Prediction #2: Merchants Will Be Key
DES MOINES, Iowa-Credit and debit rewards programs are not going to disappear because they remain effective tools and serve as differentiators.
That is according to Sara Petty, VP of client development for The Members Group, who added that she believes merchant-funded rewards will become more important because the most expensive part of any rewards program is the redemption piece.
Until the impact of the Durbin amendment to the Dodd-Frank Financial Reform Act is completely decided, Petty said it is difficult to predict the future, especially for financial institutions with less than $10 billion in assets. If the price controls in Durbin go into effect as scheduled, she predicted there will be a "domino effect" on institutions under the $10-billion threshold due to competition within the marketplace.
"It will be very interesting because there are so many unknowns at this time," she appraised. "Rewards programs will stay around because financial institutions always will want to incent behavior and those programs are very effective in influencing behavior."
As interchange income decreases, Petty said FIs will want to increase the number of transactions and somehow bridge the gap of the revenue loss-and rewards will play a role in doing that.
"The trick is to do so and still have a good business case, and part of that answer is merchant-funded rewards."
In the merchant-funded rewards scenario, the merchant absorbs the cost for the discount the company gives to consumers who are redeeming their points. For example, if Barnes & Noble offers a 5% discount, Barnes & Noble pays the difference between the full price and the discounted price, not the card issuer.
Petty said TMG has had detailed discussions with its client financial institutions about how to segment cardholders to "really incent" desired behavior. As the cards industry ventures into the future with an unknown, but probably lower, interchange rate, she said it will be important that rewards targeted to certain segments of the cardholder base are effective at changing the behavior to produce the desired results.
One bit of good news: CUs do not have to establish separate relationships with merchants for merchant-funded rewards because there are "plenty of programs available," Petty reported. She said The Members Group is looking at merchant funded rewards programs to offer to the credit unions it works with.
"These will allow credit unions to pass along merchant discounts without having to work out deals with each individual merchant. Pricing is a real gray area, though. Institutions that are under $10 billion will need to know the impact the Durbin amendment has on their interchange income. These credit unions have an opportunity because the impact will not be as drastic as on larger institutions, so they will be able to compete with banks over $10 billion because they won't have to charge as high of fees."
The most important thing to remember, she added, "It is really going to boil down to putting together a business case to operate a well-run rewards program."