Co-op Financial Services, which operates the largest automated teller machine network and processor for credit unions, is adding a debit card reward program to the list of products and services it offers them.
The addition, which the Ontario, Calif., company announced last week, highlights the industry's increasing interest in debit rewards.
"As a major debit card processor, we needed to add this to our product menu," said Stan Hollen, the chief executive of Co-op, which is owned by credit unions.
The network will begin testing the reward program next month. Member credit unions eagerly wanted to sign up for the test, but only three will participate, he said.
The program is scheduled to go live for the rest of the network's members in August. Mr. Hollen said Co-op expects to sign up between 200 and 225 credit unions this year.
Credit unions are pressing to offer their members debit rewards, because they are increasingly popular with financial institutions, he said. Such programs make credit unions "more competitive in the marketplace."
He estimated that 10% of all credit unions - between 800 and 900 - offer some debit rewards; the vast majority do not, particularly small ones that likely could not start such a program without Co-op's help.
Most credit card issuers offer some type of rewards, which have long been popular with consumers. Debit rewards do not generate the same revenue stream for institutions but are gaining traction, because they tie consumers more tightly to a bank or credit union.
In fact, Mr. Hollen said Co-op's program will be a "loss leader" for credit unions, because of the lower interchange revenue they get from debit cards than from credit cards. "This is a net expense to a credit union, but it adds value and enhances their product offerings."
The program will cost a credit union about 20 cents a card each month. Each credit union can set its own level of rewards for signature and PIN debit. Banks have tended to promote signature transactions, which generate higher interchange than PIN ones.
A study released last year by Dove Consulting Inc., a Boston division of Hitachi Consulting Corp., shows that more financial institutions are offering debit rewards. The percentage of financial institutions offering them rose to 36% last year, from about 24% in 2003, said Chris Gill, a senior manager for Dove.
This month TNS Financial Services, a consulting unit of Taylor Nelson Sofres PLC, released a consumer study saying the percentage of consumers with rewards programs linked to their debit cards nearly doubled last year, to 9%.
Consumers also appear to prefer using debit cards over credit cards to rack up rewards. According to a study TNS Financial Services conducted last year, 57% of households that had both debit and credit cards offering rewards said they were more likely to use the debit card for purchases.
RewardsNOW Inc., a Dover, N.H., provider of loyalty programs to financial institutions, will operate the program for Co-op. RewardsNOW operates similar programs for such companies as Marshall & Ilsley Corp.'s Metavante Corp. of Milwaukee and TNB Card Services, a Dallas payment card processor and issuer for credit unions.
Mr. Hollen said Co-op's program will give cardholders a point for every $2 spent. But Steven Van Fleet, the president and CEO of RewardsNOW, said rewards can be redeemed not only for travel and merchant goods and services, but also for downloadable music and books and online gift certificates.
One innovative debit program is Bank of America Corp.'s Keep the Change. When a consumer makes a purchase with a B of A debit card, the purchase price is rounded up to the nearest dollar. The difference is then transferred from the cardholder's checking account into an interest-earning savings account. B of A matches deposits of up to $250 a year.
The Charlotte company said about 2.5 million customers, 20% of whom are new to B of A, have signed up for the program since it was launched in October.
Diane Morais, the senior vice president of deposit and debit products for B of A, wrote in an e-mail that one important factor banks must consider in offering rewards program is the ability to cover the cost.
"You typically will see 'richer' programs attached to credit cards," she wrote. "However, programs like Keep the Change have demonstrated that when customers see value in the reward, they are willing to shift more of their spending from cash/checks to the debit card - so it's a win/win for both the customer and for Bank of America."
Mr. Hollen said he was happy to stick with a more traditional program. "You don't see much of a rush to duplicate" Keep the Change. "But it's innovative. I have to give them credit."
