Consumer appetite for rewards remains strong, but the legacy economics that fund those programs are under increasing strain. As these interchange economics come under pressure, banks and financial institutions are looking for new ways to fund rewards programs while maintaining customer value and loyalty.
How are rewards traditionally funded?
Until this point, interchange revenue typically funded customer rewards programs.
The challenge: Changes in payment economics can constrain the revenue available to fund rewards, making it harder for financial institutions to offer compelling loyalty benefits.
Historically, banks and card issuers have depended on interchange revenue from credit card transactions to fund cashback and rewards. But now, that model is under pressure as consumer behavior evolves and more people shift to using debit cards.
This is creating a funding gap for rewards programs.
To keep delivering the rewards consumers expect, banks and loyalty providers need to rethink how those programs are funded. There’s a clear shift toward merchant-funded rewards, where retailers help foot the bill by paying a commission for driving sales.
The new loyalty economics
Modern loyalty programs can combine multiple revenue and funding sources, including merchant-funded rewards and commerce media, to support customer benefits beyond relying on interchange revenue.
Merchant-funded rewards
Merchants fund cashback rewards in the form of commissions paid to a bank for having referred a successful sale. This allows financial institutions to provide valuable rewards without relying entirely on their own balance sheet or interchange revenue.
What this means for financial institutions
Reduce reliance on interchange
Diversify the revenue sources that support rewards and loyalty.
Increase customer value
Use merchant-funded shopping rewards to deliver more tangible benefits.
Create new revenue streams
Monetize customer shopping engagement through customers' everyday online shopping, and and commerce media.
In this infographic, explore how merchant-funded rewards can bridge the interchange funding gap and turn loyalty programs from internal cost centers into externally-funded revenue generators. (Download the full infographic as a pdf.)
