I recently shared a story in the Toronto Globe & Mail about how Canadian parents would rather talk with their children about sex, drugs or alcohol than money.

Sometimes when I talk with stakeholders responsible for loyalty program operations, I get the feeling that the question draining their complexion is not far from that mark. “Who pays for Loyalty?” is a simple question that can cause discomfort and spark lengthy discussion.

My first boss (just a few rungs up) was Hugh McColl, the ex-marine who built North Carolina National Bank (NCNB)into a regional powerhouse and set it on a course to become what is now Bank of America.  Mr. McColl taught me a lot and had a famous way to simplify the evaluation of a company’s commercial credit risk. In the middle of heated debates about which ratios should be included in a financial analysis to see if some Fortune 100 customer was able to handle a loan under consideration, Mr. McColl would remind us that “all loans have to be paid back from cash, somehow, sometime.”

This pure logic should be remembered by retailers as they push harder to lower interchange rates for card transactions. As the rush to meet implementation deadlines for the Credit Card Act of 2009 dwindles, attention is turning once again to interchange. A good take on the current debate can be found in this article.

The question before many loyalty sponsors today is actually closer to “How can I pay less for Loyalty points?” The behavior of card issuing banks responsible for loyalty programs during this recession speak loudly that reducing cost is high priority. The changes to program rules to hasten forfeiture of points or miles, added fees for redemption, and additional points needed to redeem rewards have all been applied in well known rewards programs over the past several months.

Funding the cost of loyalty can be borne by one party or shared by partners.  How the breakage of those points is shared influences how each party manages program rules and drives more (or less) breakage. In some pay-for-performance models where participating merchants fund rewards to debit card holders from their banking partner, breakage is not a critical issue for either party.

• The bank, typically paying out rewards as a cash back account credit, is not too concerned about the nearly “100% redemption rate” occurring since the retailer is footing the bill.

• Fortunately, the retailer is able to offset its expense with incremental sales earned, all of which is accomplished by a lower than average give-away (10% cash back equivalent versus 40% markdown).

Some people have tried to paint this “merchant funded” model as banks taking advantage of retailers, but I disagree. Intelligent targeting that drives incremental sales and reduces the retailer’s reliance on discounting, while delivering increased card spend at lower cost to the bank is a win-win for all parties.  With retailers papering the walls with “40% off everything in store” signs just to get consumer attention, funding the equivalent of a 10% cash back in points is an attractive alternative.

In my opinion, the renewed emphasis on legislating interchange rates is the red-herring of the year. Yes, MasterCard, Visa, and American Express have a lock on the acceptance network at the retailer. But any perceived threat of monopoly can be balanced with understanding that merchant sales increase when cards are accepted. The cost is high, but at this point, the opportunity cost  is unacceptable.

It is entirely reasonable that business wants to reduce cost, and here’s the lowest hanging fruit – train front-line personnel to stop asking customers if they want “debit or credit” and encourage them to enter their PIN for debit transactions. Consumers really don’t care how they use their card as long as the purchase is completed and there are significant cost reductions to be enjoyed by a continuing shift to PIN based purchases.

If the focus remains instead on reducing credit card interchange rates, card issuers will see a key driver of the rewards business case in jeopardy and could shut down the rewards nozzle even tighter. If cash is not available from the banks, if rewards cards were to go away all together (they won’t), retailers would be left to subsidize their own loyalty marketing efforts without the prospect of shared funding from another source. Private label cards are probably not a holistic answer as consumers have spoken that they want more utility from their payment devices and are only willing to carry the cards with highest utility in their wallets.

In a world without card based loyalty, retailers would be left one tool short of a solid toolbox. Breaking the cycle of discounts and endless sales will be increasingly difficult and consumers will be further trained to wait for the greatest discounts before “footfall” occurs in store.

Here’s the best part: consumers don’t care who pays for loyalty. They want the utility of their payment card, want to earn rewards, and want the best price with good quality from the items purchased in store. I would not want to be retail executive who puts a huge dent in interchange and, while celebrating a temporary victory, watches revenues shrink as the alternatives to ever growing rounds of discounts and pure price competition are diminished.

