Pivoting From Incentive-Driven Growth to Merchant-Funded Rewards

Banks and financial institutions are always on the lookout for new and innovative reward models for their customers. The challenge is to increase customer benefits without increasing costs, as well as provide new revenue streams.

According to Citibank’s 2021 annual financial report, the cost of launching a rewards program is huge, affecting the health of the profit and loss ratio. Citi had spent 59% of its revenue from Global Cards to provide incentives to attract customer engagement.

As previously stated in a PulseiD blog post, companies such as American Express spent around $11 billion on its reward programs last year. Grab, a South-East Asian superapp, had gone an extra mile, spending $1,065 million for rewards from its $675 million earnings, which is 158% of its total revenue. In yet another instance, payment service provider Mobikwik, spent 30% in reward gateways to lure users.

Several other businesses are struggling to choose the right balance between greater expenses and greater rewards. A Capgemini report stated that companies spend approximately $2 billion a year on loyalty programs – and that’s just in the United States alone. Yet, a majority of businesses reported that these investments did not translate into increased customer engagement.

As a result, merchant-funded loyalty programs are now considered as a perfect alternative to conventional loyalty programs. 

Though fintechs are accustomed and established in using rewards and cashbacks to pump business performance and growth, it is inevitable that, at some stage, companies need to pivot from incentive-fueled growth to a better profitable model.

Why merchant-funded rewards are important?

Merchant-funded rewards programs (MFR) take an alternative approach to cardholder incentives. 

These merchants form a professional relationship with financial institutions and banks, providing discounts, rewards or points for their service in exchange for brand marketing through the financial institutions.

It is important to note that this mutually beneficial relationship allows banks and businesses to increase reward offerings to their customers, without pumping up interest rates.

Banks and Financial Institutions : For financial institutions, a well-crafted MFR program drives new, incremental, net income.

Merchants : Merchants can gain access to highly targeted customers for a predetermined cost. By partnering with a financial institution, merchants can avoid widespread coupons or discounts that devalue their brand.

Put simply, as vendors or businesses expand their merchant network, they can offer personalized rewards based on customers’ spending. For instance, if a customer frequents Domino’s Pizza, and if the business is in the network, they can offer a discount on the customer’s next pizza purchase.

Additionally, MFR can also cover local companies, thus allowing financial institutions to gain more credibility in the region or community.

Benefits of merchant-funded rewards:

  • MFR enables low-interest rates with more attractive incentives to draw customers in.
  • Merchants have access to a new marketing channel and a valuable customer base.
  • These programs are one of the most impactful tools for financial institutions that seek to increase revenue and create positive interactions for their customers, thus increasing loyalty.
  • Healthy merchant relationships can provide personalized rewards that people want to use.
  • MFR programs provide answers to many of the challenges associated with traditional reward programs by creating much-needed differentiation in a crowded marketplace while reducing or controlling program costs.

According to Jennifer Kerry, vice president of credit card services, for CO-OP Financial Services, there is really “no downside here.” She continues, “Merchant-funded rewards very effectively and cost-efficiently generate enthusiasm for your card products and brand while spreading goodwill throughout the entire credit union community.”

Implementing a merchant-funded loyalty program

Now, this might sound challenging, but fortunately, financial institutions can partner with experienced service providers to accomplish an MFR successfully. For those marketers, considering a foray into this space would require:

  • Creating a network of varied merchant partners, including online merchants.
  • Integration of various data components.
  • Application of consumer segmentation – a key incentive to merchant participation, and analytics – to measure the profitability of the rewards program and enable well-informed modifications.


Merchant-funded reward programs work if they are based on members’ needs and wants. But this isn’t the only criteria, as MFR must also be carefully crafted, strategically sound, and simple to understand and use. They must offer real benefits that are locally relevant, and immediately redeemable by customers.

With such successful programs, banks and financial institutions not only build new revenue streams but also reinforce in customers’ minds that the bank is a partner, thus helping them with financial wellness.

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