Debit issuers are increasingly rethinking the points-for-spending approach to rewards in favor of models that can generate more loyalty from cardholders and expand their customer base, according to bankers and analysts who follow the industry.
Offering points for spending has long been considered an effective way to drive up volume on credit cards, but debit executives are questioning whether it has the same effect on debit cards, or even whether they can be certain that everyday debit transactions are spurred by reward programs.
Some executives, who say increased transaction volume is no longer the only goal, are developing strategies aimed at increasing cross-sales and strengthening ties with customers.
"Banks that are using the relationship-based approach are going to get more from the program," Shane Schoonover, a vice president and the retail delivery systems manager for Fidelity Bank of Wichita, said in an interview last week. In April his bank switched from Visa Inc.'s Extras program, which usually offers points only for signature debit purchases, to a program managed by My Rewards, a unit of Image Products Inc., that rewards PIN and signature transactions. Fidelity is currently offering points only for debit transactions, but Mr. Schoonover said it is considering expanding the program "in the near future" to apply to all the bank's products, and hopefully will increase cross-selling. "Maybe we give them 100 points for opening a checking account or applying for a new loan."
Such a program takes "rewards in a direction towards a more relationship-based, growth-based approach," Mr. Schoonover said. "It encourages those folks that might still be writing paper checks or paying cash to start paying by card. They get the reward; we get the increased spend."
With the new program, people who do not use their debit cards very often are offered more points to increase their use.
Lee Manfred, a partner at First Annapolis Consulting Inc., said the challenge with debit rewards is determining whether the bank is paying for behavior the customer would have exhibited anyway.
"The Holy Grail in retail banking is product cross-sales," he said. "As people figure out the right mix of rewards … it's very likely that you will see more of this bundling and relationship-type products."
According to a report released last week by Marsh & McLennan Cos.' Oliver Wyman and commissioned by Discover Financial Services' Pulse Network LLC, the question of how to get value from reward programs is weighing on most debit issuers.
The report, based on a February survey of 62 financial companies, found that about half of all debit issuers offer some sort of rewards, but many of them are unsatisfied with the returns.
Merchant- and issuer-funded cash rewards are growing in popularity, but the majority of debit rewards programs are points-based, the report said. Only 18% of an average provider's eligible debit cardholders are enrolled in those programs.
Tony Hayes, a partner in Oliver Wyman's financial services division and the report's author, said in an interview that a fundamental challenge for financial institutions remains providing debit rewards that will engage consumers' interest for multiple banking products.
"The greater value in these programs is less about creating incremental card spend and more around creating more loyal customers." Debit rewards need to be "recreated to emphasize the overall banking relationship," he said. "The debit card will be at the core of that relationship."
Such programs can yield increased differentiation between financial institutions, Mr. Hayes said. "Right now one of the problems with points programs is that Bank A and Bank B are pretty similar" in the types of rewards they offer, and they give consumers little reason to say, "'I want to bank with this bank.' "
Bankers have been playing with different models for debit rewards for some time, and some early movers say they are pleased with the results.
Citigroup Inc.'s "Thank You" network, introduced in 2005, lets customers earn points for all their banking activities.
The Keep the Change program Bank of America Corp. rolled out that year rounds debit purchases up to the nearest dollar and deposits the extra cents into a savings account, matching up to $250 per year. In 2006, Wachovia Corp. expanded its Possibilities Rewards to begin allowing cardholders to combine points earned on credit and debit cards.
Lee Modesitt, a senior vice president and the consumer debit card product management executive for B of A, called Keep the Change "an essential part" of the Charlotte company's debit strategy. Participation in the program is "several orders of magnitude higher" than it is in B of A's two fee-based debit reward programs, cobranded card relationships with U.S. Airways and Alaska Airlines.
"Customers who find value through using a debit card tend to be more loyal to the bank and tend to have deeper product relationships," Mr. Modesitt said. Keep the Change, which has 8.4 million members out of B of A's 25 million consumer checking accounts, "is a significant driver of overall customer satisfaction and retention."
Wachovia considers its Way2Save, a reward program similar to Keep to Change, a savings offering rather than a debit one. But its Possibilities Rewards program, which allows consumers to combine points from multiple types of credit and debit cards, is bulking up, according to Holly Heckathorne, a senior vice president and Wachovia's rewards program leader.
That program will remain card-based, but next year "we will look to expand both earning and redeeming opportunities across the bank," she said. (Wachovia, which is still using the Visa Extras platform for its rewards, will unveil its in-house replacement "sometime this fall.")
Programs that do not let cardholders combine points are "basically forcing them to choose between products," Ms. Heckathorne said. "On an individual card, it might take a little bit longer to get to redemption," but "the more they redeem the more loyal they are to the program."
Citi would not make executive available to discuss rewards.
Small and midsize banks are also innovating in debit rewards. Last month Frost National Bank, a San Antonio unit of Cullen/Frost Bankers Inc., unveiled a debit card linked to an online savings account whose interest rate increases by up to 25 basis points a month if the debit card is used frequently.
Frost did not have a debit reward program in the past, because traditional points programs "just didn't work for us," according to Bobby Berman, Frost's group executive vice president of e-commerce.
The debit reward element is not the primary reason the bank developed the new account, but it helps "customers' perception of getting value," he said. "We chose this method because it's easy, and we think customers think it's easy, and they'll get more value."
Tim Sloane, the director of debit advisory services at the research company Mercator Advisory Group, said many large issuers have established or are considering more innovative debit programs. "The bar has been raised in the past couple of years" to offer points "across all the services the financial institution offers," he said.