The visual image I leave you with is Leon Lett getting the ball knocked out of his hands just before he crosses the goal line and is denied his touchdown by Don Beebe on a play that should have led to a massive celebration.

PS: That play might be the only highlight for the Buffalo Bills in Super Bowl XXVII

When people are asked about their greatest fears, you might be surprised by the results.

In recent polls, I have seen public speaking rank ahead of getting cancer and being stricken by terrorist attacks!

Apparently in Canada, the list would be different still. A recent article in the Toronto Globe & Mail reported that in a recent Angus Reid Strategies poll of 624 Canadian parents, talking about finances with their children was one of their greatest fears. Over all, the Moms and Dads surveyed felt better prepared to discuss sex, drugs and alcohol than to broach the topic of finances. And I thought that the conversation about the “birds and the bees” was enough to break a sweat!

According to Sarah Boesveld’s article, the survey findings shine a light on the real state of adult financial literacy and points to the particular squeamish-ness of Canadians about financial conversations. Steve Garmaise, associate director with Foundation for the Advancement of Investor Rights (FAIR) was a bit more opinionated, saying “most Canadians and most parents are fairly ignorant about financial matters…and would rather hand it off to someone else.”

I would venture to add that Canadians are not alone in this regard. This is yet another reinforcement of a clear opportunity in the marketplace, and the enterprise which is able to communicate financial basics and planning skills to the public without making them uncomfortable can create loyalty among its customer base without giving away the first point or mile.

Who is better to assume this leadership role than commercial banks? Banks have multiple channels through which they can communicate (retail branch networks and secure internet banking portals) and enjoy a high frequency/high visit environment. They have an edge over competitors including brokerage firms and insurance companies which have less frequent interaction with their clients and can be too narrowly product focused.

Having just written about Social Banking and illustrating how Bank Of America is launching products designed to address consumer’s need for financial product transparency, the Canadian survey is interesting and timely. The question is: how should a bank go about executing a financial literacy campaign?

Do you include features of Financial Literacy in a relationship banking model, or is it better to skip the rewards and focus on delivering a clear message and creating trust that the products recommended are the ones a person actually needs? Time will tell, but I do believe that “what doesn’t kill you makes you stronger“. For banks, this means that flagging consumer confidence in their offerings coming out of this recession can be used as a golden opportunity.

Banks can rebuild their brands and stake out a competitive edge in the near term through marketing products as financial advocates for their clients and with a message based on value and transparency. This is the time to leave the disclaimers, fine print, and hidden clauses out of product offers. No Loyalty Asterisk™ here, please! Sun Trust is talking about “Banking Solid“and Bank of America is leading with its innovative approach to credit cards and mortgages.

Let’s see which organization makes this message a part of the core brand message, not just a convenient fad that dries up and blows away when times get better.

I am often asked where to go to learn more about Loyalty Marketing. Until Mark Johnson and his crew launched Loyalty 360, it was difficult to provide a useful answer.  There are occasional tracks presented at the annual DMA event and Colloquy continues to deliver its Loyalty Marketing Workshop in conjunction with the DMA, but for up-to-date industry specific information, the choices narrowed.

One new entrant that should be worth attending is the Cards & Payments Loyalty Conference slated for 2 December in New York.

If you’re looking for airline specific information on Loyalty Marketing, I’d suggest that you become involved with Airline Information, the brainchild of Christopher Staab and Roger Williams. Both of these gentleman have deep roots in the airline business and, through their conferences, are not afraid to tackle the tougher issues of ancillary revenues, frequent flyer programs, and cobrand credit & debit card partnerships.

One of the bigger topics in discussion these days is how the need for development of ancillary revenues can conflict with cost savings. Considering that a mainstay of frequent flyer programs has been the cobranded credit card, it is controversial that the airlines eagerly accept $billions earned from co-branded credit cards while mounting protest to the amount they pay in merchant fees. Edgar Dunn & Company and ARC estimate that the airline industry faces annual cost of U$1.5 billion for the privilege of accepting credit card payments or approximately U$12 per ticket, so the magnitude of the issue is clear.

