Debit Rewards Gain Traction

  After a year of evaluating the effects of evolving signature-debit interchange rates in the aftermath of Visa USA's and MasterCard International's combined $3 billion in settlements in the merchant antitrust lawsuit, it appears more debit card issuers now are ready to launch rewards programs. Smaller financial institutions, in fact, face losing customers if they don't, observers say.
  For this reason, industry insiders expect a growing number of small and mid-sized debit card issuers to launch rewards programs in 2005, primarily to prevent customer defections to larger institutions already supporting rewards programs. And some may turn to their transaction processors for help.
  "If you're a small to mid-sized bank, you've got to do something. You can't sit back and wait for big banks to steal your customers," says Gwenn B?zard, senior analyst at Boston-based Celent Communications. (B?zard left the firm in January.) "And as a processor, you can't compete any longer based on pricing or scale. You need to compete based on something else."
  Late last year, Allegacy Credit Union of Winston-Salem, N.C., began looking for ways to differentiate its Visa check card program and to add program value for its members. The credit union decided to launch a rewards initiative, which it now offers free to all 30,000 of its debit cardholders.
  Allegacy chose an initiative called ScoreCard, which is offered by its debit and credit card processor, Certegy Card Services. The subsidiary of Alpharetta, Ga.-based Certegy Inc. already was managing Allegacy's credit card rewards program.
  The credit union evaluated other programs, including Visa Extras, which Visa USA contends is the most cost-effective rewards program available to issuers. Allegacy, however, decided costs associated with Extras would require the credit union to charge a fee, which it did not want to do, says Alesia Turner, Allegacy market research and strategic planning manager.
  "It was harder for us to justify not charging a fee for Visa Extras because of the costs associated with it," she says. "We felt ScoreCard was more cost effective for us and our members, and provided more valuable redemption value. We also like being able to combine points with our debit and credit card programs."
  Certegy launched ScoreCard in 1989, when it began to offer credit card issuers the option of offering cardholders either bonus points or cash rebates. The company later began to offer rewards initiatives to credit card clients' debit card programs, but only if it was also processing their debit cards.
  Certegy changed that policy a year ago and began to market its rewards program to debit card issuers that use other processors, says Dennis Driscoll, Certegy vice president.
  "All we need to do is get the transaction feed," he says. "If we can get that, we can then score, house and slice and dice the data to do whatever is needed to do an effective rewards program."
  Today, Certegy provides rewards programs for about 60 debit card issuers that are not also processing customers. The company in total supports rewards initiatives for 1,835 credit card issuers and 122 debit card issuers that have a combined 2.5 million accounts. Ten clients combine ScoreCard programs for both debit and credit card customers. Of the total accounts, 2 million offer bonus points and the rest offer cash-back rewards, Driscoll says.
  Among Certegy's debit-rewards initiatives, less than a half-dozen enable cardholders to earn debit points both by signing for transactions or by entering a personal identification number, Driscoll says. The number of client issuers enabling both types of transactions to earn points is expected to rise in 2005, he says.
  However, issuers will still encourage signature use to generate higher interchange income, but not through fees, according to Driscoll.
  "There may be 40 to 50 issuers that will reward for both PIN and signature (in 2005), but they will differentiate the point values and not encourage PIN use," he says. "It's a positive way to discourage PIN use."
  The only time issuers likely would include both debit types in a rewards program is if they have not yet secured an active card base, Driscoll says. But while some issuers may provide one point per dollar spent with a signature transaction, they may provide one point per $5 spent using a PIN.
  "When you do that you send a message that your signature is worth five times as much as your PIN transaction is," Driscoll says.
  Certegy uses a basis-point system to help issuers conduct a rewards program cost-benefit analysis. A basis point is one-hundredth of a percentage point.
  The average signature-debit transaction generates for issuers interchange income equal to about 138 basis points per dollar spent. When an issuer provides one rewards point per $1, the cost to operate, market and support rewards equals 35 basis points for a Certegy-administered program, leaving issuers earning just 103 basis points per dollar in net interchange, Driscoll says.
  Issuers can reduce a debit-reward program's operational costs to 18 basis points by awarding one point per $2 spent, which pushes the issuer's net interchange income to around 120 basis points per dollar spent. If the cardholder typically conducts eight transactions per month, all the customer needs to do is initiate about two more transactions per month to cover the rewards-program cost, Driscoll says.
  Because signature-debit cards often generate more monthly transactions and total dollars spent than credit cards, consumers remain focused on the opportunity to earn points and will sustain strong activity in the program, Driscoll adds.
  "It's when you see an increase in the percent of active cardholders and the numbers of transactions they do and the increased dollar values they produce that you see the bottom-line differences," he says. "That's what drives it."