Debit, the fastest-growing segment of the consumer card business, could become issuers' next battleground.

The number of debit cardholders will reach 112 million by yearend, compared with the 106 million holders of credit cards, according to projections by The Nilson Report, an industry newsletter in Oxnard, Calif.

If issuers can overcome the fragile economics of debit loyalty schemes, experts say, such programs may be a worthwhile way for banks to differentiate themselves and reel in primary customers.

"Competition for the retail bank customer is going to become pretty intense," said Ann Schmitt, a director at Dove Consulting in Boston. Debit loyalty programs, she said, "could be very, very successful."

MasterCard and Visa debit card issuers' hardest task has been familiarizing people with the payment tool. Competition among issuers has been relatively sedate; consumers choose a bank and not a debit card; and unlike credit cards there is typically just one debit card in each wallet.

But as off-line, signature-based debit cards grow more mainstream, issuers are beginning to consider that loyalty programs, traditionally associated with credit cards, may be valuable in the debit arena.

Chase Manhattan Corp., the fifth-largest off-line debit issuer in rankings through September, pioneered the concept with the first-ever cobranded debit card, introduced a year ago. The Chase/Continental Banking Card, which carries the MasterCard logo, offers one Continental OnePass mile for every two dollars spent on purchases.

A Chase spokeswoman said consumer response has exceeded expectations, both in deepening relationships and attracting new customers. "It really does set us apart from other banks," she said. "I think it is a growing trend, but we're certainly happy to be the first issuer of the cobranded debit card."

Other debit loyalty cards have begun to crop up.

Minneapolis-based TCF Financial Corp. launched a loyalty program this month for its Visa-branded TCF Check Card. TCF customers have been mass-mailed the TCF Express Phone Card and are automatically earning onefree MCI WorldCom long-distance minute for each purchase of $10 or more. The bank also uses direct mail to find checking account customers.

"We want to stay a step ahead of our competition," said Daniel Engel, TCF's senior vice president in charge of ATM and card products. "We think we'll look a little bit better than anybody else." TCF sold its credit card portfolio to MBNA Corp. years ago and has an agent bank relationship in which its cards still bear the TCF name.

Some banks have chosen affinity programs for their debit cards. Bank One Corp., the second-largest off-line issuer, offers debit cards featuring the logos of such sports teams as baseball's Arizona Diamondbacks and Colorado Rockies.

"We're not currently exploring a loyalty program for debit at this time," said Marsha Huber, a senior vice president and access card manager at Bank One. "Basically our focus is more on building loyalty with the customer for the entire banking relationship, versus just adding something on to the card itself."

Many issuers have begun short-term promotions to let customers know that debit cards - both off-line and those that use personal identification numbers - can be used for purchases as well as to draw cash.

Whether such programs justify long-term investment remains an open question. On-line debit offers issuers little in interchange revenue, making it the least desirable prospect. The off-line debit card business, which brings in more comparable interchange revenue, still lacks the revolving credit revenues of the credit card business. In addition, credit cards with loyalty programs often charge annual fees, which are nearly unheard of with debit cards.

"You don't have alternative revenue streams the way you do on a credit card," said Peter B. Davidson, senior executive vice president at Speer & Associates, an Atlanta consulting firm. "You can move share with credit cards with loyalty programs. That has not been a proven business case on the debit side."

Indeed, Chase and TCF have taken the delicate economics into account. Departing from traditional practice, Chase charges a $30 annual fee for its Continental debit card. TCF said the $10 purchase restriction is a necessity.

"We've calculated what our break-even point is for transactions. We want people to use their card for all sorts of purchases, but we've got to choose our thresholds," Mr. Engel said. "We didn't have an opportunity to have a frequent-flier program because frankly it's too expensive."

Loyalty programs could also become a means for banks that do not issue credit cards to move spending from a competitor's loyalty credit card to their own debit card. This option grows more important as the credit card industry consolidates.

Dove Consulting and the American Bankers Association jointly did a study last year in which 3,000 consumers nationwide were asked about their spending habits. About 27% said they are "rewards-seekers" who prefer to use credit cards. That is "a pretty sizable market to try to move toward a debit product," Ms. Schmitt said.

Richard D. Cornelius, an associate partner at Andersen Consulting, said debit loyalty will probably become more relevant as geography plays less of a role in a consumer's choice of basic banking services.

"The way that consumers interact with their banks to get checking deposit services is evolving with Internet banking," he said. "It's no longer about who's got the closest physical branch to me … . With that evolution, the competition's going to change. You will see more experimentation with different ways to attract customers."

But Theodore Iacobuzio, senior analyst at the Tower Group in Needham, Mass., said he does not expect programs like Chase's and TCF's to become prevalent, because consumers do not spend enough money on debit. "I have a conceptual problem with a debit card rewards scheme because I don't see enough points being accrued to make a difference," he said. "It's going to have to be a pretty generous loyalty scheme."

Mr. Iacobuzio said a better model "involves the actual merchant where you're making the purchases," but even this type of program would be problematic, given retailers' resentment over rising fees associated with off-line debit acceptance.

But Ms. Schmitt said the value to banks will accrue at the "customer relationship level." Loyalty will be a crucial part of the new financial services landscape, she said, and banks should embrace "customer-centric" loyalty programs that transcend multiple products. In getting to that point, debit is the next logical step, she said.

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