E-commerce rewards becoming essential in digital banking game

Loyalty programs are truly today’s competitive battleground for banking institutions. Utilizing a loyalty program to improve customers’ experience and meet the expectations of today’s savvy digital banking customers is an effective way to add value for customers, increase customer retention, improve customer experience and create sizable new revenue streams.

In order to drive tender choice and stay top of mind and top of wallet, financial institutions are coming to rely on rewards programs in which cash back and savings are the central “currencies.” These rewards offerings come in three main flavors: interchange-funded points and cash back, card-linked offers for restaurants and local businesses, and merchant-funded rewards for e-commerce, including cash-back benefits and digital coupons.

The first two offerings, interchange-funded and card-linked offers, began as differentiators and have now essentially become table stakes. The third offering, e-commerce rewards, is the newest battleground, and it's where PayPal and Capital One Financial have taken an early lead with substantial investments. A key advantage of e-commerce rewards is that these programs can deliver upwards of 400 basis points in incremental revenue to banks and card issuers, above and beyond interchange, all funded by merchants’ marketing budgets.

The revenue which banks earn from e-commerce rewards programs provides a substantial offset to the increasingly competitive negotiating landscape for interchange fees, since these programs deliver incremental revenue from online merchants’ customer-acquisition budgets.

How does this work? When a banking customer purchases something online through a bank’s loyalty program, that bank earns a percentage of the sale from the merchant. In turn, the bank can then offer part, or all, of that percentage to its customer through the loyalty program rewards. This drives revenue to banks, rewards to the user and, importantly, benefits merchants through increased sales conversion, purchase frequency and reduced shopping-cart abandonment.

It’s no surprise that e-commerce rewards are the newest loyalty battleground, since online/mobile is where consumers are doing their banking and their buying.

The banking industry is seeing a rapid, tectonic shift to a digital-first customer experience. In fact, Cornerstone Advisors reported that as of May 2021, the penetration of online/mobile banking activity grew to 95% of Gen Zers, 91% of millennials, 85% of Gen Xers, 60% of baby boomers and 27% of seniors. In addition, Accenture reported that 50% of consumers now interact with their bank through mobile apps or websites at least once a week, compared with 32% two years ago.

Concurrent with the shift to online/mobile banking, e-commerce is the fastest growing area of consumer retail spending. According to eMarketer’s “US Ecommerce Forecast for 2021," consumer e-commerce purchasing is growing 3 times faster than brick-and-mortar, with e-commerce enjoying 17.9% year-over-year growth for 2021, compared with offline growth of 6.3%.

Along with their shift to digital banking and e-commerce, consumers also now expect rewards and loyalty benefits from their financial institutions. The recent “Humanizing the Bank Customer Experience” survey of 5,000 banking customers conducted by American Banker and Monigle, a brand experience agency, found that “rewards and loyalty remain paramount to the customer experience, regardless of the type of financial institution or product.”

Further, as Monigle’s senior director of strategy, Brian Elkin, noted, “investment in rewards is often a key differentiator,” and reward programs can incentivize customers to use the services of, and “‘foster emotional connections” with, their bank or credit union, “deepening ties and loyalty.”

In essence, loyalty programs are now a service expected by the banking customer.

Banks are undertaking massive digital transformation to build better digital customer experiences and personalization, and complete digital transformation can take multiple years to complete. However, when it comes to loyalty and rewards programs, banks do not have to wait years, because they are able to leverage existing platforms to rapidly roll out these features, especially since these are ancillary to the core banking experience.

For example, PayPal, through its 2019 acquisition of Honey, was able to instantly achieve advantage in the loyalty battleground, with reward incentives that the company is actively deploying to its customers. Likewise, Capital One, through its 2018 acquisition of Wikibuy, has built Capital One Shopping, a leading loyalty program that helps over 5 million customers save money and earn cash-back rewards.

The success and popularity of PayPal and Capital One’s offerings is driving financial institutions, from the largest banks to nascent fintechs, to implement e-commerce loyalty programs for their own customers. As an alternative to PayPal and Capital One’s approach, which involved massive acquisitions and follow-on investment, many are turning to white-label platform providers. For example, some companies, which have made earning and investing rewards from e-commerce central to their value propositions, have chosen to deploy their loyalty program by tapping third-party enterprise technology platforms for turnkey, branded offerings.

In the ultimate evaluation of build vs. buy vs. partner, financial institutions must consider strategic decision factors including speed to market, required investment levels and how to prioritize focus on core banking features vs. ancillary offerings. One thing is clear: E-commerce loyalty programs are a differentiator, and they too are quickly becoming table stakes.