Consumers Consolidate Debit Accounts, Prompting Issuers to React

As banks have added checking-account fees to counter reductions in debit card revenue, consumers have responded, too, by streamlining their wallets and closing dormant or less-used accounts, new research shows.

Because of their account-consolidation efforts, debit card ownership is dropping, with 62% of survey respondents saying they owned a debit card compared with 68% who did in 2011, according to a recent report from Mercator Advisory Group.

As such, issuers are looking for ways to provide more value in their debit card programs even as their transaction volumes continue to rise.

This year, issuers expect 15% growth in PIN transactions and 8% in signature purchases across the combined business and consumer card portfolios, according to a recent report from Discover Financial Services' Pulse debit network. Sixty-nine percent of regulated issuers and 76% of institutions exempt from the debit-interchange rate cap agreed that focusing on improving penetration, activation and use for debit cards is key to growth in 2012.

Because the Federal Reserve Board, as mandated by the Durbin amendment to the Dodd-Frank Act, capped debit interchange at about 24 cents per transaction, issuers say they no longer can support their own rewards initiatives. Smaller issuers are exempt from this cap.

As a consequence of the law, rewards programs funded by merchants are gaining traction among debit card issuers.

For example, Dean Bank in Franklin, Mass., uses ShoppingFLING from RewardsNow to offer customers rewards for debit-card use.

JPMorgan Chase & Co. in July revived its Disney debit card, which replaces conventional rewards with discounts from its cobrand partner. Sovereign Bank also supports a merchant-funded rewards program.

However, issuers should take caution throwing all of their loyalty efforts in one basket. For example, they may also want to reward customers for card use through internal offers.

Mercator's report didn't delve into merchant-funded rewards, but more issuers are moving to support such programs, Patricia Hewitt, director of Mercator's debit advisory service, said in an interview.

"They tend to include daily deals and more local deals and things like that," she says. "We certainly have seen that happen, and we'll continue to see that trend."

Among the more recent efforts involves RewardsNow, which is working with Zavee to tie community banks' card programs to local merchant-funded rewards initiatives. 

Another report out last month (pdf) from Celent points to opportunities for issuers to support merchant-funded rewards. But while platform providers, including Affinity Solutions, Cartera, Cardlytics, edo Interactive, FreeMoney and Truaxis, promise "win-win-win" performance with clear benefits to merchants, they face a "chicken-or-the-egg" problem, Celent says.

"Merchants are not going to re-direct large portions of their promotion budgets to these programs until they are able to reach a broad base of consumers, and [financial institutions] won't see much value in the programs unless the merchants participate with relevant and meaningful offers," author Zilvinas Bareisis wrote in the report.

Still, the promise of merchant-funded rewards remains attractive, particularly given relatively low up-front costs, Bareisis says.

"Financial institutions that don't yet offer [a merchant-funded rewards] program to their cardholders should explore opportunities in this space," he wrote.

About one-third of merchants participating in merchant-funded rewards programs are restaurants. Other large merchant categories include department stores, at 18%, and hotels/travel, representing 18% and 11% of merchants respectively, according to Celent.

Issuers could do more to promote the initiatives, Celent contends.

"Lack of program awareness" and "lack of understanding how it works'" were ranked as the two top barriers for participation, according to vendors that support the initiatives. Moreover, they say, "it takes some time and careful … design to educate the consumer as to how the program works," Celent noted in its report.

Still, the merchant-funded rewards market is poised for growth, and many more issuers will choose to implement programs over the next few years. Celent believes.

The initiatives may not necessarily become "table stakes", but for many issuers "it will be a sensible and cost-effective way to deliver value to their cardholders," Bareisis wrote. "It is also likely to serve as a defensive measure against some of the players, such as PayPal and Google, which today threaten to disintermediate the [issuers] from their relationships with the high-street merchants."

Almost every issuer supports some form of merchant-funded rewards, such as participation in online malls where cardholders receive discounted offers, Michael Hemsey, president of Kobie Marketing, a St. Petersburg, Fla.-based loyalty marketing company, said in an interview. Cobranded cards with airlines that offer free baggage check-in and other perks are another example.

But rewards initiatives must be broad, with merchant-funded offerings representing just one component, Hemsey says.

"Programs that rely only on merchant-funded networks will not be successful," he says. "If that's your only strategy, you don't have a strategy."

A positive example would be an issuer that also enables customers to use reward points toward an internal offer, such as a reduced rate on a mortgage or other loan.

"That would create a really sticky and loyal customer," Hemsey says.