Most U.S. financial institutions continue to support debit card rewards programs, although significantly fewer plan to roll out new programs this year, according to new data from Discover Financial Services' Pulse electronic funds transfer network.
Pulse last week released additional findings of its 2010 Debit Issuer Study, which was based on a survey the Boston management consulting firm Oliver Wyman Group conducted among issuers in February and March. Earlier findings from the research suggested fraud and regulatory pressure would be challenges for banks this year.
Pulse said 58% of issuers in 2009 offered some type of rewards program, up from 53% in 2008. However, only 17% of survey participants said they were considering launching a debit rewards program in 2010, down from 24% last year.
Though debit interchange regulation was not on the agenda when the study was conducted, financial institutions were already beginning to expect downward pressure on debit revenue and were therefore more hesitant to fund debit rewards programs, Tony Hayes, a partner at Oliver Wyman, said in an interview.
Financial institutions also are hesitating to launch rewards programs because issuers "question the effectiveness of debit card rewards programs and whether they really drive incremental card use," Hayes said.
Despite declining interest in launching new debit card rewards programs, many issuers continue to promote such programs.
About 36% of issuers in the recent study still identified rewards programs as a growth opportunity, with some believing rewards programs help to increase overall debit volume, create competitive differentiation and strengthen cardholder relationships, Pulse said.
Plus, "if the bank across the street offers a rewards program, then it increases the motivation for other banks to also offer rewards programs," Hayes said.
"Debit rewards customers tend to be better banking customers as they have higher profitability, are more loyal and are less likely to close their accounts," Hayes added.
According to Pulse, 72% of issuers plan to make strategic moves this year to improve debit card portfolio performance.
A growing number of banks also are deploying instant issuance technology for debit cards, enabling cardholders to receive a debit card at the branch when opening a demand deposit account instead of receiving their card in the mail, Pulse said.
Roughly 35% of issuers in 2009 offered instant issuance in most or all branches, up from 28% in 2008. Financial institutions considering implementing instant issuance increased to 36% in 2009 from 26% the previous year.
Despite higher issuing costs related to instant issuance, financial institutions benefit because "once the card is put directly into a consumer's hands, the cardholder is more likely to use the card immediately rather than waiting for it to arrive in the mail," Hayes said.
About 30% of survey respondents said that small-business debit cards would be a top growth area this year. Pulse defines small businesses as those generating up to $10 million in annual revenue. It estimates the small-business debit card segment makes up only 6% of the total debit card market.
Several issuers have indicated they plan to conduct direct mail campaigns targeting small-business owners, according to Pulse.