Loyalty Rewards and the Psychology of Payments

January 22, 2024

To compete effectively for members’ wallet share, credit unions must focus on increasing engagement and forging deeper connections. The formula for success starts with understanding your members’ needs, winning their attention, engaging them where they are, and repeating this cycle.

A recent study found that more than two-thirds of active cardholders in the U.S. use a card issued by a national bank as their primary card, compared with only 8.3% who received their primary card from a credit union. Yet more than a third of these national bank cardholders would be willing to switch to a card offered by a smaller institution, if it offered the right features.

Credit unions can acquire and deepen member relationships across all segments and categories of behavior by becoming more deeply embedded into transactional value streams and winning the primary financial interaction moment by moment. Per proprietary research captured in Co-op’s 2023 CU Growth Outlook Report, 45% of respondents cited engagement as the top reason for maintaining a primary relationship with their financial services provider.

Establishing an emotional bond is key. According to an oft-cited study of retail brands by Motista, emotionally connected consumers generated 306% higher lifetime value for a brand over those customers that were simply “satisfied.” Moreover, according to TransUnion, 80% of consumers would switch financial institutions for a better experience.

One way credit unions can build on the emotional connections they already have with their members is through loyalty programs.

According to research from Bond, when brand loyalty programs interact with their customers at the right moments, those brands experience a 6.8X lift in agreement that the program makes the brand experience better. And 70% of U.S. consumers surveyed cited loyalty programs as an “important” or “critically important” factor driving brand loyalty.

What is it about loyalty programs that increase member engagement and … well, loyalty?

Loyalty rewards promote active relationships

For credit unions, a well-designed loyalty program promotes active member relationships and enhances the primary financial relationship (PFR) with the member. Payments are the pathway to relationship primacy, and loyalty programs can help light the way.

Today’s credit users expect their cards to come with certain loyalty benefits. According to Co-op’s CU Growth Outlook research with Mastercard, 83% of respondents associated their credit payment methods with offering perks and rewards. In addition, according to the same research, 73% of primary credit users cited “rewards and perks” as a reason for using credit as their preferred payment method for personal purchases, and 62% cited it as a reason for using credit as their preferred bill pay payment method.

In 2022, consumers had an average of 1.8 active credit and debit loyalty program memberships, an increase of 10% over 2021. Just as significantly, 74% of consumers are more likely to recommend brands with good loyalty programs, and 78% say such programs make them more likely to do business with a particular brand.

Card loyalty programs also impact consumers’ spending behavior. Nearly 2 in 3 (65%) report modifying the amount they spend to maximize the benefits they receive. According to LoyaltyOne, 95% of companies reported their loyalty program members spend more annually than non-members.

But, not all loyalty programs are created equal, and offering the right selection of cardholder benefits is key. Cardholders say they are willing to spend 61% more if their program has the right mix of benefits.

Members with a budgeter mindset are primed for loyalty

To understand why loyalty programs can be so effective, it’s important to understand the psychology of payments. The Co-op CU Growth Outlook research shows that consumers fall into two distinct groups: the “budgeter” and “non-budgeter” mindsets.

The budgeter type views money as a way to enhance their life and uses it to pursue future happiness or achieve concrete goals. This archetype is mindful of their spending behaviors and is typically a heavier user of credit, which they view as a transactional tool, rather than simply a lending product.

Budgeters tend to be more financially confident, and gravitate toward self-service solutions. They also covet rewards with high perceived value, such as exclusive access, memberships, and new experiences.

Budgeters also tend to take a long view of their financial picture, and actively seek ways to improve their future financial standing, such as cash back programs that deposit rewards directly into savings.

To capture the budgeter’s wallet share over the entire member journey, the research finds that credit loyalty programs play a key role. Specifically, during the Redeeming stage, well-designed loyalty programs with a choice of redemption options, including both cash back and rewards.

During the Building Relationship stage of the journey, loyalty programs are a crucial way to reward long-time members with tangible redemption options and incentives that meet their personalized lifestyle needs.

Keys to a successful loyalty program:

Card rewards programs have been around for a long time. But whereas the earliest incarnations were limited to travel rewards or cash back options, today consumers desire choice and seek out programs that offer multiple options to fit their particular needs. Specifically, cardholders want to earn rewards where they spend the most – or where they aspire to spend more. For example, within the travel segment, many consumers set a goal to save up for a dream vacation using the points they earn through everyday purchases.

As you seek to enhance your current card loyalty program, look for ways to stand out from the crowd. Here are a few suggestions:

Offer real value: Per Co-op’s research with Mastercard, 57% of credit card owners stated they would use their card more if they received greater rewards per dollar spend, and 48% would increase their usage if they received more rewards on purchases.
Stay flexible: One of the most important aspects of any loyalty program is members’ ability to redeem rewards the way they like. Although cash back remains table stakes, with 55% of rewards cardholders redeeming for cash back or gift cards, younger generations seem to be more interested in redeeming points to use on unique experiences. 42% of Gen Z and 39% of millennials with rewards cards redeemed for travel in the past year, compared with just 17% of Gen X and 14% of boomers. To offer cardholders maximal flexibility, an increasing number of programs are moving toward a universal redemption ideal. For example, American Express recently announced that cashback cardholders can now redeem their reward dollars on Amazon, the world’s largest online marketplace.
Up your game: Gamification, through the use of badges, tiers, icons and other incentives, is one of the most powerful ways to increase engagement and incite passion among your members. A recent study by Snipp Interactive found that incorporating gamification into loyalty programs led to a 47% increase in engagement. Some global brands are taking this to the next level by employing game theory to increase engagement. For example, Starbucks customers can earn stars for each purchase within the app, which allow them to achieve higher reward tiers.
Get more by giving back: Another way to increase member engagement is by tying your credit union’s focus on social responsibility and charity to your loyalty program. For example, shoe retailer DSW encourages members of its VIP rewards program to donate their shoes and rewards points to those in need. Participants can receive additional rewards for their philanthropic efforts, and to date, nearly 5 million shoes have been donated through DSW’s Soles4Souls charity.
Reward based on member segment: Our research has found that needs-based segmentation reveals product depth and complexity across both life events and lifestyles. By aligning your members’ personalized value propositions with needs-based segmentation, you can turbocharge your credit union’s portfolio growth and increase both engagement and loyalty. This is borne out by industry research that shows that members of enhanced rewards program tiers feel nearly three times as loyal to the brand.

Of course, the success of any loyalty program is measured through return on investment (ROI). ROI can be tracked through various metrics, such as share of wallet (how much the member spends with your card versus other payment methods), improved member retention and overall credit and debit portfolio growth.

But the truest measure of success is felt when members enjoy heightened satisfaction, increased engagement and a stronger emotional connection with the credit union. When designed and deployed properly, loyalty programs can positively impact all these measures, while building on the “People Helping People” philosophy that has long been the hallmark of the cooperative movement.

Creating powerful payment experiences that reward your members does not have to be difficult. Co-op Lifestyle Loyalty is one-of-a-kind in the market, bringing together best practices from credit union and national loyalty programs to competitively position your cards for success, with configurable capabilities to reinforce your brand. Increase the performance of your Co-op Debit and Credit portfolios and strengthen member relationships for a lifetime of loyalty. To learn more about how to reward your members and strengthen your Primary Financial Relationship, visit Co-op Lifestyle Loyalty.