Redemption behavior for credit card reward programs in China在中国的信用卡奖励计划的赎回行为

Citations∙Related ContentSearch our articles for similar content∙Key readingsSearch our reviews for related itemsOriginality/value– The study provides an original insight into an important element of consumer behavior with credit card reward programs in the banking industry serving a lower-middle-income segment in a developing region such as China. Guidance is also offered for marketing managers responsible for promoting credit card usage and reward programs.Article Type:Research paperKeyword(s):Loyalty schemes; Customer loyalty; Credit cards; China.Journal:International Journal of Bank MarketingVolume:27Number:2Year:2009pp:150-166Copyright ©Emerald Group Publishing LimitedISSN:0265-23231. Customer loyalty programsCustomer loyalty programs are now thought to have been among the most successful marketing tools of the 1990s, and they have received considerable attention in both trade and academicjournals. Loyal customers are considered an asset to the business, as relative costs of customer retention are substantially lower than those of acquisition (Fornell and Wernerfelt, 1987). Consumer loyalty is considered an important key to organizational success and profit (Oliver, 1997), and practitioners increasingly refer to the “lifetime value” of customers as a form of equity. Customer loyalty programs focus on the firm's existing customer base with the intention of building lasting relationships as well as to strengthening commitment and creating “velvet handcuffs” that bond the customer to the brand (Dowling and Uncles, 1997). Some key loyalty-marketing trends have been identified and explored in detail (Capizzi and Ferguson, 2005).2. Literature review2.1. BackgroundThe first loyalty programs appear to have been the “trading stamp programs,” popular in parts of the USA during the late 1950s and 1960s. Typically customers received one stamp for every 10 cents of purchase, and could redeem their stamps for merchandise at specially established redemption centers. Trading stamps became so popular in some areas that retailers competed by offering three and four times the normal award of stamps. It was not unusual to see automobile glove compartments and kitchen drawers stuffed with trading stamps. In the early 1980s, airlines added frequent flier programs, with points accumulated on the basis of miles flown and redeemable for free flights, (Wansink, 2003). Frequent flier programs have been in existence for over 25 years and have dramatically changed the pricing and marketing programs of what is essentially a commodity business (Varien, 1999). During this period also, loyalty programs became popular with other service industries such as hotels, rental car agencies, department stores, and credit cards.Loyalty programs usually provide rewards based on cumulative purchases, and are an explicit attempt to enhance customer retention and increase product usage. They also serve to attract new customers with the promise of additional benefits. They encourage repeat buying and thereby improve both retention rates and “share of wallet” fr om regular customers (Lewis, 2004). Bell and Lal (2002)in their study on the “Impact of frequent shopper programs in grocery retailing” suggest two major reasons for the success of frequent shopper programs:1. reduced price competition and thereforehigher margins and profits due to switchingcosts faced by customers; and2. reduced marketing expenses by focusingattention on retaining loyal customers andcapturing an increasing share of their wallet.Consumers are motivated to participate in such programs because, fundamentally, they like to get something for nothing (Uncles, 1994). Past research has tried to assess the effectiveness of loyalty programs in creating true customer loyalty. Among the findings are that such programs are more suitable for products and services with high margins or ones that a customer will invest in heavily over a long period of time (Wansink, 2003). Point-based reward programs, the specific focus of this paper, also work well for products and services that are typically not unique (Geller, 1997), e.g.,video rentals, groceries, and car wash services. Rothschild and Gaidis (1981) suggested that consumers have “deal-loyalty” rather than loyalty to core products or vendors; in such cases, once the loyalty program is withdrawn there is a decline in consumer loyalty. Although a few researchers (e.g. Sharp and Sharp, 1997; Drèze and Hoch, 1998; Liu, 2007) reached conclusions that doubted the effect of reward point programs, most research results show them to be beneficial to a wide range of businesses.2.2. Credit card reward programsCredit card reward programs have become increasingly popular with banks and credit unions because they provide an extra incentive for consumers to choose one brand of card over another. In 2007, more than 85 percent of US households participated in at least one reward program, including credit card and airline frequent flyer programs (Simon, 2007). According to Bolton et al. (2000), credit card users who belong to loyalty programs spend more than non-members, but they are not more likely to retain their accounts over time, i.e., the programs increase usage but do not appear to build loyalty.There are essentially three types of rewards programs for credit card users: point-based, cash back, and airline miles, with some cards offering combinations of these. The current research focuses on point-based programs. Benefits of reward points from using a credit card are dependent on the program selected by the customer, but can include free flights, free accommodation, electronic equipment, vouchers and gift certificates to major retailers, magazine subscriptions, passes to major theme