Cash-back rewards, reliably popular with consumers, are expensive for banks to offer on debit cards, and thus relatively rare.
But TD Bank paid out what industry observers call "very generous" cash-back rewards in a promotion last quarter, to persuade its customers to use their debit cards more. Those who participated could get up to $50 back on grocery purchases, and the bank readily conceded that the promotion would be unprofitable.
"TD is actually losing money," says Sunil Kirpalani, the head of debit card and operations for the $150 billion-asset bank. "It's done to spread the message of debit and using debit."
The promotion underscores how some banks are willing to take a short-term loss to get consumers in the long-term habit of using debit cards for everyday purchases. With new overdraft rules expected to make checking accounts less lucrative, banks are counting on interchange fees from debit usage to boost their income for years to come.
"Many studies have shown that once consumers start using the card at the point of sale, they will continue to do so," says Lee Manfred, a partner at First Annapolis Consulting.
So it makes sense for TD to offer "some pretty rich rewards" for a limited time, he says.
The TD promotion ran from Jan. 17 to March 7. For every $100 spent on groceries during that period, customers could opt to receive $10 in cash or gift cards, up to the $50 limit.
TD chose groceries, a relatively recession-proof expense, because many consumers still buy them with cash and checks rather than plastic.
Manfred says most checking accounts already have debit cards linked to them, but "only 60-ish percent" of those customers actively use the cards for purchases. So rather than issuing new cards, growth hinges on getting people to use their cards more frequently.
For TD and Visa-which Kirpalani says is helping to fund the promotion with "marketing dollars"-another goal is to convince cardholders to sign for debit purchases rather than use their PINs. Signature-based debit purchases are much more lucrative for banks, because of the higher interchange rate on those types of transactions. Most banks that offer cash-back debit rewardsdo not offer them for PIN transactions.
What's attractive about tying rewards to grocery or gas purchases is "they're frequent," so more conducive to reinforcing new behavior, says Philip J. Philliou, a partner in the consulting firm Philliou Selwanes Partners."If you can change someone's behavior, the payoff could be quite significant over the long term," he says.
Kirpalani, who was a debit product management executive at Bank of America before he joined TD in January, acknowledges as much. "When are we going to make money back? Maybe two, three years from now," he says.
Kirpalani would not provide projections for the additional debit business TD expects to gain over the long term. But, by mid-February, the promotion could already be considered a success. More than 58,000 customers had registered their debit cards for the promotionduring its first three weeks-exceeding Kirpalani's projections for enrollment during the entire sevenweeks it would run.
Cash-back rewards are more common on credit cards than debit cards. Rewards are largely funded out of what a bank makes on interchange fees, and those fees are higher for credit than debit.
Though the use of cash-back debit rewards has been rising in recent years, upcoming restrictions on overdraft protection might stymie such experiments, says Tony Hayes, a partner in the consulting firm Oliver Wyman.
A rule taking effect July 1 bars banks from providing overdraft protection, and charging the related fees, on automated teller machine withdrawals and debit card purchases, unless a customer opts in for the service.
"The profitability of debit card programs will decline," Hayes says. "As a result, we would expect to see far fewer cash-back programs tied to debit in the future."