Beyond Rewards: The New Era of Bank Loyalty – Trust, Security & Relationships

By Nick Holland, Contributor at The Financial Brand

Traditional banking loyalty programs are increasingly obsolete. What once differentiated institutions – from enticing interest rates to credit card rewards – have become expected commodities, easily matched by competitors and quickly forgotten by customers. The true pillars of customer retention have fundamentally shifted towards fostering security, delivering proactive financial guidance, and genuinely recognizing the depth of a customer relationship. Yet, the vast majority of North American banks are still playing catch-up.

Many so-called ‘bank loyalty programs’ are, in essence, just transactional credit card reward schemes. As Bhavna Kaushal, Principal at BK Advisory and a loyalty strategist who has advised major financial players, points out, “For the most part, in North America, we actually don’t have bank loyalty programs. 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.”

This critical distinction has significant implications. Rewards chasers routinely “churn” cards every couple of years, seeking out new sign-up bonuses. A recent Jack Henry survey revealed that the average American now juggles 14 financial apps, signaling a widespread inability for any single institution to holistically meet their needs. Despite these clear indicators, many banks continue to rely on a decades-old playbook.

“You would be shocked at how often I have to remind folks that credit card points no longer equal loyalty programs,” states Carson Kotnyek, who previously developed loyalty initiatives at McKinsey and now leads customer ecosystems and loyalty at Zafin. He emphasizes that if a bank’s strategy is still rooted in points, it’s “back there with air miles from the 1980s.”

The competitive ramifications are severe. “The lack of loyalty has created the opportunity for neo banks,” observes 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.”

Safety First, Rewards Second: Understanding True Customer Needs

Before banks can address their loyalty predicament, they must grasp what customers genuinely desire. And here’s a hint: it’s not just points.

“No one is really looking for rewards per se,” explains Mayur Vichare, who collaborates 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 often erodes during critical customer interactions, such as dispute resolutions, service requests, and inefficient cross-channel handoffs. Vichare highlights research showing that customers in the Philippines often prefer to keep money in PayPal over local banks due to PayPal’s faster dispute process — a “hidden defection” that many banks overlook. Beyond problem resolution, security itself can be a powerful loyalty driver.

Kotnyek points to a program he is developing that leverages small loyalty incentives to encourage secure behaviors. While banks typically see low engagement (5% open rates, less than 1% action) on emails prompting multi-factor authentication, integrating such actions into a loyalty program with a small incentive — like a three-part security journey including MFA, recovery email setup, and real-time notifications — dramatically boosts uptake. The return on investment in reducing fraud losses by 5% to 10% is substantial, building trust by rewarding behaviors that protect both the customer and the institution.

From Transactions to Holistic Relationships

The evolution needed for banks can be seen in three distinct phases, according to Kaushal:

1. Single-product credit card rewards: Where most institutions are currently stagnant.
2. Multi-product loyalty: Spanning a customer’s entire financial portfolio, including deposits, mortgages, and cards.
3. Emotional loyalty: Layered with personalized tiers, subscriptions, and AI-driven insights.

“It’s the Amazon model,” Kaushal elaborates. “They’re adding value, not just reducing friction. The customer doesn’t want to leave that holistic value.” She cites BBVA as an example of a bank that has reached this third stage. Through AI, BBVA delivers proactive alerts — notifying customers before potential overdrafts, identifying unused subscriptions, and surfacing savings opportunities. “Suddenly it’s like, oh, my bank cares about me,” Kaushal notes. “Is it worth another few points going somewhere else when they’re teaching me about savings and watching out for me?”

Vichare sees similar promise in AI-powered financial coaching. While traditionally reserved for high-net-worth individuals, AI democratizes access to such guidance, fostering trust by demonstrating a deep understanding of a customer’s complete financial picture, not just their transaction history.

Dig deeper into banking loyalty strategies:

• 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: Engaging Behavior, Not Just Transactions

While the term “gamification” might conjure images of simple badges, its effective application in loyalty programs drives stickiness that points systems cannot. “It’s not games,” Kaushal clarifies. “What they are doing is incentivizing behavior.” She highlights Scotiabank Chile’s ScotiaRewards, which uses missions and challenges to encourage cross-product adoption. Customers complete specific actions — such as setting up direct deposit, adding a family member to an account, or establishing bill pay — to unlock higher tiers with enhanced benefits. This creates a subscription-like dynamic without the fee, building multi-product loyalty and engagement.

Vichare offers another compelling example: household banking. When spouses share accounts, product holdings often increase significantly. One credit union observed a 4-5% rise in certificates of deposit and a 10-13% jump in auto loans after customers began sharing accounts. “If you help them achieve their financial goals, loyalty automatically starts flowing,” he states.

Emily Cisek, founder of Paige, extends this concept across generations. Her platform assists families with estate planning and organizing documents through community banks, merging financial and emotional support. This is crucial given that 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 explains. “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: Doubling Down on Relationships

Ironically, community banks and credit unions already possess a significant, often unrecognized, advantage in loyalty. “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 Bank. “Our loyalty scores range in the 91 to 92 percentile. It’s not sexy, it’s just fundamentals.”

McEvoy notes that large banks 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 aspire to emulate megabanks, when they should instead amplify their 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 frequently observes this advantage. “A lot of people come to the branch not for transactions; they actually just come to chat,” he recounts. One credit union shared a story of staff at a megabank across the street redirecting customers: “That’s not us—there’s a credit union right across the street, they will speak to you.” This willingness to engage builds a level of loyalty that no points program can ever replicate.

The Path Forward: Unifying Data and Valuing Relationships

So, where should financial institutions begin this transformation? The less glamorous, yet crucial, answer lies in the challenging work of breaking down data silos and deeply understanding customer information.

“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.”

Institutions that master this will move beyond viewing rewards as a peripheral addition to credit cards, instead treating loyalty as a fundamental recognition of the entire customer relationship. This means prioritizing the repair of broken customer journeys before layering on new features. It necessitates using data to gain a comprehensive understanding of customers across all products, not just isolated transactions. Ultimately, in a market where competitors can easily match rates and mimic apps, the sustainable competitive advantage will be found in making customers feel that staying is undeniably easier, more secure, and more valuable than leaving.