parks, and even tax reduction (China Securities Journal, 2004).In addition, consumers' preferred usage of reward points (i.e., accumulation or redemption) differs by country. For example, during one period many Australian credit card holders were effectively paid each time they used their cards as a result of the combination of interest-free credit and reward points (Lowe, 2005). In South Korea, increasing competition among credit card issuers has led them to load their cards with several incentives, including reward points and discounts. Although cardholders earn reward points, they are required to accumulate a certain number of points before being able to use them. Consequently, the rewards system does not appeal to infrequent card users, for whom increased discounts without reward points would be more attractive (Euromonitor International, 2008). In the USA, more than half of today's credit-card solicitations offer rewards. Interestingly, however, at least half of all customers with point-based reward cards have never redeemed their points (Quinn, 2005).On average, cards that offer rewards charge higher interest rates on unpaid balances than cards that do not offer rewards. Presumably, people who clear their balances each month should prefer a card that offers rewards. Consumers who do not clear their balances each month are referred to as “revolvers” and a 2004 study in the USA estimated 115 million cardholders to be “revolvers” (Public Broadcasting Service, n.d.).Promotions are an important element for the success of reward programs. Mastroberte (2005) concluded that even some very good ones may fail due to lack of proper promotion. Developing promotional themes that focus on information about the value-added features of a particular creditcard may induce customers to select and use it (Goyal, 2004). Since establishing a reward program has considerable cost implications, any company launching one must look into its feasibility in terms of expected increase in sales, market share, customer retention, and profitability.2.3. Credit cards in China: Past, present and futureIn 1985, the Zhuhai branch of the Bank of China issued China's first credit card. Since that time various cards have followed, including the “Great Wall card” of the B ank of China (BOC), the “Mudan card” of the Industrial and Commercial Bank of China (ICBC), the “Dragon card” of China Construction Bank (CCB), the “Jinsui card” of China Agricultural Bank (CAB), and the “All in One card” of China Merchants Bank (CMB). Chi naUnionPay (CUP) reported that in 2005 there were 960 million payment cards issued, 920 million of which were debit cards. The remaining 40 million were credit cards, of which only 12 million were revolving credit cards (ChinaUnionPay, 2006). The remaining 28 million credit cards were what is known in China as “quasi” credit cards, in that they required a deposit from the cardholder to be held by the card issuer. These would elsewhere be called “secured” credit cards, as there is a secured deposit required from the cardholder that is then held against the card (Worthington et al., 2007). Given China's population of over 1.3 billion people, this low penetration rate is expected to increase rapidly in the future.Emloh and Wang (2005) cite a McKinsey Quarterly report that credit cards are already thefastest-growing consumer credit product in China, and that all signs point to explosive growth in card usage and profitability over the next decade. The potential of the credit card business in China is huge for several reasons:∙China's current credit card penetration rate isminuscule compared with the USA (0.9percent vs. 300 percent[1]; Reuters News,2007).∙The total average unpaid balance of all creditcards in China is only US$36 million (2.5billion RMB[2]) (Gleave and Hall, 2007).Despite a cultural propensity toward savings,the emerging Chinese “consumer class” is ripefor credit-based purchases and carryingbalances forward across billing periods.∙The Chinese domestic credit card business hadnot realized any profit by 2007 (although forthe multi-national banks, credit cardoperations accounted for about 10 percent oftotal profit) (Gleave and Hall, 2007).∙Credit cards accounted for only three percent ofconsumer purchases in China, compared tosome 20 percent in Hong Kong at the end of2004 (Craig, 2005).Taken together, these suggest that credit cards in China are in the early growth stage of their product life cycle, with major profitability still to come. McKinsey & Co. estimates total industry profit could reach US$1.6 billion by the year 2013 (Reuters News, 2007).The Asia-Pacific region is the fastest-growing wealth management market in the world (Dwyer, 2004), and the Chinese emerging middle class – characterized by income stability and upward mobility – holds high potential for increased use of credit cards. Further, it is rapidly growing to become the largest middle class the world has ever seen. What happens as this market emerges in China may help scholars and business practitioners predict what is likely to happen in India and other rapidly developing and “Westernizing” countries. The gross domestic product (GDP) per capita in China reached US$2,360 in 2007 (National Bureau of Statistics of China, 2008), suggesting that China is stepping into lower-middle-income country according to the classification given by World Bank. In 2006, there were 35 million middle-income households in China, with annual incomes ranging between US$7,500 and US$25,000, and this number is expected to grow to over 100 million by 2016 (HSBC, 2007). Also, Farrell et al. (2006) of McKinsey & Company have reported on the value of China's emerging middle class, in particular the urban-affluent segment who earn more than 100,000 RMB per year. This group is estimated