> Posted by Akhand Tiwari, Bhavana Srivastava, and Vijay Ravi, MicroSave

Loyalty Programs

In today’s world, loyalty programs are a dime a dozen, with everyone from retail stores to luxury hotels offering membership for even the smallest of transactions. A publication from Smith School of Business suggests that the average Canadian household is enrolled in no less than eight loyalty programs. In this context, it is pertinent to examine if loyalty programs actually serve their intended purpose. If yes, how specifically do they impact a company’s business?

The premise of all loyalty programs is that they promote continued patronage. In a world where there is often little variation between competitors’ offerings, a well-designed loyalty program could make all the difference for your business. After all, a good loyalty program could very well decide which airline you choose for your next business trip!

We make an important distinction here – between loyalty programs and rewards. While loyalty programs aim to instill continuous engagement, the focus of rewards is on pushing specific action. Rewards are target-oriented and last only for a limited period. To illustrate this, think of offers, such as zero-processing fees, which are designed to increase adoption of a credit product, and higher interest rates on term deposits, which promote savings.

Based on MicroSave’s experience on how low-income households exhibit loyalty towards their financial service providers – we have some useful insights.

Loyalty Programs and Financial Service Providers

The success of any service provider depends on the quality of engagement with their customers, measured in part by customer satisfaction. The emergence of new players who offer financial services across the spectrum has increased the significance of loyalty programs in this industry. With programs offering options of cashback, equated monthly installments (EMIs) on high-value purchases, and loyalty points for using credit cards, the financial sector is no stranger to the loyalty bandwagon. However, so far, these programs have been designed to cater to the middle-class or, more recently, to merchants.

With the digital finance revolution, the industry is increasingly eager to tap into the bottom of the pyramid. It now wants to bring into the mainstream those who have been traditionally excluded. Changes in target consumer base and product-delivery methods warrant a new approach to loyalty programs as well.

Loyalty and Low-Income Households

For a financial service provider that seeks loyalty from this segment, how should the approach differ? While the focus of a loyalty program should be to promote patronage, could the program also include other dimensions? We believe that, for this client, there is a need to promote a positive mindset by demonstrating their importance to the company. There is a need to display trust, which will be reciprocated in the form of loyalty. This is critical, given the low-income market’s strong reliance on their social circle as a source of both information and influence.

Existing loyalty initiatives, like cashbacks and discounts, may not make sense when the institution is trying to promote patronage and trust.

Also, loyalty programs that offer benefits that are not obviously related to the core product (like a mobile operator offering discounts on FMCG products), may be a welcome bonus, but do not actually impact customer loyalty.

Simply put, we believe financial service providers can build customer loyalty among low-income clients by providing an important element that is lacking in their lives – dignity.

Financial service providers may offer their customers dignity in many ways. Some initiatives that we know work well are:

  • Recognition makes customers stick around even during crisis periods because they have a sense of ‘ownership’ associated with the brand. For example, MFIs who work with base-of-pyramid segments often celebrate their customers for regular repayment. A token of appreciation in a group meeting often does wonders to their attitude towards the organization.
  • Many FSPs conduct skill-based training sessions and workshops that focus on building livelihoods. These work in two ways. Firstly, receiving an invitation to attend a training and being awarded a certificate is regarded as “being recognized”. Secondly, customers see this as skill-building, which garners social respect. Moreover, when applied well, these skills result in increased income — improving the economic conditions of the household. We have seen at Equity Bank in Kenya, for example, that customers who have attended training sessions have a stronger affinity to the organization and tend to stick with it longer than those who have not. These customers also demonstrate better behavior in terms of timely repayment and regular attendance in meetings.
  • Good customer service and a happy customer experience can go a long way to improve loyalty, while poor customer service can quickly erode it. We’ve seen that a major reason for dormancy of bank accounts can be a lack of respect shown by bank staff to their customers. Responsive product design and processes also improve customer experience. In Bangladesh, MFIs have modified product features to help their customers through cyclones and excessive rains that affect Bangladeshis every year. In its earlier days, Equity Bank used salary boards to allow clients to check whether their salaries were credited to their accounts without having to wait in line to ask tellers. As CGAP notes, “customer-centric providers tend to fare better in the long run, as they are better at retaining customer loyalty and identifying and meeting evolving demand.” Arguments in this thoughtful piece from KPMG Australia highlight the importance of customer experience as well.

In order to create a fully functional loyalty program, these piecemeal activities should be institutionalized with clear goals and targets in sight. One might argue that cost-constraints inhibit financial service providers from focusing on these activities on a sustained basis. However, consider this: the cost of acquiring a new customer is always high – definitely higher than retaining existing customers, though the estimates vary (see the cost of retention vs acquisition and this Harvard Business Review note). Organizations serving the BoP face the same challenge. However, the fact remains that even in trying times (such as the emergence of new, aggressive competitors, political interference, and/or macroeconomic shocks, such as the demonetization exercise in India), these investments will provide the organization with the much-needed time to face new challenges.

Image credit: Accion

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