Community banks should examine their customers' card use and use their findings to customize rewards programs, a new white paper says.

The paper cites research from the Federal Reserve Bank of Chicago that suggests that often, little is needed to get cardholders to respond to a rewards program. The Chicago Fed's study found that a 1% cash-back bonus created average monthly spend of $220 among previously inactive cardholders.

The CARD Act "and proposed debit interchange regulations may be making the job [of card portfolio management] more difficult, but methods for program optimization still exist," said Ivy Sprague, product development architect at Members Group and the author of the white paper.

Rewards programs can have a profound effect on portfolio performance, the white paper says.

The rewards incentive in the Chicago Fed study gave cash-back cards top-of-wallet status for more cardholders, which could help smaller institutions that compete with larger-scale programs, Sprague says.

"Encouraging cardholders to pull out your institution's card also encourages them to think of [your institution] first when they have additional financial needs," she wrote.

The key to creating a rewards program that will encourage use of a financial institution's card over another is to understand how consumers want to be rewarded, Sprague said. She suggests providing rewards for causes important to the cardholders' communities. It's also a good idea to keep abreast of economic trends, she said, giving the example of a Virginia credit union that offered cash back on gas purchases to help cardholders cope with high gas prices.

Analyzing transaction data can help even small banks understand customers, Sprague said.

She suggests doubling rewards at home improvement stores for cardholders in communities where do-it-yourself repairs are popular.

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