Bank of America Corp.'s new cobranded card with General Motors Corp. represents a major test for the industry in debit-only cobrand programs.
A handful of issuers have had success with debit airline reward programs that grew out of cobranded credit card relationships. But non-airline, strictly debit loyalty plans have not evolved as naturally, especially since last year's devaluation of debit transactions in the Wal-Mart suit.
Since then, however, top banks have continued to make the case for debit rewards - not only adjusting the payoff structure to compensate for lower merchant fees, but also repositioning the debit card as more than a checking account accessory.
A cobranded card tied to a popular loyalty program would seem to be the Holy Grail for debit rewards. But apart from airline miles that almost guarantee use, the profitability of a cobrand debit portfolio seemed uncertain.
Enter Bank of America's offering with GM.
The cobranded card, which will be issued this month in pilot programs in Tennessee and Florida, will test whether two heavy-hitting consumer brands - the country's largest debit card issuer and the world's largest automaker - can draw enough transaction volume to justify the loyalty program.
The Charlotte banking company says it can capitalize on the Detroit automaker's wide base of loyal households to increase sales for GM as well as ramp up transactions and even acquire customers of its own.
"There is an acquisition play from the standpoint of being able to differentiate our product from our competitor's product," said Kenneth J. Kavanagh, the head of B of A's debit card business, in an interview Friday.
"We also believe that it will encourage additional usage for our cards for our customers who like to take advantage of the rewards program, and it's also going to help us on retaining those relationships from otherwise leaving the banks."
Tennessee and Florida will be "a real sound test" given their diverse demographics, Mr. Kavanagh said. He said B of A has weighed factors including age, population growth, income, card use, and B of A's retail presence in the areas.
The card is GM's first cobranded debit card. But it has had a cobranded credit card with HSBC's Household International for 12 years. GM said it chose B of A as its debit card partner because of the considerable size of its retail bank footprint, covering 28 states.
In an interview Monday, Jack Bowen, the general director of customer relationship management for GM, said the debit card deal was driven less by transaction-based fee considerations than the potential to increase sales and strengthen its customer base.
"A lot of cobranded partnerships are based upon revenue sharing and cash flow," Mr. Bowen said. "For GM, we're in this for the relationships. We want the banks to be very successful, and at the same time, the game for us is scale, and to grow our market share on a national basis. And to sell vehicles."
GM debit cardholders will earn 2% of their signature-authorized purchases in credit towards a new GM vehicle. Cardholders, who pay a $15 annual fee, can redeem their credits within five years for $1,000 to $3,500, depending on the car.
So far, industry observers seem mixed about the card program.
Jeffrey M. Trachtman, the vice president of bank card products at Fifth Third Bancorp, said it had turned down ideas for similar debit reward schemes. "You simply can't get enough spend to make the program profitable," he said.
The volume generated by such cards cannot pay for the brand rights involved in the cobrand agreement, Mr. Trachtman said. As a retention tool, the issuer would only be "paying for volume it already had."
Lee Manfred, a partner of First Annapolis Consulting of Baltimore, said that based on current debit card usage, an average customer would only earn about $80 a year toward the purchase of a new GM automobile. But customers enrolled in a GM loyalty program would probably increase their usage, especially with increased acceptance at fast-food restaurants and similar merchants.
Mike Stephens, the managing director for Advantage Consulting Group Inc. in Massapequa, N.Y, which specializes in cobranded deals, questioned the policy of rewarding only signature transactions. Excluding PIN transactions is "certainly limiting for the consumer and might cause some frustration," he said. "That's probably one of the key questions that they're going to be answering" in the pilot.
Otherwise, he said, B of A's GM card would probably be a very good retention program and potentially a "back-door" acquisition program as well. "It appears if you don't have a rewards programs for your debit customers, you may quickly find yourself behind your competitors," Mr. Stephens said.
James L. Accomando, the president of Accomando Consulting Inc. in Fairfield, Conn., said that debit card rewards programs are ultimately better than credit card rewards for banks seeking to develop relationships with consumers.
"When they nail a debit customer, that's a true, cemented customer with the bank," he said. "You may have five credit cards, but one primary checking account. When they pick up a debit customer, it's serious."
Noting that HSBC's GM credit card offers 5% per purchase, Mr. Accomando said that if Bank of America's program is "an acquisition strategy, the 2% falls short of what an incentive a customer would need to leave their existing bank and come on board."
But he said the new card will be good as a retention tool because there are so few debit card rewards programs.
First Annapolis' Mr. Manfred said that this type of program will probably start a trend given that the banking and automotive industries have "fast imitators."
