Loyalty vendor Buzz Points has armed itself with $19 million in fresh capital in hopes of capitalizing on small banks' growing desire to expand their debit rewards programs.

The infusion came from Discover Financial and other backers, and Austin, Tex.-based Buzz Points intends to use the funds to add more banks to its program that offers customers points for swiping their debit cards. Eventually, those points can be traded in for gift cards to local merchants or used to make a donation to a favorite charity.

Buzz Points' planned expansion comes at a time when many small banks are looking to either add merchant-funded rewards to their product mix or expand existing rewards programs. Consumers have come to expect rewards for using debit cards, and small banks fear that if they don't offer rewards they will lose customers to larger and regional banks that do.

"There is a growing expectation for debit card rewards," says Ronald Mazursky, director of debit advisory service at Mercator Advisory Group. "Bankers are trying to be smarter about their rewards program offerings."

Buzz Points' selling point to small banks is that it typically partners with local, rather than national, merchants. Whereas a large bank might offer points to be redeemed for gift cards at Banana Republic or Pottery Barn, a bank using Buzz Points' program might offer reward points that could be redeemed at a local dress shop, independent book store or coffee house.

Hints of this attitude are very visible online with banks like Bank of Tennessee promoting "shop local, bank local" on their websites.

A "large amount of community banks are looking for something local," says Mercator's Mazursky.

The most tangible benefit to the bank, of course, is that it receives interchange income with each swipe of a debit card. An ancillary benefit is that some of those shops either are or could become bank customers. Plus, bankers say that promoting local mom-and-pops is simply good business because it generates goodwill while helping local economies.

To be sure, there are challenges for merchant-funded reward programs, including whether the math (interchange income) works out for the bank, and keeping merchants — who may be less apt to continue to give repeated discounts to shoppers — distributing new offers on a regular basis. Indeed, consumers require new deals to keep their interest in the program, say observers.

"Without enough [merchant offers], it's like shopping at a mall where half the storefronts are shuttered — it just doesn't feel very exciting," says Ben Rogers, research director at Filene Research Institute, a think tank for credit unions.

Buzz Points, which recently added five sales people to its team of 70, plans to use its new funding to move into new markets.

Already, the company counts about 30 financial institution clients and operates in 13 states — including Texas, Florida and Illinois — and it is in the process of moving into Massachusetts, Michigan, Montana, Missouri and New York.

"We want to be coast to coast," says Jay Valanju, the chief executive at the five-year-old Buzz Points (formerly known as fisoc). "There is a lot of opportunity in the space right now."

Using Buzz Points' software, a bank can quickly enroll customers in its debit rewards program via email. Customers, once opted in, will receive points for swiping their enrolled cards and eventually can redeem them for gift cards to spend at local shops or use to donate to charities. There's a social twist, too: consumers receive points for say, tweeting, about the reward.

Still, consumers have a plethora of options when it comes to rewards programs, and competition is getting increasingly fierce.

Bank of America, for example, launched a program in 2012 that distributes discounts to consumers based on what they buy. BankAmeriDeals, the name of the program, has pitched 1.5 billion offers to its digital banking customers that have led to deeper customer engagement and retention, according to a February report in Target Marketing.

Mogl, a merchant-funded-reward-program vendor that partners with banks and credit unions to give customers cash back for dining at restaurants, is working to expand its program into Nevada and Florida.

And a new industry group called CardLinX Association launched in August with the intention of helping merchant-funded rewards succeed. Members include the likes of Bank of America, MasterCard, Discover, and First Data.

Nonetheless, some programs do flop. PerkStreet Financial, which partnered with banks to distribute cash back on debit purchases, closed shop in August because it ran out of money, while Ally Bank canceled its card-linked offers program last year because it felt it was of limited value to customers.

Hits and misses are to be expected, says Peter Olynick, lead for Carlisle & Gallagher Consulting Group. "You will see some ups and downs," he says. "It's a competitive space."

As part of its ramp up, Buzz Points, plans to better focus on mobile design and will have a "slew" of mobile-oriented products coming out for banks and merchants in coming quarters, Valanju says. "It's all around mobile, mobile, mobile."

Indeed, the Federal Reserve recently published a study that found mobile phones are increasingly being used to help make shopping decisions.

Already, Buzz Points offers apps that show bank customers where they can redeem their points, among other things. Mobile, according to Valanju, is a great way to execute on his company's mission: amplifying consumer awareness about, say, Joe's Coffee when there's a Starbucks on every corner.

The focus on mobile also comes as a new crop of apps — like Wallaby and Glyph — tell customers which of their cards earn the most rewards at point of sale.

Buzz Points' software is positioned as a top of wallet opportunity for banks. A 2013 Discover-owned Pulse debit issuer study found that banks exempt from caps on interchange fees — those with less than $10 billion of assets — earn about $96 per year for interchange on debit customers. With one of its flagship financial institution customers, Buzz Points' Valanju says it adds $5.35 per card per month — a telling metric of usage.

"Awareness must change buying behavior, otherwise [you] haven't accomplished anything," Valanju says.