You can take part in the debate by attending one or both of AI’s conferences in the coming weeks. First up is the FFP-ARAC “Mega-Event” to be held 22-23 October in Los Angeles.  This conference has a decidedly strong marketing bias while the Airline & Travel Payments Summit, planned for 2-3 December in Miami will address payment and revenue issues as well as related marketing topics.

If you can’t wait for either conference and want to stay on top of industry issues, you can also visit Roger Williams’ Load Factor blog.

I recently attended an AI Networking Cocktail in Miami and hosted Evan Liu of Spirit Airlines as he talked about the role of Free Spirit for the carrier and future plans for development. These events are well organized and attended and I encourage you to give AI some mind share if you are interested in the airline industry.

AI has been specifically looking into the development of cobranded airline debit cards as a compromise solution between ancillary revenue and cost savings.  Delta Air Lines recently introduced a SkyMiles co-brand debit card in association with SunTrust Bank, and considering the economics of the debit card, you might ask why and how can issuers/airlines support the value proposition of giving away frequent flyer miles on debit card purchases.

AI was looking for the same answers and recently published results of 31 airlines surveyed in their latest “45 Second Survey on Cobrand Loyalty Debit Cards”. They found that only 37.9% of airlines had previously looked at the benefits of issuing a cobrand debit card while over 55% consider debit cards as a “steady or significant” source of growth for ticket purchase. Today only 5% of airlines surveyed offer a cobranded debit card, though 48% responded that they were “very interested” in pursuing co-branded debit cards.

To navigate safely through the storms of commercial aviation and take part in the rebirth of frequent flyer programs, stay in touch with AI.

I love to connect the dots. And, for all that is wrong with business air travel, there is also something right about it. In an always connected world, it is great to have a respite from everything digital.

My personal hope is that the offer of Internet access during commercial air travel fails miserably. As humans, we need space in our lives. We need to have down time and to rest in our thoughts without the compulsion to activity that drives most of our days.

So it is that, on a flight to Toronto, I connected the dots between “Social Banking” and “Financial Literacy“, a topic made popular by banks rebuilding their brands as they emerge from this tough recession.

I recently read an insert in US Banker about the “growing trend of Social Banking”. With due respect, the two page advertorial said little specific about how banks might use social media tools to promote their brands and enhance profitability. The article cited only one meager example of a bank having started a blog and twitter account to pitch product bundles and low interest rate offers to potential clients.

Reading the WSJ on the flight, I noticed a full page ad from Bank of America, promoting “Clear, easy-to-understand products. Just what you asked for.”

Before I turned the page, dismissing the bold print as another empty marketing promise, I read further and understood that BofA was highlighting changes to its Overdraft Coverage policy and was introducing a new card product, “BankAmericard Basic Visa Card” as well as a mortgage-related service “Home Loans Clarity Commitment“.

Despite the throw back name of the card product (I thought BankAmericard went away with the Brooklyn Dodgers) the idea was right. “Some customers just want a basic card, that’s it“, read the copy….. “And this is it. One rate, however you use your card and no over-the-limit fees.”

To successfully execute a social media strategy, business needs to have something to say. Manufacturing a message or “soliciting your opinion” can be perceived as phony in the Blogosphere and among “tweeps” in the Twitter world.

If I were the person responsible for BofA’s social media strategy (do they have one?), I would lead with my understanding of consumer needs in these tough times and promote financial literacy, not in a philosophical way, but through demonstration of the new products and services being developed to help consumers manage their financial lives.

That’s the future of “social banking”.

Citibank launched its ThankYou! Network in 2004 and in doing so,  staked out ground as the first top-tier bank to embark on a rewards program that went beyond credit card and included multiple retail bank products like checking accounts and consumer loans.

Credit to the first bank to launch a Relationship Banking program in North America goes to Banco Popular de Puerto Rico which launched its Premia program in 2002. The architect of the Premia program, Fabio Garcia-Passllacqua, deserves kudos for incredible vision and courage in launching Premia and can be proud that the program continues to return strong results to the bank.

