Differentiate Cards With Merchant-Funded Rewards

By Kelly Passey

How competitive are credit card rewards today? A recent report showed that consumers search online for the best credit card rewards 514,610 times a month, according to Orange Soda, an online marketing company based in American Fork, Utah.

Add 8,200 searches made specifically for debit rewards and it becomes evident that not only are payment card rewards in high demand, they’re expected. Consumers are clearly shopping to find the best rewards before they put a card in their wallets.

This level of demand is coming as many financial institutions feel pushed to lower the cost of their cardholder rewards programs. The recession is taking a toll, interchange fee pressures are mounting, and balance sheets are increasingly weighed down with liabilities from existing points-based programs.

Facing lower margins, many of these organizations are seeking more affordable ways to attract and keep customers while building card preference.

Enter the merchant-funded program, which has flourished in this environment. In this model, a network of merchants offers exclusive discounts or a cash-back amount to the credit union’s member cardholders.

In exchange for offering the reward for credit or debit card purchases, the merchant receives promotional exposure to those members, often through existing communications such as bill inserts, e-mails, online features, and in-branch advertising.

Merchant-funded rewards offer many credit unions an excellent way to offset costs, increase value, differentiate their offerings, and maximize cardholder engagement—especially those with a compelling card base to incentivize merchant participation.

Build a merchant community

Credit unions are at a distinct advantage when designing a merchant-funded program because they can leverage their focus on a specific group affinity or geography to attract local merchants.

With this model, your rewards network is likely to include many merchants your members already patronize, rewarding them for existing behaviors while shaping their card choice. This allows your credit union to capture a level of cardholder spending and member engagement that remains elusive for many larger banks and card issuers.

The credit union’s existing business members are clearly the best place to start when it comes to building a merchant network. A well-run program can strengthen those key relationships and build greater loyalty among business clients.

Plus, as your business customers become part of your rewards network, all of your members enjoy more local opportunities to shift more of their spending away from cash or other cards to their credit union card as part of their everyday spending.

For local merchants not currently participating in your credit union, the merchant-funded program offers a unique opportunity to build affinity and the potential for future business. Local merchants generally seek out opportunities to become a “preferred provider” for groups in their community.

These retailers and restaurants are often willing to offer exclusive discounts to large member groups to gain business and expand their own loyalty strategy.

According to Boston-based Aite Group, 68% of credit unions are focusing more attention on building up their business banking products and services than they have in the past. Therefore, an affinity-based merchant coalition can add value to business clientele and differentiate your credit union from competitors while lowering rewards program costs and driving greater member engagement.

Next: Local appeal matters

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