In today’s environment, having the right rewards program to match your existing and targeted cardholder customer base is more important than ever. That’s why ICBA Bancard, in partnership with TCM Bank, N.A., recently released, “Cultivating the Strategic Value of Credit Card Rewards Programs,” with key considerations for community bankers in structuring their card portfolios.

I recently sat down with Damon Moorer, president and CEO of TCM Bank, and ICBA Bancard’s leading rewards expert, to dive deeper into the white paper and get his take on what makes a successful credit card rewards programs. What follows are highlights from our conversation.

Tina: Credit card rewards programs have become table stakes today. Why is that?

Damon: Loyalty rewards programs are a key factor for selection of a credit card account. If you’re credit worthy, you will have a number of options when shopping for what provides you with the best value.

As an example, let’s say I prefer cash-back options. I have one card that offers 1.5 percent on all transactions, and another card that offers 6 percent at the grocery store, 3 percent on gas, and 1 percent on everything else. Guess which one I’m using at the gas station?

But you, Tina, are an avid traveler in non-COVID times, so you may be more apt to go with miles or hotel offerings.

That’s the key for community banks: They need to tailor programs specifically to their customer’s preferences. And as we continue to move to a more digital environment, this value proposition becomes more important. The card at the top of a digital wallet will be the one that provides the most value to the customer, so to drive card transactions, community banks need to be the one offering that card.

Tina: You’re right. On my last vacation, card points paid for my family’s airfare and hotel stay, but I also have a cash-back card that I used to help my son furnish his apartment. You have to speak to the value your customers want in certain scenarios. What about emerging competitors like the Apple Card? What kind of impact are they having in the space?

Damon: When it comes to effectiveness, it’s all about engagement, and now we have mobile payments engagement with the card product. The Apple Card really is nothing but a cash-back card, but when you go into the app, you see your Apple Cash accumulate. That visual just reinforces the behavior: You see the value, can leverage the value in an easy way, and watch it ebb and flow over time with use.  

When you look to how younger generations interact with payments, this kind of approach will be critical. Generation Z is looking for mobile engagement and a gamified approach in using value, so it’s something for banks to consider.

Tina: What you’re really talking about is a shift in the redemption model. How does this trend toward the more immediate gratification impact a bank’s portfolio and P&L?

Damon: That’s a great question because it’s a significant consideration. When card rewards can be redeemed in a digital format, you do see a reduction in things like fulfillment expenses and shipping, but you have also created a way that rewards can be much more easily redeemed. In non-digital programs, we historically were able to spread the expense across our portfolio, but in this digital approach, we’ve transitioned to a place where the success of the program is based on the number of redemptions you have. That increase in redemptions means you’re going to have to modify your value proposition. If you keep it the same, you’re going to sink the P&L.

Tina: Rewards programs clearly can’t be “set and forget.” What does a community bank need to consider in setting up rewards offerings?

Damon: Card managers have to actively oversee their loyalty programs. I recently came across a bank that had instituted a 1.5 percent cash-back program across their whole portfolio, and it was killing their P&L. The key is differentiation. Not every customer wants the same solution. Having different value propositions for different customers offers a blend across the portfolio that allows card managers to approach the program from a precision-based mindset. 

Tina: That’s such an important point. I’m just thinking back to what you said about Gen Z. We know they don’t like to revolve. With that said, banks have to really think about that value proposition.

Damon: Absolutely. That’s where an option like merchant-funded rewards can come into play. In these programs, the merchant backs the offer, whether it is a rebate, a discount, or some other incentive that banks can pass along to their customer. The key is to make sure the merchants align with the customer base’s shopping needs in their community. When I’m evaluating a merchant program for our portfolio, I make sure that there are a number of community-based options in addition to national partnerships. That’s critical to community banks and their community-based relationship model. 

Part II of my conversation with Damon will be featured in the next Tina’s Take. For more insights into the latest credit card trends, download our white paper. Have questions? Contact us directly at [email protected].