Citi has made progress with its program, its alliance with Expedia just one example of extending the value of their ThankYou! points through intelligent partnering.

Two news items sighted this week, however, may signal a change in course for the ThankYou! program and its value for it members.

First, AMR Corp., owner of American Airlines, announced that it had taken steps to raise $2.9B cash to quiet investment community concerns about its future liquidity.  In a press release, AMR revealed details of the cash raise and that it had agreed to sell $1 Billion of AAdvantage Miles to Citigroup, its long standing cobrand credit card partner.

Though Citi reported to treat this advance purchase as a loan, it clearly indicates the importance of the Citi AAdvantage credit card as the flagship product in Citi’s card business and the confidence the firm has in its ability to drive card usage and acquisition by offering AAdvantage miles as a reward.

It also highlights that while relationship banking remains a challenging concept to sell to consumers, credit card rewards programs are like the high-hot heat that got Nolan Ryan into the baseball hall of fame.  Like the fastball, it’s a straight-down-the-middle value proposition that consumers understand.

The second news item that not everyone will connect to ThankYou! is Citi’s announcement that it is concentrating its retail banking business in the U.S. on six key markets. Explained another way, Citi is executing a plan to close branches in many markets and shrink its retail delivery system. Though Citi offered a statement that “Customers, not products, are driving Citi’s strategy for North America consumer banking”, one has to wonder how easy it will be to compete for deposits with the likes of Bank of America and Chase when the only way to open an account for customers outside of the 6 markets is through a website.

The two announcements taken together makes you wonder if the expansion of a relationship banking program can be successful as the institution scales back its retail network, and if the temptation to return to a cards-centric approach to rewards to meet short term goals will put ThankYou! in a back seat.

The beauty of business travel has to be the opportunity to see life through a different lens. At least I am claiming this as a benefit as there has to be an offset to long airport security lines, expensive food, and uncomfortable airline seats that compose the rest of the experience!

When we remain sequestered in the US, we tend to believe that the way we do things is the “only” way. But while we naval-gaze on how we can leverage the continual wave of innovative technology to add efficiency and cost savings to our business, we miss the bigger point. There are still lots of gaps to be closed in markets outside the US and quite a few of them can be closed with minimal effort or thought. For example, when I find reward program operators hoping to add online rewards redemption or upgrade technology, I can confidently provide advice without stretching the limits of imagination.

On the other hand, I often encounter situations where technology is more advanced or a business model different enough that loyalty program operations are enabled well beyond what we can execute within our borders. The fact that many banks are both issuers and acquirers of cards opens up all sorts of possibilities for POS messaging and reward redemption that is a much bigger challenge to implement in the US.

At the end of a busy day in Toronto this week, I was seeking a little caffeine boost and stopped into Tim Hortons, Canada’s favorite coffee and donut provider. Waiting to pay, I saw a sign on the counter informing me that Debit cards were not accepted at Tim Horton’s “to maintain our high speed of service“. I posted the photo on my Pikcur account and share it with you here just in case you don’t believe me.

I’m really not sure how to interpret Tim Hortons’ policy on Debit Cards. Visa had a long running campaign illustrating how debit cards bring speed and convenience to daily shopping experiences and the launch of contactless debit cards several years ago raised the ante on moving the “Q” through check out.

Maybe its really not speed that Tim Horton is worried about. In fact maybe their policy is less about adding convenience to the customer experience and more about reducing processing costs. Even that argument falls short as the cost of cash-handling has been proven to be significant in the QSR world.

Sometimes we don’t have all the answers, but we can observe and document for the moment, hoping that the dots are connected somewhere down the road. For now, I’ll just put Tim Horton in my “Questions about Debit Cards” file.

Two forces are at work in the financial services industry today that place bank marketers at an interesting crossroads.

The first is a new wave of regulatory pressure specifically targeted at credit cards. The Credit CARD Act of 2009 will have wide ranging impact on the payments industry in the US.  Passing of the legislation was in reaction to increasing criticism and lobbying by consumer groups and was driven to passage as the US economy cratered over the past 18 months. The impact on credit card usage will be better understood with the passage of time, but there are immediate effects which mostly benefit consumers.

