Thursday 13 November 2008

Short term gain or long term relationship?

Abbey have recently launched a credit card providing 3% cash back for 6 months on card spend for groceries and petrol. The press release around this stated "The increasing cost of living, combined with the credit crunch, means families need all the help they can get to cover the cost of their weekly shopping essentials - which is why we developed this cash back card".

This card is interesting on a couple of fronts.

Firstly it is blatantly targeting everyday transactions – the holy grail of card spend. If a card issuer can get a card to be used in habit forming sectors such as supermarket and petrol, then it's more likely to be front of wallet for other purchases. All card issuers encourage this activity, but it's normally more subtle as part of a statement communication or targeted marketing. This is one of the first such cards to be rewarding just this form of spend and is being done at a time when consumers are much more aware of their spend within these categories due to rising food and fuel costs.

By excluding other categories such as travel and expenses, the proposition rules out many customers in the traditional cash back segment of travel and entertainment who use their card to pay for business expenses. This card is squarely aimed at families who would normally pay for groceries and fuel by other means such as cash and debit – a previously overlooked segment within cash back loyalty.

What is a little worrying however is the promotion.

Anyone working within the card industry will know that 3% cash back is not a proposition that can be supported within the normal economics of a credit card. All merchants pay a card issuer for spend taken on a credit card, but this is no where near 3%. For Abbey to fund this offer of 3% its either in for the long haul and is hoping to make back its investment through a long term relationship with the customer, or it is hoping to make back its investment in the shorter term through a large number of customers revolving a balance on the card, paying interest and hence offsetting the costs of 3% being paid to a smaller number of transactors – customers paying off in full every month.

I wouldn't like to suggest which business case is driving this proposition. However, in a mature market with customers an increasingly scarce resource, the best route to healthy, long term profits is through healthy long term customer relationships. A loyalty proposition which encourages the right behaviours for the card issuer, the merchant and the customer provides a long term win-win for all stakeholders.

I sincerely hope the new Abbey cash back card is such a product – with customers at the heart of the proposition and a continued focus on meeting their needs so as to reap the rewards of a long term relationship.