to command 500 billion RMB (nearly 10 percent) of China's urban disposable income, despite accounting for just one percent of the total population[3]. The report estimates that by 2025 the urban-affluent segment will comprise 40 million people in China, accounting for 11 percent of all urban dwellers. However theurban-affluent will be a critical market for some categories of products and services; in particular, Farrell et al. (2006)claim “their importance to banks and other financial services firms will increase” because these Chinese households are the ones most likely to use consumer credit facilities to buy consumer goods (Worthington et al., 2007). In addition to sustained annual growth averaging over 9 percent between 1980 and 2008, China's full emergence into the global economic community is evidenced by the Chinese government's commitment to the WTO, hosting the 2008 Olympic Games in Beijing, and hosting the World EXPO 2010 in Shanghai. This growth includes a vastly improved and expanded electronic payment infrastructure (e.g. POS), a further enabling condition for the rapid growth of credit card use.Because reward programs have proven effective in attracting credit card customers and somewhat effective at building their loyalty (Uncles, 1994; Geller, 1997), understanding their effect in China is important to both scholars and the banking community in Asia. However, studies of this nature are rare (Li et al., 2007). The current research evaluates one kind of credit card reward programs (the point-based programs) launched by Chinese banks in recent years.2.4. Research gap and motivationMost of the studies related to credit card point-reward programs have been conducted in developed countries, where they are well established. Past research has dealt with issues related to characteristics of rewards and their impact; however, some of the basic issues (for example, the role of consumer awareness and the extent of card issuers' efforts in creating consumer awareness and knowledge) appear to remain unexplored anywhere. Further, no studies appear to have been conducted on loyalty programs of financial services in China. Chinese credit cards have featuredreward programs since 1999, and almost every credit card company now offers its own point-based reward program. By 2007, the Chinese credit card industry had become extremely competitive.Despite the popularity and rapid growth of card reward programs in most developing countries, however, their impact on customer usage rates and loyalty is largely unexplored, especially with respect to awareness of the programs themselves and the redemption of rewards. The current research offers an analysis of:∙awareness levels of point-based rewardprograms among Chinese credit cardcustomers;∙redemption rates of reward points among creditcard users;∙reasons behind low levels of point redemption;and∙factors that precede redemption.In assessing these factors the paper addresses:∙whether a relationship exists between the acustomer's length of credit card use andawareness of the point-reward point program;∙the relationship between awareness and pointredemption;∙whether positive consumer attitudes towardprogram incentives is associated with greaterlevels of redemption; and∙the relationship between card credit card usagerates and redemption rates.”3. Research method and questionsA two-phase study was conducted between May and August, 2007; the first consisted of exploratory focus group discussions, while the second involved over 400 personal interviews with credit card users in China. All focus group discussions and survey interviews were conducted by doctoral students in management who received formal training in research methods and interviewing skills at either Peking University (in Beijing) or Fudan University (in Shanghai) in China. To avoid possible confusion among bank cards, debit cards, and credit cards, interviewers were trained about the differences, and they in turn ensured that respondents – in both phases of the study – clearly understood what a credit card is.Three focus discussions were conducted for the first phase of the research, which explored customers' awareness levels of credit card loyalty programs and other factors affecting their use. Participants were credit card holders in Beijing, Shanghai, and Guangzhou, and most were either graduate students or young salaried workers. Questions for the groups were related to attributes ofcredit card point-based reward programs and participant behaviors toward and attitudes about them (see Appendix), such as the length of credit card use, average usage rates, preferences for making purchases using credit cards versus cash and the reasons behind such preferences, awareness of additional features of and reward programs available with their cards, redemption of reward points, reasons behind not redeeming reward points, and general attitudes toward credit card incentive programs (see Table I)[4]. Participants who understood the reward-point program of their card expressed were more apt to speak of redeeming points. A typical example was a corporate officer who displayed enthusiasm about the different circumstances in which she redeemed points[5]:Redeeming tangible gifts is the most fundamental level (laugh). There are lots of ways to utilize reward points. For example, we could redeem some in airport to use the VIP room to enjoy relaxed waiting time. [You can use points] to park your car in the parking area of department stores when you go shopping; by the way, using a specific card in appointed stores could obtain double points! I redeem my points in many ways, and it's really convenient, why not? (Ms Li, company officer)Understandably, participants who knew little about reward point programs were unlikely to redeem points:I