while we miss the mark with our customers? Are we even sure that consumers desire a relationship with their bank or will service, trust, and advocacy define brand loyalty in banking?

The card rewards race will continue to intensify and the issuers which emerge to capture market share will be those committed to pursuit of true innovation and have their ears tuned to the customer drumbeat.

Bill Hanifin