Few consumers associate rich rewards programs with debit cards because traditionally it's been credit cards that have offered more-expansive benefits.
But now that more consumers are shunning credit and turning to debit, the banks are taking note. "Debit card users are actually outnumbering credit card users now, and as a consequence of that, rewards are a bigger focus," says Rick Ferguson, the editorial director of Colloquy, a loyalty marketing research firm.
While membership in credit card rewards program is declining -- from 71% of consumers surveyed by transaction processor First Data in 2008 to 67% this year -- debit rewards participation has increased significantly, from 34% of consumers surveyed in 2008 to 45% this year.
Just as banks used credit card rewards to attract new customers and encourage credit card spending in untapped markets (think double rewards for purchases at gas stations and fast-food restaurants, where cash was once the primary payment method), they are now starting to sweeten their debit rewards in hopes of luring more customers to their kind of plastic.
How the banks benefit
There's a lot at stake in that game. For one, rewards programs can actually help banks' revenues from interchange fees, now that new regulations will significantly curtail their ability to collect overdraft fees, says Ron Shevlin, a senior analyst who covers retail banking at market research firm Aite Group."Consumers that may have moved over to debit cards because of economics are eventually going to start looking around and saying, 'Could I get more for my transaction?'" says Julie Bohn, a vice president for information services at First Data. "If financial institutions don't respond now with good programs to keep consumers interested, you'll see that pendulum swing back where credit cards will earn the customer back."
The catch: Offering a rewards program isn't cheap. On average, a bank spends $20 to $25 per member each year for a debit rewards program, Shevlin says, which includes all costs associated with technology, marketing, support and redemptions. (Credit card programs are more expensive, at an average $30 per member a year.)
Financing these programs isn't as easy as it is for credit card programs, which bring in more revenue from interest charges, fees and higher interchange rates. "Generally, debit card rewards aren't as rich because it's harder to fund a compelling rewards program out of a strict debit card play," Ferguson says.
But the banks are finding some creative ways to offer compelling debit rewards programs. Here's what you can expect to see in the following months.
Continued: Taking rewards offline
