The TowerGroup has just released a new report suggesting that banks rethink their loyalty programs for cards. I tend to agree that existing loyalty card programs need to be retooled, but I’m not sure I’d go with the TowerGroup recommendations to use loyalty rewards to encourage good credit behavior in the hard times that we may be getting into.

Banks need to be vigilant about charge-offs, even in tough times. But that requires a target approach that deals with the relatively small segment of the population that will be credit risks. Reward points aren’t the right instrument for that.

The problem with loyalty programs is they’ve all become pretty similar and they are about as powerful at generating real loyalty to the brand as a nonrefundable deposit. Nor are they targeted to the people who need the most incentives to spend more, or remain with the brand. So TowerGroup is right—real innovation is required here, but not in policing bad behavior. Karen Webster at MPD has a great paper on loyalty (registration required) that you might want to check out for more thoughts on card loyalty programs.