Sovereign Bank Bets on Debit Rewards, Despite Regulation

ORLANDO — Some banks are still finding ways to offer incentives for every card swipe, even if traditional debit rewards programs are dead in the water, says the head of Sovereign Bank's cards and payments division.

A rule capping interchange fees has taken a big bite out of the revenue that funded once-lucrative debit rewards programs. The vast majority of banks have cut back or eliminated those programs after the rule, based on the Durbin amendment of the Dodd-Frank Act, went into effect last year.

But Sovereign has given away more than $200,000 in prizes — including two Audi TT Coupes, a cruise trip and various electronics — to its debit customers over the past couple of years to help boost card usage, Sovereign's Eduardo Tobon told American Banker in an interview on Thursday. Sovereign is a unit of Spain's Banco Santander.

"Surprising our customers with rewards is a theme we've been working for some time… before Durbin came in," he said. "How do we delight customers with something they are not expecting?"

Moving cash-based customers to debit is a key aspect of responding to new regulations, according to Tobon.

"The opportunity is to see if there are transactions that do not happen on debit today that should be happening on debit [and moving customers] from cash to debit," he said.

But Tobon acknowledges that such a shift alone won't make up for lost interchange revenue.

"It helps offset some, but not all. It would be naïve on the part of anyone in the industry to think that just volume will make up for it. It's just not going to be the case," he added.

Another sort of shift — from debit to more lucrative credit cards — is now possible for Sovereign, which bought back its credit card portfolio from Bank of America last year and in January launched its new "Sphere" credit card. Credit interchange rates remain well above the cap for debit, making some banks enthusiastic about encouraging their customers to do more spending on their credit cards.

But Tobon, while acknowledging the opportunities newly available from Sovereign's credit card business, declined to elaborate on how the bank might shift spending from debit to credit.

"It's a lot harder to do it than to say it. It can be done but requires a lot of work. Habits need to be changed and that's not an easy task," he said.

"If there are transactions that can be easily done on credit and it's convenient for them to do it on credit… then I'd love for them to use that method of payment. But if it's easier to for them to do it on debit, obviously that's going to be their preference," he added.

Tobon says the bank's debit prize strategy works because customers aren't expecting any kind of payback for their day-to-day spending.

"In the research that we've been doing, we find that consumers for certain types of transactions are not necessarily thinking they're going to accumulate enough points to earn very much," he said.

The bank, which also has a merchant-funded offers program for debit, will soon be distributing another $50,000 to winners of a new contest called "Morning Rush," according to Tobon. Each debit card purchase from February 15 to March 30 earned cardholders another chance to win one of the fifty $1,000 prizes being offered.

"You buy coffee, rent a movie, buy a song online. Well, that's not going to get you many points to do something meaningful with," Tobon said.

"The logic there is I might as well just do it, I might not necessarily get any immediate, incremental benefit other than that's the [purchase] need I have….but at the same time, wouldn't it be nice if just bought a newspaper and got $1000?" he added.

Tobon was in Orlando on Thursday to speak at the annual Card Forum and Expo sponsored by American Banker and its publisher, SourceMedia.