Credit card issuers for years have generated millions of dollars in processing fees from consumer spending on travel. In return, the card companies boosted global travel with popular loyalty programs that reward consumers with traveling freebies and deals.
In the wake of the coronavirus pandemic decimating demand for travel, a new wave of payments and fintech companies are capitalizing on the opportunity to fill the void with new, alternative rewards and loyalty programs.
Entrants into the ecosystem are eyeing a multi-billion-dollar opportunity. Card issuers spent $31 billion on U.S. cardholder rewards in 2016, per a PwC report. That number has surely grown in recent years amid steady economic expansion and increases to consumer spending.
Travel loyalty programs offered by credit card issuers and banks have long dominated the rewards space. Airlines-branded cards were the “most searched for” type of card in the United States before the pandemic, according to Business Insider.
But the travel industry’s demise has left many consumers debating whether they should renew their travel-focused credit cards (many of which carry high annual fees) and wondering how to use accumulated points that would formerly go towards hotels and flights.
“While many consumers gravitate to cash-back rewards, co-brand programs that feature alliances with airlines, cruises, and hotels leave consumers with points that may not be useful for several years,” according to a June 2020 industry report from Research and Markets.
“Rewards with cash options,” says the report, “will find consumers more likely to gravitate toward cash options than rewards that provide options for hospitality and travel.”
The popularity of cash back, however, doesn’t mean consumers aren’t receptive to new products. The evolution of fintech over the last decade, combined with the pandemic’s market disruption, has created a perfect storm for non-traditional financial services companies to pioneer new forms of rewards and loyalty programs.
“A vast majority of card rewards programs today are not aligned with consumer spending habits,” wrote the authors of the PwC report. “An overhaul of these programs to match real-time consumer engagement should be pursued.”
Quontic, a digital banking startup that has raised $11.3 million in venture funding, is doing precisely that with its new Bitcoin debit card, which offers up to 1.5% cash back in the form of the largest cryptocurrency. The New York-based neobank believes consumers are craving alternative forms of rewards, and that Bitcoin’s soaring price in 2020 will lure in new customers.
“The number of banks and fintechs moving into the online/digital banking arena has increased significantly over the past few years, [and] COVID related bank branch closures and social distancing requirements have hastened the pace of consumer adoption of online and mobile banking products,” wrote Steven Schnall, CEO & founder of Quontic, in an email to FinLedger.
“This presents the perfect storm for the creation of new and innovative digital products and loyalty programs such as Quontic’s Bitcoin Rewards Checking,” continued Schnall. “We see Bitcoin as a particularly timely and appealing reward program due to its growing regulatory acceptance, increasing valuation and desirability as a store of wealth.”
Larger financial services companies are following suit. Visa announced in December it is partnering with crypto startup BlockFi to lanch its own Bitcoin rewards credit card. Crypto unicorn Coinbase is also launching a crypto loyalty card. Beyond the hype associated with crypto, Bitcoin and its skyrocketing price are especially attractive in today’s low-interest rate environment, with interest rates on savings accounts hovering at just 0.05%.
Bumped, another innovator in the rewards space, is betting that consumers crave “a sense of ownership” in addition to wealth creation. The Portland-based fintech (which has raised $35 million in venture funding) partners with banks and businesses to reward customers with fractional shares of stock. Rather than earning cash back or travel miles, consumers accumulate ownership in their favorite companies (or those whose share prices they believe will grow).
Bumped CEO David Nelsen believes that obtaining stakes in companies is appealing to consumers at a deep, psychological level, in a way that will drive Bumped’s growth for years to come.
“This is a different type of reward. It’s not about how much, it’s about the fact that they are a shareholder,” said David Nelson, CEO and Founder of Bumped. “People take a lot of pride walking into a store they have ownership in.”
Nelson says that Bumped (which effectively operates as a broker dealer) would welcome the opportunity to partner with credit card issuers on the prowl for pandemic-proof rewards programs.
Bumped’s broader social mission – to increase the percentage of Americans invested in stock markets from today’s paltry 55% – is especially timely. Pandemic-fueled economic dislocation has forced unemployed people to draw down investment accounts to pay bills, while stocks’ surprising gains in 2020 underscore the importance of democratizing access to share ownership.
Elsewhere in fintech, the ascendant “Buy Now Pay Later” companies (which allow e-commerce shoppers to pay for things in installments) are also prioritizing rewards innovation. (See FinLedger’s breakdown on BNPL).
Klarna, one of the biggest players in the space, introduced in July a points system that allows consumers to accumulate points for gift cards. Afterpay, another BNPL market leader, launched in November its own loyalty program, branded “Pulse”, which encourages and rewards responsible spending behavior.
The BNPL market has doubled in the last two years, but still represents less than 2% of the global e-commerce market, according to a recent FIS report. That means the opportunity is vast for more BNPL companies to hook consumers with rewards and loyalty programs.
Looking forward, as the financial landscape continues to innovate and reorient itself for a post-pandemic world, consumers can expect fintech upstarts and financial services giants alike to launch more rewards and loyalty programs in the quest for market share. Credit card issuers, beware.