From Interest Margins to Customer Primacy: Why Rewards Matter – and What Makes Them Work

Banks still make most of their money the old-fashioned way. They gather deposits, extend credit, transform maturities, manage risk, and earn the spread between the cost of funds and the yield on assets. Despite waves of digital innovation, this basic economic engine remains intact.

Which raises an obvious question.

Why are banks so active in businesses that are not really banking at all? Why do they invest in cashback schemes, rewards programs, lifestyle benefits, merchant offers, subscriptions, travel perks and other initiatives that often generate little direct profit and sometimes appear to lose money altogether?

The answer is simple: because the competitive battleground has shifted.

Banks increasingly compete not only for margins on products, but for customer primacy: being the institution a customer thinks of first, uses most often, and defaults to when the next financial need arises. In practice, primacy often shows up in one metric: share of card spend. The bank whose card is used first – and most – tends to win the relationship.

In a world where banking products are increasingly commoditized, that matters enormously.

Why primacy matters more than it used to

Retail banking has long contained commodity characteristics. A mortgage is still a mortgage. A current account still stores money and enables payments. Product innovation exists, but often at the margins.

For some time, digital user experience provided a meaningful differentiator. Better mobile apps, cleaner onboarding, smoother payments and more intuitive interfaces helped challengers win share.

But UX advantages rarely remain exclusive for long. Best practices diffuse across the market. Features are copied. Interfaces converge. Most banks now meet a broadly acceptable digital standard, even if some remain better than others.

In many markets, switching barriers have also fallen. The traditional concept of a “home bank” – the institution where salary arrives and everything else follows – has weakened. Customers increasingly hold multiple accounts, move balances easily, use specialist providers for different needs, and compare offers more actively. Fintechs and neobanks have accelerated this trend.

In such a market, winning a single product sale is useful. Winning the ongoing customer relationship is far more valuable.

That is where rewards programs enter the picture.

Rewards as strategic infrastructure

Rewards programs are often presented as customer benefits. Sometimes they are. Customers do respond to well-designed programs – but more to relevance than to generosity. Strategically, however, rewards are better understood as tools to influence behaviour.

They can help a bank:

• increase card usage
• become the primary spending account
• reduce churn
• increase engagement with the app
• support premium pricing
• create positive brand sentiment
• improve cross-sell economics over time

In short, rewards aim to convert a transactional relationship into a habitual one.

Not all rewards programs do this in the same way. To understand them properly, three questions matter more than glossy marketing materials.

1. Who ultimately pays for the reward? Banks, merchants, partners, networks, or some combination.
2. What economic benefit do they receive in return? Higher spend, retention, traffic, data, pricing power, or new customer acquisition.
3. Is that exchange sustainable over time? Can the payer continue funding the reward while still earning acceptable returns?

Every loyalty scheme is, at heart, a value transfer mechanism. Someone funds customer behaviour. The only real question is whether they receive enough value back.

Four common reward models

Most bank rewards programs fall into four broad archetypes.

1. Bank-centric points programs

The bank issues its own rewards currency. Customers earn points through card usage, subscriptions or broader engagement, then redeem them for benefits. Examples include established card reward schemes like Barclaycard Avios or Chase Sapphire, as well as newer fintech variants such as RevPoints. Points are attractive to issuers because the marginal cost of issuance is low. They are easy to print. The economic cost appears later, when points are redeemed.

That creates flexibility. A bank can shape perceived value through waived fees, premium benefits, travel rewards, vouchers, partner offers or internal products. Points can also create retention effects: accumulated balances feel valuable, and customers may hesitate to leave before redeeming them.

But they face a persistent dilemma: if rewards are unattractive, customers disengage; if rewards are compelling, they become expensive. Many points programs therefore sit in a difficult middle ground: operationally complex, strategically celebrated, but economically ambiguous.

2. Coalition points programs

Several institutions participate in a shared rewards currency. Examples include Payback in Germany or jö in Austria. The logic is clear: a broader ecosystem makes points more useful. Customers can earn and redeem across groceries, fuel, travel, pharmacies and financial services. This increases relevance and reduces the narrowness problem of proprietary schemes. Coalitions can also spread cost across participants.

But they introduce another challenge: politics. Conflicts tend to arise about who issues the most points, who receives the most redemptions, who gains traffic, who owns the customer relationship and who captures the data. Over time, tensions often emerge around how costs and benefits should be distributed. Coalition programs can build a larger ecosystem, but no single participant fully controls it and managing the politics can be daunting.

