A New Currency: How Customers Are Unlocking Buried Treasure
Business Solutions Rewards program memberships nearly doubled between 2000 and 2010 to over 2 billion memberships, and the average household now participates in more than 18 programs, a 30 percent increase since 2008.
Since the new world order imposed by Dodd-Frank and the Durbin Amendment last year, companies in many industries have found themselves under increasing pressure to recoup lost revenues and develop innovative approaches that result in long-term profitability. This is particularly the case among legacy rewards issuers—financial services, airlines and hospitality companies, in particular— which have been in existence for decades and therefore built up large organizations designed to service the loyalty and rewards segment. At the bottom line, ironically, these and other changes have created significant upside potential in rewards and loyalty that most companies in business today have not fully considered.
The modern-day loyalty industry celebrated its 30-year anniversary in 2011 and is growing at lightning speed, even on the heels of a recession. Yet, in the absence of the tools to realize a grand unifying vision, few businesses recognize the impact this industry could have on our economy—an impact that extends well beyond the federal economic stimulus packages we have seen (estimates of which approach $1 trillion). Nearly every U.S. dollar of the $3.9 trillion spent last year generated a point or mile of rewards currency. Rewards program memberships nearly doubled between 2000 and 2010 to over 2 billion memberships, and the average household now participates in more than 18 programs, a 30 percent increase since 2008.
"While travel and hospitality and retail account for 36 percent and 40 percent, respectively, of the loyalty rewards industry, the financial services category holds the lion’s share of both the volume and the perceived value in rewards currency. "
The total value of newly issued points and miles in 2010, for U.S. consumers alone, as compiled by Swift Exchange in conjunction with COLLOQUY and released in last Spring’s 2011 Forecast of U.S. Consumer Loyalty Program Points Value, totaled at least $48 billion on an annual basis, a figure that can only be expected to grow. Of this $48 billion (inarguably a conservative estimate), some $16 billion—roughly one-third of the currency issued each year—goes unredeemed. As yet undetermined is exactly how much total value in loyalty currency has been carried forward, unused, since the inception of modern loyalty programs three decades ago. Unleashing this currency would expand consumer-buying power and significantly improve the health and viability of every seller of goods and services in the U.S. and eventually around the world.
Real economic power
In the 30-years since modernday reward programs were launched, the industry has grown, from airlines, financial services and hospitality to retail most recently, becoming a major global economic force in its own right. Three industry categories fuel more than 95 percent of all rewards currency issued. The financial services category is the largest issuer, at $18 billion of perceived value per year, with travel and hospitality a close second at $17 billion. The retail category comprises 40 percent of all loyalty memberships as reported by the 2011 COLLOQUY Loyalty Census, yet issues the smallest value at $12 billion a year. This is because a large portion of the retail category focuses on rebate programs that are not easily tracked.
Interestingly, while rewards programs and the miles and points they issue have grown exponentially, the broader loyalty industry has not grasped its true impact on our economy. Popular conceptions of reward programs have remained ingrained in conventional thinking and proprietary, closed-loop solutions. Media coverage of reward programs often focuses on the microeconomics—on valuations of rewards currency in terms of the fractions of a cent that they are worth. Focus must now shift to the macroeconomics of what was a $48 billion per year industry over a year ago, with specific attention to how this rapidly growing treasure trove can be unleashed as a financial stimulus to the benefit of those that issue the currency as well as merchants and consumers.
This discovery serves as a catalyst for a new phase in the evolution of loyalty as a business. Such a paradigm shift demands that new tools, technologies and capabilities be placed at the fingertips of issuers, customers, merchants and manufacturers in ways that will enable redemption in ways unimagined. This new paradigm will usher in an era of realization that brings much-needed focus on filling consumer-centric gaps. These unmet needs include easy aggregation and redemption of points, the ability to spend points as easily as cash, as well as the need for collaboration among merchants and issuers, to name just a few. The result will have a significantly positive impact on a material portion of our economy.
A bright forecast
While travel and hospitality and retail account for 36 percent and 40 percent, respectively, of the loyalty rewards industry, the financial services category holds the lion’s share of both the volume and the perceived value in rewards currency. Herein lies the opportunity for the financial services category to reinvent products, which will ensure their future success.
Some sources suggest nearly 80 percent of credit cards currently carry a rewards component. The financial services category, with a 37 percent share of perceived rewards value issued, operates within a highly competitive, dynamic landscape of proprietary programs. In recent years, a robust competitive environment and strong demand for rewards has left this sector ripe for continuing innovation.
As the financial services category continues to recover from the onslaught of the financial crisis, Swift Exchange maintains that an unlimited choice of rewards content and the ability to easily use multiple currencies concurrently will result in greater customer satisfaction. It is customer satisfaction that drives improved loyalty, adoption, utilization and, ultimately, profitability. As a by product, greater utilization can only improve customers’ experience and general perception of the brands that issue the rewards currency. Given its sheer size, the financial services category has the opportunity to lead the way to the future of the rewards industry.
The recipe for a transition from a period of rewards accumulation to rewards realization will be defined by solutions that help consumers collect on the promise of the value of those rewards as easily as they make purchases in their daily lives. As part of this evolutionary transition, in which Swift Exchange is a deeply committed participant, rewards program issuers can look forward to the introduction of transformational tools that will enable them to establish commercial relationships with millions of partners. Rewards programs are a proven driver of profitable consumer behavior among financial institutions’ most prized customers. Transforming the value of these programs for consumers will drive even more value to program operators. The stars are now emerging and aligning. The buried treasure beckons. Get ready for transformational change.