Growing Rewards

Since rewards programs worked so well for the credit card industry, financial institutions are looking at tying them to debit cards. According to experts, the trend is on the cusp of really taking off. Debit rewards are "a logical progression from the explosion of credit card rewards programs, the importance consumers place on rewards and the increasing use of debit," says Bruce Cundiff, research analyst, Javelin Strategy & Research (Pleasanton, Calif.).

Most of the large banks have begun offering rewards tied to their debit cards, according to Trish Preston, group head of debit product management at MasterCard (Purchase, N.Y.), which predicts that by year-end, the top 10 debit issuers all will have some kind of debit card rewards program in place. Currently, 36 percent of banks offer debit rewards, reports Dove Consulting (Boston).

Debit rewards comprise the next frontier in banks' efforts to retain customers, Preston relates. "Banks want customers who use their accounts in the most profitable ways," she explains. "If you offer debit rewards, customers might think twice before using cash or checks to buy something. They'll think twice before moving their relationship, too."

Debit and credit card rewards programs do not differ much in how they work, Preston notes. "Maybe the value of the rewards might be different because of the profitability of credit cards versus debit cards," she says. For instance, a debit program might give one point for every $2 spent, rather than for every $1, as is the case with most credit card programs.

Another difference, adds Javelin's Cundiff, is that most debit programs restrict rewards to signature debit purchases only, not PIN-based transactions. "Banks earn more money on signature transactions," he says. "This leads to cardholder confusion - if customers don't read the fine print, they won't know that PIN transactions are ineligible for rewards points. This needs to be explained clearly to consumers."

Merchant involvement in debit rewards initiatives, however, could alleviate some of the confusion, Cundiff says. This would come in the form of affinity debit programs in which the merchants - not the banks - fund the rewards. This, Cundiff says, would open the door to PIN-based transactions in the point-accumulation game. "The majority of rewards programs are paid for by interchange fees. If a merchant receives large volumes of PIN transactions, their costs go down," he explains. "So they can potentially take some of these savings and offer affinity programs."

But regardless of the signature-based versus PIN-based debit rewards issue, banks still stand to gain from a debit card rewards program. MasterCard's Preston says the company is looking at ways to help banks optimize their initiatives by linking credit and debit card rewards in a kind of packaged solution. "A lot of banks are interested in this," she notes. "In such a highly competitive and commoditized market, banks are looking for ways to differentiate themselves. They want to hook customers into more than one product."

Although Preston and Cundiff agree there is not quite as much visibility around debit rewards as there is with credit card rewards, both think the idea will have mass appeal for consumers once banks get them up to speed. "Debit rewards is a concept that resonates with consumers," Javelin's Cundiff states. "It will spur debit usage and is a big retention play. It's still limited to the large financial institutions, but it might be something the midtier and smaller institutions need to implement to remain competitive over the next 18 to 24 months."