May 21, 2020Financial Institutions, Loyalty Strategy, Loyalty Trends, News
Banking Strategies During COVID-19
In the challenging world of a global pandemic, government shelter-in-place orders, travel bans and social distancing are measures that force a change in consumer spending habits. As expected in these situations, spend in the travel, dining and entertainment industries has seen a rapid decline, along with all other types of discretionary spend. Across all industries spending behaviors have changed, and it is unclear how long these behaviors will become a new normal. Conversely, spend on groceries and streamed entertainment services have seen a noticeable increase. For the millions of consumers that have lost their main sources of income as a direct result of the pandemic, the inevitable changes in spend behavior are accompanied by understandably high levels of anxiety and insecurity.
The banking industry has already seen a significant hit in earnings due to potential credit losses brought about by the pandemic, however their actions imply that they are cognizant of the fact that their very own financial fortunes are directly linked to their customers’ ability to recover from this crisis. This has caused a shift from the aspirational benefits of credit cards (motivated through tiering and long-term goals) to necessity benefits, in other words, rewards members can achieve and use in the immediate and near-term.
At Aimia, we set out to explore how credit card loyalty programs, and more broadly, financial institutions are responding to this societal shift.
Credit Card Reward Programs
There are a number of examples in the market of credit card reward programs aligning their offering with their customers’ changing spend behavior making it easier to earn and burn on services and products available during the pandemic. Here are some notable ones:
TD Bank in Canada are offering double points on online grocery purchases from over 20 brands. They are also offering 25% less points to redeem for gift cards, merchandise and ‘Shop The Mall’ retailers available through TDRewards.com.
American Express’ partnership with Uber has been around for over five years now. With social distancing measures forcing consumers to avoid Uber rides, they have shifted their reward points offer from Uber rides to UberEats. Any Uber credits earned can now be applied to UberEats.
These include expenses for the video-conferencing platform Zoom, the instant-messaging platform Slack, the video-conferencing platform GoToMeeting, market intelligence app Gong and remote work collaboration app Monday.com.
On top of bonus points, Brex account holders can also apply for up to 25% discount off new annual subscriptions to Zoom, Slack and Monday.com purchases during the COVID-19 crisis.
With the ominously high unemployment rate and its obvious implications to banks’ financial outlook, it’s very easy to imagine bank executives taking the traditional route of cost-cutting and tightening lending restrictions to minimize the erosion of shareholder value. Since the global financial crisis, financial institutions have had to painstakingly rebuild trust amongst consumers. The current crisis gives them the opportunity to demonstrate that they have truly espoused stakeholder capitalism and corporate responsibility as key principles within their companies.
There are many examples that show this to be the case. After all, institutions that embrace longer-term thinking would be quick to realize that:
Their company’s eventual recovery from this crisis is intrinsically linked to their customers’ ability to pull through this crisis;
They are uniquely placed to directly influence their customers’ ability to pull through; and,
The way they treat their customers now will play a more influential role in determining their long-term loyalty than any rewards program.
Here are a few notable examples:
DBS Bank (Singapore) are allowing multiple credit card holders the ability to consolidate all their accounts into a single loan with significantly lower interest rates.
The Big 5 Canadian banks have announced up to 3 months deferral on credit card payments (up to 6 months in BMO’s case) and either a reduction in the effective interest rate to 10.99% (Scotiabank, BMO and CIBC) or a rate reduction of 50% (TD Bank and RBC) for those that qualify for payment deferral. CIBC are offering tailored assistance packages for their customers where the level of support will vary according to each customer’s situation.
At the end of the day, every recently unemployed individual or struggling business will be in his/her/its unique situation – different levels of debt, levels of liquidity, asset-base and prospects for a quick recovery. As a consequence, logic dictates that banks that set themselves up with the ability to provide tailored assistance packages will likely be the most effective at shoring up their existing customers through the crisis.
The Elephant in the Room
For credit card issuers, as much as these actions – i.e. deferral of monthly repayments, reduced interest and waiving of late payment fees – are designed to provide a much-needed lifeline to consumers and small businesses, they will eventually need to face the proverbial “elephant in the room” – the inevitable rise in debt delinquencies. Current regulation in the US requires issuers to charge off credit card debt aged 180 days – i.e. write it off as an asset and incur a loss. There are similar such regulations in other markets, all with the same consequence.
Looking back at the Great Recession, the credit card charge-off rate for all commercial banks rose from 3.85% in the second quarter of 2007, to 10.97% in the second quarter of 2010. Given that the outstanding revolving debt peaked at $1.021 trillion in April 2018, a 10.97% charge-off translated to billions in lost revenue for issuers.
The slightly overused cliché of “we’re all in this together” could not be truer than in the current situation. At no other time in modern history have the fortunes of governments, businesses and consumers been inextricably linked, where one’s success cannot exist without that of the other.
A concerted effort is required, and financial institutions play a pivotal role. Anecdotally, the actions that banks have taken thus far have been positive, but only time will tell if more is required to generate the desired outcome for the long-term.
For a free consultation on how to ready your loyalty program as we emerge from COVID-19, contact us today.
1Board of Governors of the Federal Reserve System (U.S.), Charge-Off Rate on Credit Card Loans, All Commercial Banks [CORCCACBN], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/CORCCACBN
2According to the Board of Governors of the Federal Reserve System, credit card loans comprise most of revolving credit, but other types of loans are also included