Foresight 2020: Merchant-Funded Rewards – Challenges and Opportunities for Retail Bank

Date: 29-May-2013
With the emergence of payment cards and their increasing adoption by consumers and acceptance by merchants, banks and other cards issuers have been making significant efforts to make consumers use their cards over those of their competitors. In line with this, banks have been at the forefront in issuing cards with benefits and features offered through loyalty programs. These programs allow banks to distinguish their products from the basic services offered by competitors by offering attractive deals in a variety of product categories.



However, it has become apparent that bank funded reward and loyalty programs have lost value and impact, from both the banks’ and consumers’ points of view. Banks and card issuers have introduced similar loyalty programs in the recent past, which have become mutually almost indistinguishable. This has compelled banks to carry out other expensive promotional initiatives to set themselves apart. Banks and other card issuers have also realized the benefits of merchant-funded loyalty programs and consider these programs as replacements for traditional loyalty programs.



The business model of merchant-funded products has changed as the roles of the stakeholders associated with merchant banking have altered: the risk associated with expenses has shifted to merchants, and is not borne by card issuers or program managers. Risk is also mitigated by the use of a pay-for-performance basis followed by merchants, creating an effective new revenue stream for card issuers through merchant-funded incentive programs, leading to higher revenue generation and profitability.


In the last 10 years, cards issuers have tried numerous variants of rewards and loyalty programs to distinguish themselves from their competitors. The most common and popular programs are those funded by banks, and are typically associated with rewards points on purchases using the card, cash back offers and miles or points for frequent flyers.



The merchant-funded loyalty program is a growing trend in the cards and payments industry. Through the programs, merchants make alliances with banks and other card issuers to offer rewards and incentives to their customers. Merchant-funded rewards and offers are primarily marketed through digital channels such as online and mobile banking along with email and other online methods. The programs are targeted at various customer segments based on their payment and transaction history.


Reasons to buy

Gain a strategic insight into the emergence of merchant funded loyalty programs.
Plan for the future by learning about the trends and drivers of merchant funded rewards programs as well as the program strategies.
Get ahead of your competitors by reviewing a set of case studies enabling you to understand the processes involved in building a merchant funded loyalty program.
Expand your business by obtaining an understanding of the competitive landscape and industry dynamics.


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