Western Union (WU) plans to use its prepaid cardholders' transaction data to offer discounts on money transfers and bill payments.

The Englewood, Colo. company plans to offer prepaid rewards by the end of this year, said Diane Scott, the president,  executive vice president and chief marketing officer of Western Union Ventures, in an interview with American Banker. Western Union Ventures is a unit of the company that focuses on developing new offerings for consumers.

The discounts create loyalty, which would drive more of Western Union's money transmitter customers to use prepaid, said Scott.

In 2011, "we moved $81 billion to different parts of the globe, and most of that ends up cash," Scott says. "The opportunity to convert a lot of that cash into stored value is our sweet spot."

Banks are also taking a hard look at using transaction data to create a rewards program. Many technology vendors already offer such services to card issuers, according to industry watchers.

Even credit card networks are employing such tactics.

"Using payment transaction data for cross-selling and offers around other products is something that quite a few banks and card issuers are starting to do," says Zil Bareisis, a senior analyst with Celent. "The big value is that essentially when you issue a payment instrument you know how that customer is using it."

For example, American Express (AXP) plans to use transaction data to create merchant-funded rewards programs for its digital wallet, Serve.

Google (GOOG) and eBay's (EBAY) PayPal have announced similar initiatives to use transaction data to create marketing options for advertisers.

There is money to be made in saving consumers cash, says James Van Dyke, the president and founder of Javelin Strategy and Research in Pleasanton, Calif.

"Financial institutions received a black eye over the last few years due to earning increased profits through punitive fees in areas such as overdrafts," he says. "The way to more sustainably earn profits is to focus on … services that consumers willingly adopt."

There are downsides to Western Union's approach.

The primary concern, analysts say, is that some people don't want their transactions tracked. Western Union's plans may drive consumers away instead of making them more loyal, says Ben Jackson, a senior analyst at Mercator Advisory Group.

"Many prepaid card users cite privacy as a reason for using prepaid cards over other forms of payment," he says.