The second force at work is a growing need, indeed a demand, by consumers to improve their finanical literacy quotient. Members of Generation Y surveyed have cited a lack of understanding of financial products and an eagerness to get help to establish a higher comfort level with financial basics. Some bank marketers are putting programs in place to meet this need and may be creating the foundation for stronger consumer banking relationships for years to come.

The question remains: Will the industry jump on board to promote financial literacy or will it treat the subject as a passing fad?

That the need exists is undeniable. Just witness the results of the National Financial Literacy Challenge. Conducted among 46,000 high school students in 2008, the average score was a failing 52 of 100, indicating the level of work to be done. Congress recognizes the need as well, and is considering setting up a Consumer Financial Products Commission to evaluate products sold to consumers by the financial services industry and provide relevant protections.

Financial literacy could be defined as having the skills to be able to understand and perform basic tasks such as balancing a checkbook, creating and living within a budget, paying bills on time, avoiding late fees, and saving for the future and/or major purchases.

Becoming advocates of increasing financial literacy seems like a no-brainer as banks could build trust through transparency and a show of sincere interest in the welfare of their customers.

The reality that represents a speed bump in the progress is this: US Banks generate a massive amount of NSF and other deposit account related fees on an annual basis according to the FDIC.

The connection between transparency, financial literacy and Loyalty Marketing is this:  I am aware of some marketers who propose to craft Debit Card Rewards programs where the business case is driven by increasing overdraft fees and have listened to more than one debate about the wisdom of rewarding points for NSF fees. The answer to that question can be found by asking what type of consumer behavior we are encouraging. If it’s not good for the consumer, we should take it off the board.

Fifth Third Bank and SunTrust are examples of a wave of banks taking the high road. SunTrust has launched it’s new campaign “Live Solid, Bank Solid” and is training its own staff in financial basics, hoping that the skills learned will be shared with the customers they serve.

Fifth Third has launched a new marketing campaign “Don’t be That Guy” and has created a series of humorous but instructive videos to illustrate “what not to do” in common financial situations.

Targeted to students, the bank has seen a 27% increase in new accounts opened by students in the first 6 months of 2009 over same period of 2008 according to Larry Magnesen, Fifth Third’s CMO.

Whether the current interest in promoting financial literacy survives the economic recovery is dependant on two main factors: Will consumers relax as the economy improves and go back to their old ways of debt-fueled free spending? And, will banks be able to resist the temptation of short term profits to promote financial literacy and build more trusting relationships for the longer term?

If US consumer reaction to the ebb and flow of fuel prices is any indicator, we may be witnessing a recession induced fad. Helping consumers to stay in better financial shape, however, should make them lower risks for credit card and other consumer debt and create a higher appetite for financial services products. That longer term promise might be something attractive for banks to consider.

I’ve always admired great writers and Rick Ferguson, the Editorial Director of COLLOQUY, is on my list of the best.

I had the opportunity to co-author an article for COLLOUQY with Rick on the changing nature of card rewards programs in this challenging economic environment. If you would like to have a quick read, it is available via download from COLLOQUY or the Resource Section of Hanifin Loyalty.

Rick has followed up on the topic with a clever take on what credit and debit card issuers should be considering as they balance the current profitability of their card portfolios with the needs of the majority of their most loyal customers. The Rewards Cardholders’ Bill of Rights is worth reading, especially in light of the volume of negative press about how card issuers are handlling the transition in prepartion for enactment of the Credit Card Act of 2009.

Rick’s Bill of Rights is on target and some points he makes should apply to the broader market:

• The “fundamental right to privacy and data protection” affects all loyalty program sponsors. The responsibility to use data with integrity is inherent on the sponsor. The absolute need to protect it from prying eyes is a heightened priority that affects any consumer facing company with sensitive data on file. The moment consumers lost trust in data protection standards will be the time at which the data faucet begins to shut down.
• Transparency in communications of program rules will engender loyalty. There is still too much fine print associated with this industry in particular and marketing in general. Live by the Loyalty Asterisk™ and you may perish by the same.
• The “right to good customer service” does seem fundamental. As loyalty is increasingly defined by the aggregate of CVP (consumer value proposition) and the customer experience, organizations will be judged on the perceived level of recognition as articulated by the customer service experience. Invest in associate training now.

