Banks Must Redesign Loyalty for a World Where Customers Don’t Stick Around
By Nick Holland,Contributor at The Financial Brand
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Traditional bank loyalty programs are failing. Interest rate incentives and credit card rewards that once differentiated institutions have become table stakes, easily matched and quickly forgotten. The real drivers of customer retention have shifted toward security, proactive guidance and genuine relationship recognition. Yet, most North American banks haven’t caught up.
Need to Know:
- Most bank loyalty programs aren’t loyalty programs at all — they’re commodity credit card rewards that customers churn every few years.
- Rates and points no longer drive retention; trust, security and proactive guidance do.
- Loyalty doesn’t live in a product — it lives in the relationship and most banks still measure the wrong thing.
- Fintechs and neobanks didn’t win on better products — they won by making customers feel understood and protected.
- The next era of loyalty will reward behaviors, not transactions and recognize the entire customer relationship, not just the card in their wallet.
“For the most part, in North America, we actually don’t have bank loyalty programs,” says Bhavna Kaushal, Principal at BK Advisory, a loyalty strategist who has led programs at Scotiabank and American Express and now sits on Euromonitor’s Global Loyalty Experts Council. “We only have transactional credit card loyalty programs. The customer’s loyalty does not lie with the bank. It actually lies with the retail partner.”
A distinction that matters: Rewards enthusiasts routinely churn cards every two years chasing sign-up bonuses and the average American now has 14 financial apps on their phone, according to a recent Jack Henry survey — a clear signal that no single institution is meeting their needs. Meanwhile, banks continue to run the same playbook they’ve used for decades.
“You would be shocked at how often I have to remind folks that credit card points no longer equal loyalty programs,” says Carson Kotnyek, who built loyalty programs at McKinsey before joining Zafin to head up customer ecosystems and loyalty. “If that’s where you are today, which is still 80% to 90% of the industry, you’re back there with air miles from the 1980s.”
The competitive implications are serious: “The lack of loyalty has created the opportunity for neo banks,” says Keith Smith, CEO of Payouts Network. “If the (traditional) banks were innovating the way they needed to, the neo banks wouldn’t exist. They don’t have a different product, it’s just the relationship.”
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Safety First, Rewards Second
Before banks can fix their loyalty problem, they need to understand what customers actually want. Hint: it’s not points.
“No one is really looking for rewards per se,” says Mayur Vichare, who works with credit unions and community banks at Backbase. “They are looking for financial institutions providing them a safety net, a cover that my money is safe. If they find the safety is absolutely fine, then come the journeys.”
Loyalty fails with disputes, service requests and cross-channel handoffs: Those journeys are where it often gets destroyed. Vichare points to research showing customers in the Philippines keep money in PayPal rather than local banks, simply because PayPal’s dispute process is faster. “That is a hidden defection that no banks are looking at.”
Security can also be a core loyalty driver: Kotnyek points to a program he’s currently developing that uses small loyalty incentives to drive security behaviors. Banks typically see 5% open rates on emails asking customers to enable multi-factor authentication, with less than 1% taking action. “But if you implement through your loyalty program a small incentive to do a three-part security journey including multi-factor authentication, set up a recovery email and opt in for real-time notifications, your uptake is through the roof,” he says. “The ROI to reduce 5% to 10% of fraud losses is huge.”
The program rewards behaviors that protect both the customer and the institution — a model that builds trust rather than just burning through interchange revenue.
From Transactions to Relationships
Kaushal frames the evolution banks need as three distinct steps:
- Single-product credit card rewards. This is where most banks remain stuck.
- Multi-product loyalty spanning deposits, mortgages and cards.
- Layering in further emotional loyalty through tiers, subscriptions and AI driven personalization.
“It’s the Amazon model,” Kaushal explains. “They’re adding value, not just reducing friction. The customer doesn’t want to leave that holistic value.”
She cites BBVA as an institution that has achieved step three. By leveraging AI, they deliver proactive alerts — notifying customers before they overdraft, identifying unused subscriptions and surfacing savings opportunities. “Suddenly it’s like, oh, my bank cares about me,” Kaushal says. “Is it worth another few points going somewhere else when they’re teaching me about savings and watching out for me?”
