NEW YORK—For decades, credit card rewards have been one of the most powerful tools financial institutions have used to attract and retain customers. But new research suggests many issuers no longer believe their traditional rewards programs are accomplishing that mission.
According to a new report from PYMNTS Intelligence and FIS, fewer than half of issuers say their current rewards programs effectively drive loyalty, retention or card switching, even as billions of dollars continue to be invested annually in points, cash-back offers and other incentives. The findings point to growing dissatisfaction with traditional rewards models and explain why issuers are increasingly interested in a new approach known as "smart basket" technology.
The report found just 44% of issuers believe their rewards programs increase customer loyalty or retention, while only 47% say rewards cause cardholders to switch to their cards and just 40% believe rewards influence the timing of spending. While rewards continue to generate transaction volume—with 66% of issuers saying they increase card use frequency and 61% saying they boost total spending—the programs appear far less effective at strengthening long-term customer relationships.
That finding is especially significant because loyalty has become increasingly difficult to maintain as consumers juggle multiple payment cards, digital wallets and alternative payment methods. According to the report, many issuers believe traditional rewards programs have become blunt instruments that drive spending but fail to meaningfully increase customer lifetime value. At the same time, consumers report similar frustrations. PYMNTS found that half of shoppers say they never see relevant offers, while 40% of consumers who ignored an offer said it simply wasn't relevant to them.
Enter smart basket technology, which seeks to bring rewards directly into the checkout experience. Rather than offering generic points multipliers or statement credits after a purchase, smart basket systems use real-time transaction, payment and loyalty data to deliver personalized incentives at the point of sale. A shopper might automatically receive a discount on a specific item or merchant category during checkout, with savings applied instantly instead of weeks later. The goal is to connect payment choice directly to an immediate and visible benefit.
The concept appears to have struck a chord with issuers. PYMNTS found that 90% of issuers are very or extremely interested in participating in a smart basket ecosystem, with only a single company among the 70 surveyed expressing disinterest. Interest was remarkably consistent across institution types, including large banks, regional institutions, credit unions and fintech firms. More than eight in 10 issuers said they would adopt smart basket technology either quickly or selectively if it became commercially available.
The enthusiasm stems from issuers' belief that smart basket systems outperform traditional rewards programs across virtually every important metric. When asked to compare smart basket capabilities against current post-transaction rewards, issuers rated the newer approach as significantly more effective in every category studied. The largest advantages were in improving top-of-wallet status, customer retention, card selection at checkout, frequency of card use and overall share of wallet. Even customer acquisition—the category where smart basket scored lowest—still showed a substantial advantage over existing rewards programs.
For credit unions, the findings may be particularly relevant. Smaller institutions have traditionally struggled to compete with national issuers on rewards budgets and large-scale loyalty programs. Yet the report suggests smaller organizations may be positioned to move more quickly than their larger competitors. While 38% of institutions with more than $50 billion in assets said they would wait to see proof of return on investment before adopting smart basket technology, none of the smallest issuers surveyed expressed a wait-and-see approach. Researchers suggested smaller institutions may benefit from more flexible operating models and greater willingness to embrace emerging technologies.
Another notable finding is how quickly issuers expect the technology to become mainstream. Eighty-four percent said smart basket capabilities will become a core part of their loyalty and rewards strategies within five years. Even more striking, 81% said the technology will either become a standard capability or a significant competitive differentiator within just two years. In other words, many issuers do not see smart basket as an experimental feature but as a potentially essential component of future card programs.
The transition, however, will not happen automatically. Issuers cited a number of structural challenges that currently limit their ability to deliver personalized offers. Only 39% have merchant or platform partnerships capable of executing offers at the point of sale. Less than half have the transaction-level capabilities necessary to reconcile offers, manage funding or apply real-time decisioning. Those gaps help explain why so many institutions continue relying on broad-based rewards despite recognizing their shortcomings.
The report also found issuers are unwilling to surrender control in exchange for innovation. Three-quarters expect smart basket systems to increase their control over loyalty economics, and they identified governance, financial liability and limits on incentive exposure as critical conditions for participation. In other words, issuers may be eager for a new rewards model, but they want one that preserves oversight of customer targeting, merchant participation and economics.