To one senior debit card executive, perhaps the most interesting thing about the aftermath of the Wal-Mart settlements has been just how little has changed.
Yes, it came as a bit of a shock last spring when MasterCard International and Visa U.S.A. announced they had come to terms with the merchants that had sued over the price of accepting debit cards. And, yes, it seemed ominous when one bank after another announced the earnings hits they anticipated from interchange revenue decreases.
But while the pundits were speculating about whether volumes would drop and how long it might take for them to bounce back, U.S. Bancorp's debit team was crunching numbers and figuring out how to recalibrate their debit reward programs to keep them both attractive and lucrative.
The result: The sixth-largest U.S. debit card issuer slashed the reward payments on debit transactions by about 75%, and its volume grew 23% last year.
"To the customer, it really has been a non-event," John Owens, the senior vice president in charge of debit and prepaid products at U.S. Bank, said about the hoopla over the Wal-Mart settlements. "We still offer our check card rewards program. There hasn't been a massive backlash in terms of merchants not accepting debit, and debit cards are now significantly less expensive than credit cards" for merchants to accept.
Most of the largest banking companies now offer a reward program or two attached to a debit card. Some, including Bank of America Corp., have declared intentions to bulk up in this area.
But few if any can stake as many claims in debit rewards as U.S. Bank has since it introduced its "Checking That Pays" program three years ago. Today more than 60% of U.S. Bank's active debit card users belong to one of its four reward programs, which will pay out about $30 million of rewards this year.
The cash rebate customers get when they use their U.S. Bank debit cards with a signature at the point of sale has been trimmed, but more flavors of rewards programs have been added, and U.S. Bancorp is on the prowl for others (though it does not, and will not, reward customers for PIN debit transactions).
"At the end of the day, the fact that we added a few reward options even post-settlement is evidence that it works for us," Mr. Owens said. "Trust me - we do the math. We did have to modify our expense structure to reflect the new economic realities of debit. We did have to take into account the reality of the new interchange rates when we constructed those reward programs."
The Cash Bonus Visa Check Card underwent the biggest change. It used to have a tiered reward structure that let cardholders earn as much as 1% of their signature-secured debit purchases in a cash award deposited directly in their account once a year. In a post-Wal-Mart world, the card now offers a flat rate of 0.25% on all signature debit purchases.
People who sign up for Checking That Pays get a Visa-branded card and can choose one of four reward options.
In addition to the cash bonus - which, Mr. Owens said, is by far the most popular option - there is the Harley-Davidson Visa Check Card, which lets cardholders earn entries into a sweepstakes to win motorcycles, and the U.S. Bank Check Card with Visa Extras, which lets people earn points that can be put toward merchandise and gift certificates.
Any Visa issuer can offer the Extras program, but U.S. Bank worked with Visa to develop it and is now issuing a significant percentage of the cards issued through the program, Mr. Owens said.
The fourth option is the WorldPerks Visa Check Card, a mirror product to the cobranded credit card U.S. Bank issues in partnership with Northwest Airlines. The debit version is the only U.S. Bank debit product that charges an annual fee: $20, which Mr. Owens called "the lowest in the industry."
The reward of a frequent flier point for every $2 spent in signature-secured debit transactions is only half as rich as the credit equivalent but has not changed in the wake of the Wal-Mart settlement.
"There wasn't anything we did to our airmiles program, because we didn't need to," Mr. Owens said. The reward structure still worked out under the new realities.
That said, U.S. Bank is considering paying $1 an airmile and charging a higher annual fee for the debit card, so there may be tinkering ahead, depending on how things play out.
"We'll be spending the rest of the year seeing how those rewards change with that revised structure, but so far so good," said Mr. Owens, who works in a St. Paul office of the Minneapolis company. "It's not like you can go down the street and get a better deal" from a rival bank.
U.S. Bank also offers two debit reward products for small businesses, one with the Cash Back feature and the other with Visa Extras. An affinity debit card is under consideration, as are further cobranded and reward products. Affinity cards - largely the provenance of the giant credit card issuer MBNA Corp. - pool a percentage of transaction spending to donate to a nonprofit.
Attaching an affinity program to a debit card is not a common concept at the moment, but Mr. Owens said it could give a full-service commercial bank like his a leg up on the monolines. "You are going to see us add, not subtract, to our bundle of Debit That Pays cobrand partners," he said. "I think the world keeps spinning, and ultimately the customer gets to pick how they want to keep paying for things, and that's how it should be."
