Recent data suggest banks' confidence that they could get their customers to use debit cards has turned out to be justified.
But it remains to be seen whether banks can build on that by getting consumers to see the cards as more than a small-ticket payment device. Large issuers have looked to rewards in the past couple of years, but bank executives say those programs, popular with credit cards, do not translate well to debit because profit margins cannot yet support the costs.
Banks are continuing their experiments anyway in the hope that debit -which caught up with credit cards in transaction volume, according to Visa U.S.A.'s first-half numbers - will match that gain in dollar terms.
Some say that debit has reached its peak. "You're already seeing" a tapering off in the cards' growth, said Jeff Trachtman, vice president in charge of card products at Cincinnati's Fifth Third Bancorp.
At Fifth Third's processing arm, Midwest Payment Systems, which works with 850 banks, the pace of debit transactions is still growing but has probably topped out, Mr. Trachtman said. "Banks are trying to increase usage" among low-volume users - to "drive debit cards as a potential retention tool through reward programs," he said.
A look at the retail bank industry shows debit pilot programs using airline miles (Bank of America Corp., Citigroup Inc.), rebates (U.S. Bancorp, Fifth Third), and even fee-based penalties for using the cards the wrong way - with a personal identification number - (Wells Fargo & Co.). There are more tricks to try, but executives say the jury is still out as to whether what works with credit can also work with debit.
"There are any number of ways to build the value proposition for customers: affinity programs, rebates, reducing fees on related products like checking accounts, all kinds of things," said Robert Whyte, senior vice president in charge of debit cards at Bank of America, the country's largest debit card issuer.
Bank of America introduced three Visa Check cards, cobranded with Alaska Airlines, America West, and USAirways, a year ago. "It's fair to say that we're still testing," Mr. Whyte said.
Incentive devices for debit cards are still new, said Mr. Whyte , who attributed industrywide growth of debit cards to adoption by more banks. "I don't think reward programs, at least to date, have been driving the growth," he said.
Visa said Monday that in the first half it processed 3.04 billion Visa debit card purchases and 2.96 billion Visa credit card transactions. It was the first time debit had topped credit in number of transactions at Visa.
Stacey Pinkerd, Visa U.S.A.'s senior vice president of debit and prepaid products, said in an interview Monday, "Rewards are an increasingly used tool, but they're not broad enough at this point to make a significant difference in the overall numbers."
Pat Wesner, executive vice president in charge of consumer and small-business credit and debit portfolios at U.S. Bancorp, agreed. "Relatively speaking," she said, "there are very few reward programs offered in conjunction with debit cards right now. You see this volume spurt since the mid-'90s without any reward or rebate programs."
Ms. Wesner said the industry is still tweaking debit features - in part because banks are still figuring out the "economic dynamics" of debit cards.
"Somewhere it's written down in stone that groceries and gas are cash purchases, and refrigerators are credit," she said. "Debit involves a different value exchange for the consumer and the card issuer."
U.S. Bancorp's U.S. Bank this summer started Checking that Pays, under which customers get 1% rebates of the total purchase amount made on the Visa check card. In addition to its standard check card, U.S. Bank has three cobranded versions: with Northwest Airlines, the Minnesota Timberwolves of professional basketball and the National Football League's Denver Broncos.
There is one catch with Checking that Pays: cardholders only accrue points on "offline," or signature-based transactions, not on transactions completed with PINs. The difference is more than technical. Banks make money on signature-based transactions, which run through the Visa and MasterCard networks. They do not make money on PIN-based transactions, which run through such electronic funds-transfer networks as Star Systems and NYCE and are cheaper for merchants to process.
Banks' decisions to steer customers toward signature-based transactions through loyalty programs that reward them for signing - and also through fees that punish them for PIN-punching - pose a counterthreat to merchants who have long pulled customers in the other direction.
This tug-of-war is playing out in the class-action antitrust suit brought by nearly four million retailers against Visa and MasterCard. Merchants seek an end to the associations' "honor all cards" rules that require them to accept offline debit payments in addition to credit card payments.
"There is a very strong battle going on right now between large retailers promoting consumers to use PIN at the point of sale and Visa and MasterCard issuers who are educating consumers to use signatures through reward programs," said David Robertson, the president of The Nilson Report, a payments-industry newsletter based in Oxnard, Calif.
Mr. Robertson said some of the recent acceleration in debit transactions can be attributed to the growing popularity of debit loyalty programs, an indication that banks may be winning in the point of sale struggle with merchants.
Ms. Wesner of Minnesota-based U.S. Bancorp said she expected to see "more advertising, more articulation, and more explanation" of check card usage, such as the benefits of signature-based transactions, which include the associations' guarantee of limited liability on fraudulent charges.
Bank of America's Mr. Whyte said the Charlotte company is "gradually moving toward an approach that encourages just the use of the debit card" -whether signature- or PIN-based. B of A's debit programs reward both types of transactions.
