Kelly Shermach

Prepaid card issuers and payments-industry experts expect to see more federal regulations aimed at preventing criminal use of prepaid cards and at protecting consumers-especially those not savvy about financial tools.

When Capital One Financial Corp. in August bought prepaid card distributor NetSpend Corp. for $700 million in cash, the McLean, Va.-based institution's hunger for new business and consumer financial-product relationships already was well-known. But the deal caught the industry unaware of bank discussions with nonbank entities in prepaid, observers say.

Rewards programs have become so prevalent that consumers now look for the added value when choosing credit cards. However, the programs, which started as a way to increase activation and usage and to differentiate one brand's card from others in consumers' wallets, now represent the biggest expense consuming issuers' interchange revenue.

Since she was an undergrad, Stanford University biochemistry lecturer Dafna Elrad, 34, has used a credit card as her primary budgeting tool. Choosing to carry just $20 or $40 in cash, she charges all purchases exceeding $5.

A showdown between credit and debit card use for Web-based shopping is under way. A March study by JupiterResearch found that a growing percentage of consumers are opting to use debit cards instead of credit cards online.

In recent years, point programs have become a necessary cost of entry for issuers marketing payment cards to small businesses. With the programs now common, the challenge for issuers is to differentiate their loyalty programs yet still turn a profit.

If one reward program is good, can two be twice as good? The success of credit and debit card loyalty programs has led banks to implement systems that reward consumers for all their banking activity. Large banks especially are finding the returns on these "relationship rewards" programs promising despite the expenses incurred for marketing, systems and fulfillment.

Wal-Mart Stores Inc. has spotlighted the gas-related feature of its new Wal-Mart Discover card to stoke customer interest in applying for the plastic. The card includes a 3-cents-per-gallon discount on fuel purchased at the 700 Wal-Mart stores that also have gas stations.

Private-label cards increasingly have come under the credit card industry microscope in an examination of their value proposition, both for issuers and for cardholders. And merchants are questioning why they should support a private-label program when general-purpose, cobranded cards keep growing in popularity.

So ubiquitous is the acceptance of MasterCard, Visa, American Express and Discover cards, it would be easy to take for granted merchant participation in the card programs. The card associations and closed-loop issuers, however, have no intention of letting their merchant partners become wallflowers, especially not in their advertising to prospective and current cardholders.

It's official. Card marketing is going to kindergarten. Loyalty card programs have become so prevalent and successful for for-profit companies in influencing consumer behavior that not-for-profits and public-sector entities such as schools have begun to employ them.

According to the respected British business magazine, The Economist, loyalty points represent the second-largest currency in issue, behind only the U.S. dollar. More than 100 million consumers receive promotional currencies for spending on everything from mortgage payments to flights and hotel stays to gallons of milk, according to the magazine.

Despite issuers' attempts to attract entrepreneurs to business cards, many small-business owners still use their consumer cards for work expenses. CCM reviews some marketing efforts aimed at changing that.

Loyalty-program marketers typically position their offerings to consumers as no-brainer schemes for attaining status, savings or some aspirational reward. Behind these schemes are increasingly sophisticated databases, many of which include so-called rules written to thank customers for displaying desired behaviors and to motivate them to keep shopping at the sponsoring merchant's locations.

Points for purchases may represent valuable currency to the majority of Americans, especially in shaky economic times. But marketers, including credit card issuers targeting high-net-worth individuals (i.e., the rich), are moving away from such tangible gifts as loyalty program awards, even if they are keeping the points.