3. Bank-funded cashback

The simplest model: the bank gives customers money back on spend. Cashback is easy to understand, transparent, and immediately rewarding. Customers usually love it. Historically, many issuers funded generous cashback through interchange revenues, card economics and broader customer lifetime value assumptions.

But as interchange economics tightened and competition increased, broad-based cashback became harder to justify at scale. Cashback remains powerful as an acquisition tool, a premium-tier benefit or linked to credit cards, but structurally it can resemble price competition: easy to communicate, easy to copy, expensive to maintain.

4. Merchant-funded cashback

In this model, merchants fund rewards in exchange for customer demand. Banks communicate offers to users, who receive cashback for shopping with participating retailers.

This model is attractive because it can align incentives:

• customers get value
• merchants get sales
• banks get engagement without bearing full cost

In practice, one concept dominates the economics: incrementality.

The core cashback problem: deadweight loss

If a customer would have made the purchase anyway, cashback does not create growth. It simply transfers margin from merchant to customer. That is deadweight loss.

This problem becomes acute with large, high-frequency retailers – especially grocery chains. If customers already shop there regularly, blanket cashback can become extremely expensive while producing little additional demand. Subsidizing existing behaviour at scale is rarely attractive.

That is why large merchants increasingly ask tougher questions:

• What sales were truly incremental?
• Did basket size grow?
• Did trip frequency increase?
• Did spend shift from competitors?
• What is the ROI after subsidy cost?

For generic cashback programs, the answers are typically weak.

Why generic cashback is losing relevance

Retailers increasingly run their own apps, media channels and rewards ecosystems. They possess first-party data and direct customer relationships. As a result, they are less interested in external rewards schemes they do not control – unless the proposition is genuinely incremental and complementary.

Some banks still assume merchants are eager to join any bank-led program because of audience reach alone. That assumption is often overstated. Large merchants now expect commercial rigour, not vanity partnerships.

The future: precision over generosity

The next generation of rewards is unlikely to be defined by bigger subsidies. It will be defined by precision.

The key question is not: “How much cashback should we offer?” It is: “Which behaviour are we trying to change?”

Examples include winning the next grocery trip, increasing basket size, triggering an extra visit, shifting spend from a competitor, encouraging trial in a new category, or reinforcing valuable habits.

The challenge is designing a model that brings value to all sides – the merchants, the customers, and the bank. The solution cannot be a simplistic “let’s only target people who don’t shop with us”. That would mean non-relevant offers for most customers and lead to disengagement with the program. In the end, this would not work for the merchants either.

What is needed in practice is the capability to use enriched transaction data to understand each customers’ shopping patterns. From that picture, it becomes possible to identify where behaviour is genuinely moveable and to use a targeted nudge, rather than a blanket discount.

Why capability matters

This is not a spreadsheet business. To run effective modern rewards systems at scale requires:

• robust campaign and data infrastructure
• data enrichment capability
• targeting logic
• experimentation frameworks
• merchant analytics
• attribution models (to credibly prove incrementality)
• operational robustness
• flexible campaign tooling

Without those capabilities, programs tend to drift back toward generic subsidies dressed up as innovation.

Where specialist partners fit in

One implication of all this is that successful rewards ecosystems are rarely built by financial institutions alone. They require deep merchant relationships, a nuanced understanding of how consumers actually shop, the ability to identify where behaviour can genuinely be influenced, and the infrastructure to execute targeted campaigns reliably at scale. Most importantly, they require focus – the kind that comes from doing this as a core business, not a side initiative. This is precisely where specialist platforms such as Dateio can play a role: connecting bank payment data with merchants’ commercial objectives to deliver targeted offers that move behaviour and generate desired, measurable outcomes.

Closing thought

The banks that will win in this space are not necessarily those that offer the most generous rewards. They are those that understand which behaviours actually matter and design programs precise enough to move them.

Most discussions about rewards programs start with the product: points, cashback, tiers, benefits. The better starting point is a business question – what specific customer behaviour do we need to change, and what would it be worth to us if we did?

Programs that start with that question and build backwards from it tend to generate measurable commercial value. Programs that start with the product tend to generate marketing spend.

The difference is not cosmetic. It determines whether a rewards program is a strategic asset – or a cost centre dressed up as one.

The visible form – points or cashback – is only the surface. The deeper question is whether the program changes behaviour profitably.