Banks and credit unions are struggling to shore up the profitability of their debit card programs, as they face a significant reduction in interchange revenue under the Durbin amendment in the Dodd-Frank Act. As a result, debit rewards will certainly come under scrutiny in coming months, and may become an endangered perk for cardholders.
How important are rewards to debit cardholders? Data from Mercator Advisory Group's CustomerMonitor Survey offers insight gathered from about 1,000 U.S. consumers last May. Roughly one in four debit cardholders (28 percent) indicated they participate in a debit rewards program. But alarmingly, only 24 percent of rewards program participants indicated that they had ever redeemed debit rewards, suggesting a low level of engagement. Of course these statistics depend on consumer recall; the percentage actually enrolled in rewards programs could be higher. But if cardholders cannot recall participating, the importance of rewards is in question.
Obviously, issuers will need to review their own program economics and weigh the expense of rewards against the revenue received from debit cards. But it seems fair to note that many issuers are not realizing the potential value of their current programs, for lack of cardholder communications about rewards, both at account opening and on an ongoing basis. Just 22 percent of rewards participants indicated that their financial institution explained the rewards program to them at account opening, and only 20 percent said they received reminders from their issuers about accrued rewards. Issuers that decide to continue offering reward programs should invest in better publicizing them.
Debit rewards have focused, in part, on directing cardholders to use signature-based transactions, which are traditionally more profitable for issuers. Should the interchange advantage of signature transactions disappear under Durbin, as it now appears, issuers will likely need to retool rewards programs to be agnostic to transaction type.
The implementation of the Durbin amendment is a work in progress, with many specifics left to be resolved. But the financial challenge to debit issuers is real, and we are likely at a crossroads where issuers will need to re-commit to a rewards strategy or eliminate the expense.
