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Loyalty programmes and Smart Cards
August 1998

Banks migrating to smart cards

Banks throughout the world are moving towards smart cards as a replacement for magnetic stripe cards. They are moving at different rates: some have already migrated, eg France, Germany, Singapore; some are testing the technology, eg UK, and some are still considering what to do, eg United States. When the banks move to smart cards, the infrastructure for reading cards at point of sale will have developed, thus making it easier for non-banks to introduce smart cards. The question is whether companies wishing to launch smart cards should wait for the banks or whether they should take the initiative. One of the justifications for introducing smart cards is that the banks can take advantage of the technology to offer value-added services. One of the main services they are looking at is loyalty - both for their own customers and as a service to the merchants they have acquired.

Loyalty programmes are becoming more sophisticated

Many of the early smart card based loyalty programmes have not used very sophisticated marketing techniques, simply accumulating points within a single brand of merchant, and arguably some could have been based on magnetic stripe technology. However, programmes are beginning to appear which use more of the potential of smart technology, eg a petrol programme in Holland gives extra loyalty points depending on the recency of the last visit. This is made possible by storing date of last purchase in the card instead of on a central database. This technique has allowed the programme to attract a larger share of purchases of heavy petrol users. Therefore, the smart card facilitates the move towards more sophisticated marketing techniques.

Loyalty programmes in a wide range of markets

Improving customer loyalty has become a key marketing goal for companies in a wide range of markets. Hence, loyalty programmes are now being operated not only in traditional retail sectors, but in industries as diverse as hotels, telecommunications, sports clubs, automotive and restaurants. Many of these industries operate in 'off-line' environments, ie they are not continuously connected to a central computer and therefore the smart card provide a cost effective solution to their marketing needs.

Increase in multi-partner programmes

The trend described above has made it easier to attract partners to loyalty programmes. A multi-partner loyalty programme can be more appealing to consumers and it can spread the marketing and operating costs for participating partners. Shell UK was one of the first oil companies to enter the loyalty arena with smart cards. The best known scheme in the UK market is the BA 'Air Miles' programme which has numerous 'look-a-likes' around the globe.

Increasing consumer appeal

Customers can instantly view data on the card at point of sale to see that points/ bonuses/ credits have been added, check the new balance, etc. without waiting for statements to be mailed. Smart cards also allow the merchant to view past transactions without going on-line. This enables them to enquire about customer satisfaction with prior purchases and resolve any outstanding issues. This is a powerful driver of customer satisfaction. With magnetic stripe-based programmes, customer information is accessed through an on-line, central host computer; the speed of response from the host may be slow, keeping the customer waiting and allowing queues to form.

Consumers can be rewarded instantly at point of sale using a combination of information on the card and rules in the terminal, reinforcing the link between purchasing behaviour and the reward. With a magnetic stripe scheme, partners are often unwilling or unable to go on-line to connect to the host, and therefore it becomes necessary for the customer to write in for their rewards.

One-to-one marketing

Many marketing specialists talk about the benefits of moving towards one to one marketing, where the marketing programmes are targeted to the individual needs of the consumer rather than making the same offer to whole segments of the population.

The information carried on a smart card can be used at point of sale to generate customised offers to cardholders. Offers can range from rewards or discount vouchers right through to simple recognition based on previous purchasing habits. The recency, frequency and amount of previous purchases can be useful guides in making the most appropriate offer to the cardholder at point of sale. Since the information on the card can be transmitted to the central database at a later date, database marketing can still be used to support the loyalty programme.