Advice: Don't Back Off; Develop New Strategies Now
TAMPA, Fla.-Credit unions are being urged to become more active in developing strategies to grow credit and debit rewards programs, despite what doomsayers are predicting.
That is the advice from Bill Lehman, VP of portfolio consulting at Card Services For Credit Unions (CSCU). As the Federal Reserve prepares to implement the interchange provisions of the Dodd-Frank Financial Reform Act, Lehman said credit unions should be preparing to take advantage of limitations on large banks due to the Durbin amendment to Dodd-Frank.
"With Durbin being the genesis of the conversation, the debit rewards environment in the future will be an opportunity for credit unions," he said. "Rewards will change dramatically, especially at larger institutions."
Among the changes Lehman foresees: rewards programs will be devalued, in that the levels consumers have to earn before getting a reward will go "a lot" higher. Instead of 25,000 points earning a free airline ticket, for example, the number will be much higher and the ticket might be more restricted than is today. Financial institutions will be "measuring" individuals to determine if they warrant rewards," he predicted. There will be a move toward merchant-funded rewards, there might be more fees imposed and some FIs might even consider canceling rewards.
"Chase has already pulled away from debit rewards," he noted. "Debit rewards will not have anywhere near the value they have today."
These changes could work out to be an opportunity for credit unions, Lehman said, if they can effectively market and take advantage of the fact many large financial institutions will be stripping down their rewards programs.
"If we take advantage of this opportunity, it can strengthen existing relationships and attract new members," he predicted. "Credit unions need to consider retaining rewards programs and keeping them as a differentiator."
Of course, credit unions may have to implement some of the steps larger FIs will have to take. Lehman said CUs will have to include in their income/expense models such variations as merchant funding, and consider rewards as part of a relationship. Points might be linked to having more than just a checking account, but multiple relationships.
"It will be hard for credit unions to swallow, even though most credit unions are exempt from the interchange limitations [the Durbin amendment is supposed to apply only to FIs with less than $10 billion in assets, or all but three CUs]," Lehman told Credit Union Journal. "Interchange most likely will evolve and interchange income will be reduced under the two-tiered system due to market pressure. Why would a merchant want to pay more than 12 cents for a credit union card? To the extent it will change, I wish I knew, but credit unions should not assume the exemption will mean they won't have any loss of interchange income. There must be a balance of reduction of costs and remaining a differentiator."
According to Lehman, a move to merchant-funded rewards would be a "perfect enhancement" to rewards programs that exist today. Merchants will not be asked to pay for redemption of merchandise and air travel, he said, and credit unions will not be able to offer only a merchant discount program because consumers are "too savvy" and they expect to earn free air travel.
"But it will be a much larger part of it and financial institutions will start to add merchant funding," he declared. "By adding it on as a feature it helps alleviate costs. It is an agreement between the financial institution processor and the merchant to get a discount from the merchant."
CSCU is working with merchants to create rewards programs that give cardholders an incentive. For example, using a card at Best Buy would yield a greater-than-normal number of points per transaction-instead of one point for every dollar spent, the new threshold might be six points for every dollar.
"The financial institution only funds the original number of points," he explained. "I envision that merchant-funded rewards will change, meaning not only will cardholders earn bonus points at certain merchants, they will be able to redeem their points at the merchant."
Lehman said if he was managing a credit union card program today and was looking at both the current and proposed legislation that pertains to credit and debit interchange rates, he would assume his interchange income is going to be reduced. In response, he said CUs should look to recoup that revenue across a number of products, not just debit.
The Holistic View
"If we can gain that revenue across a number of products and services, it will be less detrimental. Rewards programs should be looked at holistically and credit and debit should be managed together. The CARD Act already caused credit card rewards programs to evolve, and Durbin is causing changes to debit."
In his opinion, this legislative intervention is "a bad example of our government getting involved in something it shouldn't be involved in."
"The regulation was not very well thought out and has been very negative to our industry," he said. "We are waiting for the final ruling, which has paralyzed us a little bit. We should be proactive and looking for ways to make sure we are going forward with a strategic plan to grow our credit and debit programs regardless of these rules."