Maybe the comment in Rick’s Bill of Rights that sent chills up my spine was highlighting of the “love-hate” relationship that exists between card issuer and cardholder. He quoted a Creditcards.com survey that said:

• “82% of Americans believe that credit cards provide a valuable service”, while
• “73% believe the government should regulate the credit card industry more closely”

Every credit card marketer and payments executive needs to push back just a little on the risk managers. One day the economy will be a little brighter and it will be at that time when consumers begin to hold more power. Card issuers should protect themselves for today while planning for tomorrow.

Read the Bill of Rights and let me know what you think.

One of the blogs I enjoy reading is written by Chris Brogan. He’s got some interesting takes on social media and a huge following.

Today he stepped in the Loyalty Marketing sandbox with his post The Myth of Brand Loyalty. I won’t recount the story here and encourage you to read it as well as take in the comment stream which follows. There are a few good ones and you can read my take as well in which I reference how Airlines Take Flight Without Data.

To be fair, the airlines and Apple (Chris’ example) aren’t alone. We see it all the time….companies that have accumulated tremendous stores of data and are not using it to market efficiently and effectively. Or, as I witnessed this week in client meetings, there are banks with reams of customer satisfaction research, customer profile information, and transaction history that have studied it all, developed recommendations, but inexplicably have not put into action a measurable marketing campaign based on this information.

It’s not about capacity, it’s all about willpower. Corporate commitment to Customer Loyalty from the top down is needed for success and, where I can identify that commitment, I would personally invest in the related equity issues. These will be the winners in the market over the next 10 years.

Have you ever had a retail experience that starts with a bang and ends with a thud?

That’s what happened to me recently at Wachovia Bank, and I share it as it illustrates a core practice of Customer Satisfaction surveys that needs re-engineering.

I had occasion to open an account at Wachovia and the experience was the best I have had in retail banking for many years. It was influenced by two key factors:

• To my good fortune, the branch was in a small community and oriented to personal service
• The staff were all old school bankers who take time to know their customers and listen to their needs

The very next day, I received a call at home (yes, it was at dinner time) as a follow up to my visit to the branch. Impressed with the quick follow up, I agreed to participate in a live survey that was to take “3-5 minutes“. The questions were general and asked for rating on a 1-7 scale.  I made a mental note that many questions were repetitive and, like many Customer Satisfaction surveys, seemed to be crafted to elicit as many “7’s” as possible.

When we wrapped up, the operator asked me if I would be willing to participate in an additional “3-5 minute” survey that would hone in on branch specific questions. I agreed as I wanted to give props to the branch personnel. As the automated survey devolved into no more than a digital repetition of the first survey and did not provide me an opportunity to recognize the people who provided such good service in the branch, I disconnected.

Just like on Gilligan’s Island, when they started out for a “3 hour tour, a 3 hour tour”, I felt that I had been invited to spend 3-5 minutes and then duped into a 12-15 minute experience that was artificial and frustrating.

I really do not understand how corporate executives continue to be lulled into attaching importance to Customer Satisfaction surveys. Most surveys are prefaced by indicating that “only a 10 or 7 will indicate full satisfaction” and the questions are too generic to allow any real insight to be collected. When consumers are lulled to sleep with too many questions and too little discernible differences, responses become less and less meaningful. Face it, in that circumstance, consumers just want to wrap it up and could care less what number rating is offered up.

This is one more item of evidence that cements my conviction that Customer Satisfaction surveys are not reliable indicators of future customer loyalty or intent to repurchase. The survey I would like to conduct would be to gauge the level of skepticism associated with Consumer Satisfaction awards, the ones you often see as part of automobile advertisements. Given the customer experience I had with survey execution,  why should we really think that one of those trophies means that the car next to it is worth our hard earned money?

It is time to rethink, restructure, and rewrite how these surveys are executed if they are to continue to have relevance in the market.