Mr. Owens is relatively new to the card industry but seasoned enough to know what the "before Wal-Mart" and "after Wal-Mart" pictures look like.
He joined U.S. bank in 1999, shortly before ING Group NV bought the life insurance company ReliaStar Financial Corp., where he had been the director of strategic planning. He joined the bank's strategic analysis group, got promoted to a job in emerging payments, and started his current job in October 2002.
Unlike some other banks, which house debit cards within the retail bank in a unit separate from the credit card-issuing operation, U.S. Bank puts its credit and debit operations together. Both report to Pat Wesner, the executive vice president of U.S. Bank Retail Payment Solutions. Mr. Owens says having both under one roof is a big help.
His business includes U.S. Bank's thriving prepaid card operation, which is something of a novelty in that it features reloadable prepaid cards rather than the one-time-use gift cards many banks offer.
"I think we have more reloadable prepaid Visa cards than anyone other than B of A," the nation's largest Visa issuer, he said.
U.S. Bank has contracts with various states and companies to issue prepaid cards for various purposes: payroll, child support payments, long-term disability payments, or unemployment insurance. One of the biggest hits is the child support card, which Mr. Owens said has saved the state of Iowa over $400,000 a year in postage alone.
"We are the leader in child support prepaid cards," he said. "Of the five live programs" in different states, "we have four of them, and we have three more coming soon."
The cards go to custodial parents who may or may not have bank accounts but rely on the state to collect child support payments; U.S. Bank sees those parents as potential deposit account customers.
But it is debit volumes that have grown at 50% over the last two years among U.S. Bank cardholders. It is looking at all the currently fashionable methods for fostering debit growth - quick-serve restaurants, Internet payments, recurring payments - but "I consider that blocking and tackling," Mr. Owens said. "The new stuff is continuing to push forward on debit rewards, making sure we continue being a leader in this space, and partnering with the credit card folks to look for new cobrand partners that are interested in both credit and debit rewards."
Since the Northwest is particularly wedded to PIN debit and merchants have, naturally enough, been pushing that option, which is cheaper for them than signature debit, is there confusion or disappointment among debit reward cardholders about how to qualify for bonus points?
No, Mr. Owens says; U.S. Bank tries constantly to educate consumers about debit, and there is growing evidence that customer savviness is increasing.
"Kind of an interesting angle on this is how smart the public is getting about rewards," he said. "The high spenders who know that they're getting a reward know to hit 'credit' and sign for it" when using a debit card. Hitting the "debit" option will cause a point of sale device to ask for a PIN.
Nowadays customers who know about U.S. Bank's daily limit on debit card spending will call to request a one-time exemption before making a big purchase - such as a car. "We make sure we authenticate that customer, and we will kind of slide the purchase under the door," Mr. Owens said. "Those are the people we want to make sure that they get it."
Further proof that people understand how to play the system: A major merchant customer told U.S. Bank, "Your customers are the ones who know how to hit 'credit,' " Mr. Owens said. And the transaction mix has not changed since the Wal-Mart settlements, whereas some other banks' volume has slid from signature toward PIN debit.
Kenneth J. Kavanagh, who has been the debit card executive at Bank of America since October, recently articulated in these pages its strategy of, among other things, persuading credit card customers who do not revolve their balances to switch to debit rewards programs ["
Mr. Owens said he thinks the switch will be a tough sell.
"The customer who is a credit card transactor on a rewards card knows what they're doing," he said. "They're spending to get a nice, rich reward and not revolving, and they're probably using their check card as well. Debit card rewards will never be as rich as credit card rewards, because there's not enough revenue to offset the expense."
The 40% of U.S. Bank customers who still do not have rewards attached to their debit cards signed up for their deposit accounts before Checking That Pays was introduced and have not contacted the bank to sign up. "If those customers want to opt in, it's a phone call, it's a flick of the button, and they're on it," Mr. Owens said.
U.S. Bank promotes its debit reward program in the branches, online, and through statement stuffers, so people know the option is available, he said.
"We believe that these reward programs work, that they're good for the customer, and that ultimately they're good for the bank," Mr. Owens said. "You have to do the math, and it's not like you can turn on the button and say, 'OK, we're in debit rewards,' and sit back and watch the money grow on trees. You have to manage it carefully and make sure that the program is working for both the bank and its customers."