Vichare sees similar potential in AI-powered coaching. “A lot of these advisors are kept to high net worth individuals,” he notes. “With AI, you have the opportunity to provide coaching to everyone, building trust that I really know you.” The key is making customers feel that their institution understands their complete financial picture, not just their transaction history.
Dig deeper:
- Master All Six of the New Pillars of Banking Loyalty
- Your Biggest Differentiator: Caring about Customers
- When Fraud Goes Social, Banks Need to Think Like Teens to Protect Them
Gamification and Tiered Models
“Gamification as an incentive:” The word often conjures gimmicky badges and leaderboards. But when done right, behavioral programs create stickiness that points programs can’t match.
“It’s not games,” Kaushal clarifies. “What they are doing is incentivizing behavior.” She points to Scotiabank Chile’s ScotiaRewards program, which uses missions and challenges to drive cross-product adoption. Complete certain actions — bring over your payroll, add a family member to your account, set up bill pay — and you unlock new tiers with better benefits.
The program creates a subscription-like dynamic without a subscription fee. “Now I’ve gotten to level one, two, three by doing these things,” Kaushal explains. “If I change my payroll to come to you, I unlock more. What they’re able to do is create multi-product loyalty and engagement through gamification.”
Vichare offers another proof point: household banking. “When two spouses start sharing accounts, the number of product holdings go up,” he says. One credit union found that certificate of deposits increased 4-5% and auto loans jumped 10-13% when customers began sharing accounts. “If you help them achieve their financial goals, loyalty automatically starts flowing.”
Emily Cisek, founder of Paige, extends the household concept across generations. Her platform helps families organize estate planning, documents and memories through community banks — combining the financial with the emotional. The stakes are significant: nearly 70% of heirs move their money after an inheritance. “When you help a family stay organized and supported long before a transition, the next generation already feels that trust,” Cisek says. “The future of loyalty isn’t about incentives. People don’t care about getting a toaster. And competing on rate is no way to build loyalty — someone else will come along with a better rate and they’ll be gone.”
The Community Bank Advantage
A counterintuitive opportunity: Community banks and credit unions are already winning on loyalty — they just don’t realize it.
“Our branches and our call centers know our customers. They know not just their names, but their stories,” says Brian McEvoy, chief retail banking officer at Webster Five. “Our loyalty scores range in the 91 to 92 percentile. It’s not sexy, it’s just fundamentals.”
Large banks, McEvoy observes, have “almost as an intentional strategy, severed the emotional connection between the bank brand and the customer. The community banks and credit unions never did that.”
Paradoxically, smaller institutions often look at megabanks as the model to emulate when they should be doubling down on existing strengths. “You don’t know how good you’ve got it as a community bank,” Smith argues.
“You’ve got a finite amount of customer data. Pull it out of the silos, you can do some really amazing stuff in terms of loyalty that the large banks could only dream of.”
Vichare sees this advantage play out regularly in his consulting work. “A lot of people come to the branch not for transactions; they actually just come to chat,” he says. One credit union told him that when customers visit the megabank branch across the street, staff often redirect them: “That’s not us—there’s a credit union right across the street, they will speak to you.” That willingness to engage builds the kind of loyalty that no points program can replicate.
The Path Forward
So where should institutions start? The unsexy answer: the heavy lifting of breaking siloes and mining customer data.
“First, fix your basics—focus on your regular integrated channels,” Vichare advises. “Then fix your data so you have one view of your client. A lot of banks don’t even know who they’re targeting—no segmentation, nothing.”
The institutions that get this right will stop thinking about rewards as a program bolted onto credit cards and start treating loyalty as recognition of the entire customer relationship. That means fixing broken journeys before layering on new features. It means using data to understand customers across products, not just transactions. And it means recognizing that in a market where every competitor can match your rates and mimic your app, the sustainable advantage lies in making customers feel like staying is easier and more valuable than leaving.
