The recent crop of debit card reward programs attempts to address a long-standing problem for this market - the relatively low interchange fees for debit transactions that make it hard to turn a profit offering attractive rewards.
The new programs try to do this one of two ways: either by offering rewards across product lines so that the cost of the debit reward program is offset by the use of other banking products, or by relying on merchants to help fund rewards.
The first strategy, most visibly adopted by Citigroup Inc. in its Thank You rewards, will probably gain serious traction over the next two years, experts say.
"Banks have a keen interest in this type of program," said Laura Kelly, a group head for debit strategy at MasterCard International. "They realize that the debit card is the heart of the depository relationship with the bank, so they want to use it to expand the relationship beyond that."
MasterCard says it is in discussions with several issuers to help them develop enterprisewide programs. Visa U.S.A. says it is already providing the capability to a number of its issuers but would not say which ones. And Morgan Stanley's Discover Financial Services announced last month that it planned to roll out a rewards platform through its network, which would let banks reward customers for using credit and debit cards, car loans, mortgages, and other banking products.
Royal Bank of Canada's RBC Centura Banks Inc. is piloting a program that combines its debit and credit card programs with Total System Services Inc., the Columbus, Ga., processing giant, and plans to expand the program across more product lines.
TSYS, which is mostly owned by Synovus Financial Corp., has also been running combination debit and credit programs for clients including Wilmington Bank and Trust, First Resource Federal Union, and Columbus Bank and Trust - for over a year.
Another big processor, First Data Corp., is pilot-testing a program with several clients to let them offer customer rewards across products, and in April will begin offering the program to the processing clients of Concord EFS, which First Data acquired in February 2005.
One of the easiest and most popular approaches to a cross-product rewards program is to first combine a bank's credit and debit card programs, many in the industry say.
Ms. Kelly said MasterCard is already servicing several issuers that merge debit and credit points, and is piloting the merging of small-business cards with consumer credit card programs.
But making a rewards program reach across more than one product line can be difficult, experts say, particularly for larger institutions.
"Getting it to market is easier said than done," said Kelly Hlavinka, a director of Frequency Marketing Inc.'s Colloquy Group. "Just as there are different people managing those silos, there are different systems managing each of those silos."
To make the economics of debit reward programs work, some banks are trying a tactic that relies on merchants, rather than just the bank, to fund a portion of the program.
AmSouth Bancorp started a program in August that requires participating merchants to offer cash rebates directly to customers and rewards for both PIN and signature transactions.
Checking account openings at AmSouth rose 33% in August from a year earlier, and in September they rose 42%. The Birmingham, Ala., company said so far about 20% of its debit cardholders have received at least one cash-back reward.
The program "certainly translates into higher interchange," said Joe Verciglio, AmSouth's senior vice president of payment products. "Banks are trying to make themselves a little more unique," he added. "I see a trend where banks will be more likely to go to a proprietary reward model."
Indeed, two big issuing banks plan to roll out debit reward programs that emulate this model.
Jonathan Silver, the president of Affinity Solutions, which worked with AmSouth to develop its program, said a large bank with a card portfolio roughly four times the size of AmSouth's will pilot a similar program in May, with a larger rollout planned for October. In addition, Mr. Silver said Affinity Solutions is helping "a number" of other banks come online with similar programs this year.
"The starting point was that the basis points" a customer earns "could be upped if you bring in the merchants," Mr. Silver said of an AmSouth-type program.
"A lot of the drivers for purchase behavior in life are event-driven, which trigger borrowing behavior that merchants align well with," he added.
MasterCard said one of its large issuers plans to unveil a debit reward program in the second quarter that will work with specific merchants and target families with children.
Instead of a cash-back incentive, however, cardholders will have a certain amount of money put into a college savings account by merchants when they use their card at participating retailers.
"It's a combination of merchant and issuer contribution," Ms. Kelly said, and "is one example of how a program could be very differentiated."
In addition, both Visa and MasterCard have off-the-shelf debit programs involving specific merchants that can be adopted by issuers.
Wachovia Corp. is offering 5,000 Visa Extras points for customers who enroll their Wachovia debit cards in the program through the end of March.
Since the January kickoff of the promotion, 39,000 customers have signed up for the Visa Extras program and Wachovia has sold more checking accounts than it had projected over the past three months, said Mary Beth Navarro, a Wachovia spokeswoman.
Some warn that a one-size-fits-all approach will not cut it as debit rewards proliferate.
John Owens, U.S. Bancorp's senior vice president for debit and prepaid cards said: "Big, smart, respected banks are showing renewed interest in the debit card reward concept. But … as the rapid growth of debit cards flattens out a bit, they are going to have to differentiate themselves."
Though there is clearly renewed interest in debit reward programs among issuers, many experts say they do not expect such programs to become as widespread in the debit business as they are in credit cards.
"I don't know that it will be as ubiquitous because in the debit world, the issuers are more diverse," said Stacey Pinkerd, Visa's senior vice president of consumer debit products. The top five debit issuers "represent significantly less than the top five credit card issuers, so it requires a lot more people to be involved."
Ms. Hlavinka says that "rewarding customers to build their loyalty and share of wallet and doing it in a unique way is a more healthy path than just launching programs" - the route issuers took in 2002.
Those programs carried annual fees, rewarded only for signature debit transactions, and did not let consumers accumulate points easily. Aside from their cost they were undistinguished.
"I hope that we don't go down the same path that credit has where there are so many reward programs that look so alike," Ms. Hlavinka said. "I'm hoping that the financial services industry has learned that lesson."
