Pending debit interchange rate rule changes are causing uncertainty about strategies for debit card rewards programs.
The biggest question is whether banks will be able to fund debit card rewards programs after the Federal Reserve Board issues new debit interchange rules next year that many expect will result in lower rates.
Issuers' overall interest in launching new debit card rewards programs has waned over the last year amidst rising economic and regulatory uncertainties, Inderpreet Batra, a principal with the consulting firm Oliver Wyman Group in Boston, said in a panel discussion at SourceMedia Inc.'s ATM, Debit & Prepaid Forum in Phoenix on Oct. 4.
"A lot depends on what the Fed does with debit interchange rates," Batra said, noting that some issuers may decide to scale back or eliminate their existing debit rewards programs, since these are primarily funded by debit interchange.
But Batra said that even with the uncertainties surrounding future funding of debit rewards programs, "there can still be a positive business case" for many issuers supporting debit rewards because of the popularity of debit payments and the product's central role in customers' relationships with banks.
"Even if the economics of [debit] is less favorable than it used to be, it doesn't mean it's not worth rewarding that customer" for initiating debit card transactions, Batra said, emphasizing debit cards' continued importance in attracting and keeping bank customers.
Card issuers may consider finding alternative sources of funding for debit rewards programs, such as merchant-funded programs, which are increasingly gaining favor among some issuers, Batra suggested.
Moreover, many banks have also failed to adequately promote their existing debit card rewards programs to consumers, Batra said, citing data from Discover Financial Services' 2010 Debit Issuer study.
The data shows that in programs where as many as 75% of bank customers were automatically enrolled in a debit rewards program, as few as 9% of customers actually visited the rewards program's website and registered to receive rewards.
"Even though [many banks] are enrolling customers, they are not driving high engagement in using debit card rewards programs," Batra said.
It seems to take "constant" promotion on the part of the bank to keep debit customers interested in participating in debit rewards programs, said Cindy Smith, the senior vice president of bank card products and services at Zions Bancorp. in Salt Lake City.
Smith said in another Oct. 4 panel discussion that Zions' merchant-funded debit rewards program, which it started in 2005, has been "extremely" popular overall with consumers.
But when the bank cut back on promoting rewards during the economic downturn, consumer participation declined, Smith said.
Participating merchants also respond positively to Zions' promotion of its debit rewards program.
"For a smaller merchant, getting promotion [and exposure] through the bank is a big deal," Smith said.
Broadening debit rewards programs to cross-promote other bank products could be a key to success in the future as the economics of funding rewards programs change, Lynn Heitman, senior vice president of credit and debit cards for the U.S. Bank unit of U.S. Bancorp in Minneapolis, said in the second panel discussion.
Issuers may consider expanding debit rewards to provide variety and incentives for customers' overall activity at a bank, Heitman said, but she cautioned that while some issuers are offering unique, "experiential" rewards for high-end credit and debit customers, such programs are not feasible for mainstream users.
Before tweaking their existing debit rewards programs, issuers should take a close look at their customer base to make sure they are rewarding customers for profitable actions and behavior, Batra said.
"Not a lot of financial institutions can tell how profitable [debit] rewards are for them," he said.
