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Boosting the Bottom Line

5/1/2006 — Independent Banker

Considering reward offers to jump-start fee-income gains

By Kelly Pike

Sifting through her mail one morning, a consumer gets an important looking letter from her bank. She assumes it's junk mail — the bank always seems to be sneaking sales pitches into envelopes that appear to be of dire importance — but she opens it anyway.

Inside she finds, to no surprise, a sales pitch. While she would normally toss it in the trash along with her weekly value coupon book of purported savings, this particular pitch catches her fancy — a free rewards program for her existing debit card. No extra costs, rewards like Starbucks gift certificates for making purchases, and she'll get 5,000 free points to start.

Intrigued by the offer, the consumer — who had been wondering what her bank had done for her lately — calls the toll-free number on the mailing and signs up. The bank succeeds in securing her business, including a credit card and a significant savings account, for a while longer.

Did You Know?
February through June is the time of year with the highest response rates for direct mail, including those mailings touting bank promotions, according to Jeff DeWald, senior vice president of marketing for PBiz Inc. in Brentwood, Tenn. July and August, the worst months, generate a 50 percent lower response rate.

This anecdote is true, but far from unusual. As many as 15 percent of customers are shopping for a bank at any given time, according to research by Mark Stenson, president of Stenson Management Consulting in Marshall, Minn. Many will be tempted by offers coming through the mail.

Attracting customers and, just as important, attracting them to products that will build a relationship with the bank and increase fee income, is a reality all community banks must contend with. Fee or non-interest income throughout the banking industry totaled $18 billion in 2004, but only a fraction of that money went to community banks. As the squeeze on net interest margins continues, fee income has become more important. It has also grown more competitive as banks expand their reward program offerings, often in ways that help anchor customers to the bank by increasing the number of products they use.

Making an Offer

For years, credit card issuers have offered reward programs allowing cardholders to rack up points toward goodies ranging from cash rebates and free gasoline to free airline tickets, hotel stays and bigscreen TVs — motivating customers to use their credit or debit cards more often and in turn, boosting the bank's interchange fee income. (See related story, page 91.) "Reward programs carry some cost," says Linda Echard, president of ICBA Bancard, ICBA's electronic payments services corporation, "but they're definitely advantageous for community banks. Most of the cost will be covered by increased usage, which also means greater interest income."

But reward programs are evolving to include a broader array of bank products, such as with Citibank's innovative "Thank You" program, which rewards debit cardholders with two or more additional services with the bank, such as a savings account or direct deposit, with extra points. And in March, National City Bank in Cleveland, Ohio, rolled out "points from National City," a program that takes the points concept to a whole new level by permitting individuals in the same household to pool their points and small-business owners to link their business accounts with personal ones to earn bigger rewards. As with credit card points, National City's points can be redeemed for a bevy of gifts. Other banks have followed suit.

While it's too early to tell how National City is faring under its new program, Citibank has earned favorable press and certainly retained and attracted afew customers. The genius behind such programs are their success in fostering cross-selling and loyalty, says James Gresham, CEO of Rennhack Marketing Services Inc., a firm in Grapevine, Texas, specializing in customer incentives.

"The basis of all these rewards programs is that the bank wants more hooks [into its customers], and if it can cross-sell and up-sell the consumer, the sticking power of the relationship is that much stronger," he says. Banks can also encourage customers to migrate to specific products and services by offering bonus points as an incentive to adopt a specific product the bank is pushing.

The average lifespan of a checking account is five to seven years. But when customers add online bill payment or direct deposit it increases the net present value of the customer because they are likely to have a longer relationship with the bank. And customers are more likely to feel happy about their relationship with the bank because they are being rewarded, Gresham says.

One of the benefits of a program that rewards customers for product use is that both new and existing customers see the value, although immediate, tangible giveaways remain the best way to attract a brand new customer to the bank, Gresham says. But even if a bank chooses not to adopt a bank-wide program awarding customers for using products and services, it should be cognizant of existing customers when extending incentives to new customers.

Rewarding Loyalty

Consider the example of the giveaway for opening a new account, an area that has grown more competitive in recent months as Bank of New York offers up to $200 cash back to customers who sign up for a checking account and other bank products, and PNC Bank offers 10,000 bonus points to new customers who sign up for the bank's free debit card reward program. Existing customers may feel left out by such programs and wonder if the bank truly values their business.

In that case, a refer-a-friend program that awards the giveaway to a customer who gets a friend to sign up for a new account may be the answer, says Jeff DeWald, senior vice president of marketing for PBiz Inc. in Brentwood, Tenn. "A premium gift offer is an incentive to try a relationship with the bank," he says.

Incidentally, the most-wanted giveaway isn't cash, DeWald says. It's a DVD player.

In some lines of business, personnel referrals should be the main source of customers, and those doing the referring should be handsomely rewarded. When it comes to trusts, after the first five to 10 years in business 60 percent of new business should come from customer referrals, says Stenson. Since a large trust account can bring in significant fee income, compensation should reflect this. For staff members, directors and officers, Stenson recommends an incentive of 10 percent of the first year's fees. Such an arrangement is not necessarily appropriate for a customer though. It's better to offer a fixed referral fee of a few hundred dollars.

And while many banks choose to run CD specials to draw in deposits and new customers, it's a tactic that isn't very effective in bringing in permanent, profitable customers, DeWald noted at a recent ICBA National Convention workshop, "Don't Bet Your Bank's Future: Profitability and the Disappearing Yield Curve." CD customers park their cash, for which the bank pays a premium, but don't bring any other business. Alternative products, such as tiered interest checking accounts, can be an attractive alternative by helping build a core relationship at a lower cost of funds while helping build multi-faceted relationships.

While the average free checking customer has an average deposit of $905 and a free checking with interest customer averages $1,400, tiered interest checking accounts, which offer higher levels of interest for larger account balances, draw in an average of $4,255 by attracting wealthier, savvier customers. Compared with a CD account where customers deposit their cash and don't touch it for months or years, tiered interest customers are more likely to write checks or use debit cards and bring other products to the bank, DeWald says.

Incentives have repeatedly demonstrated their value in attracting and retaining customers, but the reason they are effective isn't limited to consumers' desire for an airline ticket or a DVD player, says Gresham. "You have to be convenient, offer the right products and services and have good customer service. The gift is the final value-added piece that creates a tipping point for the consumer."

That's one way to keep cynical but profitable customers at the bank.

Kelly Pike is assistant director of publications for ICBA. Reach her at kelly.pike@icba.org

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