Mind games

Banks encourage the use of cards with promises of big prizes

by Nabila Rahhal
Banks playing mind games on consumers

It seems like a no brainer at first: Use your bank card for your purchases and you will eventually receive a free iPhone, a trip to Europe or, perhaps best of all, you will get your hard-earned cash back.

Without studying the fine print, consumers rush to rack up points on their cards, pushing themselves to spend more under the conviction that they are getting back what they spent. However, loyalty programs seem to promise the world, but actually offer considerably less.

What started as airline miles collection in exchange for spending on payment cards rapidly mushroomed into the intricate rewards programs that are offered by the majority of Lebanon’s banks today. “Because all banks have some form of these programs, it becomes almost a defensive action to have them — we can’t afford to not have them,” says Anthony Ussher, e-banking division head at Credit Libanais. Another benefit of reward programs for banks is that they encourage clients to open new accounts while gaining customer loyalty through the perks offered.

Delayed gratification

Rewards offered vary from bank to bank but generally fall into the following broad categories: tangible rewards such as electronics or fashion items, experiential rewards such as travel miles or packages, actual cash automatically added to your account and bank services such as credit card activation or insurance premium payment. According to Ussher, 50 percent of Credit Libanais clients redeem their points for travel; 20 percent opt for bank services and insurance premiums; and the remaining 30 exchange them for gifts.

[pullquote]Cash back programs give clients approximately $10 back for each $1,000 they spend, a theoretical 1 percent return.[/pullquote]

Accumulating points for any type of reward requires that clients use their debit, credit or online card extensively as they receive between 1 and 10 points for each dollar spent, depending on the bank and card used, while redeeming them requires a high number of points for a comparatively lesser value reward. Receiving a free iPhone 5S from Bank Audi would require a customer spend more than $210,000 while a ticket to Larnaca would translate into $22,500. Cash back programs give clients approximately $10 back for each $1,000 they spend, a theoretical 1 percent return.

According to Laurence Leigh, professor of marketing at AUB, marketers of reward programs make their rewards more valuable at the highest levels of point accumulation. “If you have 2,500 points you get a miserable reward, but if you get 50,000, the value goes up exponentially — if you get 500,000 you get a trip around the world let’s say. So, many people hold off redeeming their points in hopes of that big gift and end up not using them,” says Leigh. Given that points have an average expiration date of three years, people aspire for the big rewards but end up with smaller ones.

Scheming for loyalty 

Credit Libanais’ Ussher says that since the bank makes little money off each payment card transaction, it cannot afford to value its rewards any lower and often relies on their subsidiaries, such as insurance companies or travel agencies, to be able to offer the rewards.

Keeping in mind that consumers are essentially getting back very little in comparison to what they spend, it is a wonder that banks say these programs bring them added business.

[pullquote]Rewards schemes will compete and adapt in order to keep customer interest high. [/pullquote]

“Any loyalty scheme is designed in such a way that encourages you to consistently use one particular card. This is playing on consumer psychology where people like the idea that they are getting something for nothing: a gift they will value sometime in the future,” says Leigh, explaining that this falls under the branch of behavioral economics where people don’t necessarily act in the way that a rational economic person should and instead do things which are difficult to fit into the standard microeconomic model. They feel happy with the thought of receiving a gift and forget its actual worth compared to what they spent.

Leigh suggests an alternative to payment card usage when it comes to large purchases: “What would be a more rational thing to do would be to ask the vendor if he would give you a discount for using cash instead of plastic. The cash discount you would get this way would almost certainly be more valuable than the reward.”

Yet consumers still dream of the big free gift, and loyalty programs are here to stay. Rewards schemes will compete and adapt in order to keep customer interest high. Ussher suggests the way forward for loyalty programs is for banks to coordinate with merchants who have greater margins for advertising. With both of them working together, banks can offer consumers double points on certain occasions or merchants can offer them discounted items during low seasons.

Another idea that Credit Libanais is considering is to have instant small rewards — such as a free ice-cream — through the point-of-sale receipts, which again plays on consumer behavior, encouraging them to use their cards more.

“A lot of it is psychology but psychology works and keeps people loyal,” says Leigh.

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Nabila Rahhal

Nabila is Executive's hospitality, tourism and retail editor. She also covers other topics she's interested in such as education and mental health. Prior to joining Executive, she worked as a teacher for eight years in Beirut. Nabila holds a Masters in Educational Psychology from the American University of Beirut. Send mail
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