knew they [banks] offer it [reward point programs], but I don't know how many points should be collected to redeem gifts … is it difficult? … What do they offer exactly? I have no idea … How do I redeem? What's the process? (Mr Zhang, public servant).To redeem points for gifts? Come on, it's time-consuming to get it [a gift] in the bank, it's not worthwhile to do it because time is money, I'm not willing to visit the bank for only a tiny gift though I could, it's too bothersome (Ms Xu, business owner).People who use their credit card frequently obtain enough points to redeem some rewards more rapidly and frequently. The value of redeemed gift is also an important factor to consider:I, and my colleagues, have business trips every two weeks on average, we usually buy a plane ticket; also we need to treat clients – or ourselves when we work overtime – even more frequently. We are used to paying with a credit card in advance, and actually paying the invoice at the end of the month. But I could submit the bills [and be reimbursed] immediately at my company, so it's great to earn some interest gains, why not? Also, it's inconvenient to bring much cash when traveling, so a credit card is good for us. We mostly will choose famous restaurants, and most of them accept credit cards. I can earn interest, reward points, and convenience at same time (Mr Yu, business consultant).I can't use credit card in many places. I always pay cash in restaurants and supermarkets where I usually visit. I don't have much time and money to go shopping in those luxury places. I don't use my card often though I have one (Ms Wang, graduate student).Give me a break, why do I need to spend much money to collect points to redeem a cup [an inexpensive gift]? A cup only costs me 5 dollars if I go to buy one directly. On the contrary, if I want to obtain some good things like a mobile phone, a digital camera, or a vacuum cleaner, myconsumption is not nearly enough [to redeem reward points]! So would you please tell me what on earth the meaning of redemption is? ((Mr Liu, public servant).Some participants' attitudes toward point-reward program incentives seemed very positive:Oh of course, it's great to get some gifts by redeeming points. Those things, like slippers, cup, towel, puzzle etc, are good and useful. It's not hard to collect such qualified points, so I think I am willing to collect and rede em the bonus points to get the gifts … now I am considering redeeming my points for a Hello Kitty toaster, it's really cute! (laugh) [Many other participants said “yes”, “agree”, and “sure” noisily] (Ms Zhang, graduate student).There are many choices for redeeming your points. Most of them are good. Although I may not have enough points lately, I will keep collecting points when I use my credit card. It's free, isn't it? ((Mr Zhu, college lecturer).Focus group participants also spoke to duration of card usage, the number of cards they held and used, and point expiration periods. Focus group results provided valuable inputs in terms of identifying important variables to incorporate into the subsequent interviews, and in other aspects related to preparation of the survey instrument for the next stage of the research.The second phase of the research consisted of an extensive telephone survey, drawn from random samples of telephone subscribers from the 2006 China Telecom directories, and from convenience samples of business people (in order to increase both their representation and the response rate) drawn from the 2006 China Telecom yellow books, in five major cities (Beijing, Shanghai, Guangzhou, Chongqing, Shenzhen). These five cities may be considered to represent the urban population of China, and both telephone subscribers and business people in developing countries are generally better educated and earn higher incomes than the population at large. That is, the sample was drawn from a population more likely to be credit card users than the general Chinese population. Participants were screened to be over the age of 20 and to hold at least one credit card. All credit cards in China at the time featured reward programs. The research sought to know:1. Is awareness about point-reward programsgreater for customers who have used theircards longer? (Q1).2. Do customers who are more aware of theirpoint-reward program redeem their points athigher rates? (Q2).3. Do customers who hold more positiveattitudes toward their point-reward programredeem their points at higher rates? (Q3).4. Do customers who use their credit cards moreredeem their points at higher rates? (Q4).4. Research findings4.1. The Chinese credit card userInterviewers placed calls to 1,200 telephone subscribers and business people, of which 401 agreed to participate in the survey (a response rate of 33.4 percent[6]). Calls were placed between 3 and 5 p.m., from June to August, 2007. Table II displays the demographic characteristics of the sample; note that most respondents were male (63.8 percent); and most were employed as professionals (51.6 percent) or were business owners (28.4 percent). With respect to education, 22.7 percent were high school graduates, 40.6 percent held undergraduate degrees, and 19.5 percent held graduate degrees. The most popular categories of annual incomes were in the ranges of 20,000 to 50,000 RMB (36.7 percent) and 15,000 to 20,000 RMB (28.9 percent).4.2. Awareness of the point-reward programsRespondent awareness of their credit card reward program was coded into one of three categories: fully aware, partially aware, an d completely unaware. Six “yes or no” questions about credit card reward programs were asked to determine a respondent's degree of awareness. Fully aware respondents were those who were not only aware of the reward program(s) associated with their credit card(s), but who also knew the money-reward proposition (how many points per amount of purchase), the minimum number of points required before redemption, the redemption procedure, and the rewards available for redemption (gift vouchers, personal products, waiver of annual fee, etc.). Only 26 percent respondents were found to be fully aware. Partially aware respondents (53 percent) were those who knew about the reward program but did not fulfill all the condition of being “completely aware” (e.g., they did n ot know the money-reward proposition, or the redemption procedure, or the rewards themselves). Finally, completely unaware respondents (21 percent) were those who reported not being aware of the existence of any such program. Thus 79 percent of the sample reported being either completely or partially aware of their cards' point-reward program. This proportion is close to the 82.7 percent of credit card users in Taiwan who were fully or partially aware of reward programs offered by banks there (Lou, 2006).4.3. Reasons behind low redemption ratesOne of the more interesting findings of the study was that only 36 percent of respondents reported redeeming their reward points. Among other things, this begs the question why almost two-thirds of respondents (the other 64 percent) reported never redeeming. When “non-redeemers” were asked why, 47 percent said they were not aware of the redemption process, 14 percent said they never earned enough points to become eligible for redemption, and another 35 percent reported being unaware of the reward program altogether. Only 4 percent of the “non-redeemers” reported that the point-reward benefits were not sufficiently valuable to warrant going through the effort to redeem them. Obviously, banks and other card issuers track these low redemption rates, but it is questionable whether they actively promote to increase them.Even credit card reward programs in mature markets (e.g., the USA and Western Europe) have long been characterized by low redemption rates, where estimates range between 21 percent and 40 percent (Diamond Consultants, 2007). The reasons behind low redemption rates are basically the same as those discovered for Chinese credit card customers in this study: little communicationfrom sponsoring banks about the programs once a customer has received a card, complicated redemption procedures, etc. Again, it could be tempting to conclude that these reward programs are not currently aimed at increasing customer loyalty nearly so much as they are aimed at attracting new card holders. Some banks may conclude in this regard that it is in their bestshort-term financial interests to offer a value-added service that they do not encourage customers to use. This issue is discussed later in the paper, with particular attention to how Chinese banks might be advised to address it as the credit card market matures there.The four research questions identified above were subjected to Chi-square and other analyses to test them for statistical significance, with the following results as revealed in Table III. Simple χ2 was applied on data at the 95 percent level of significance. There was a significant association between redemption rates and awareness about reward point programs (p=0.003), credit card usage rate (p=0.021), and positive attitudes toward incentives of their point-reward program(p=0.012). Moreover, the relationships of awareness vs redemption rate (phi=0.859), usage rate vs redemption rate (phi=0.738) and attitudes toward incentives vs redemption rate (phi=0.834) were significantly positive. However, a longer card use history was not related to greater awareness about point-reward programs (p=0.185).4.4. Regression model of redemption factorsRegression analysis was employed in an effort to establish relationships between various factors and redemption behavior. The regression model expresses reward point redemption (dependent variable) as a function of the following independent variables: awareness about reward point programs, duration of credit card usage, average usage of credit cards, and attitude toward incentives of reward point programs. These were selected based on results of both the qualitative study and the significance of their χ2 analyses.The second independent variable above is the card usage rate. A customer who uses a credit card more often compared to cash will accumulate more reward points and be able to redeem them more often or for larger rewards. The third independent variable above is positive attitude towards incentive programs, another important antecedent of point redemption. Credit card users who value reward incentives may educate themselves more fully about them and accumulate points by using their cards more often. The promotion incentive is one of the most important factors influencing Chinese consumers' intention to have a credit card (Wu and Zheng, 2006). The current research measured respondents' attitudes toward incentives of reward point programs using a single-item measure by asking them to respond on a five point Likert-type scale to the statement: “The various incentives offered by cr edit card issuers are beneficial rewards to consumers.” Length of credit card usage, although it has a small impact on redemption, still may be significant if for no other reason than that a customer using a credit card over a long period of time is more likely to accumulate reward points. The resulting regression formula was RPR=0.827+0.423Aw−0.27D+0.29U+0.39At. The determination coefficient is 0.552 (R2), and the regression formula is fit (F=65.642, Sig.=0.001) (see Table IV).The important conditions positively affecting redemption of reward points were found to include awareness of the reward point program, a positive attitude about the incentives, and average。