Most U.S. financial institutions continue to support debit card rewards programs, although significantly fewer plan this year to roll out new programs, according to new data from Discover Financial Services’ Pulse electronic funds transfer network.
Pulse recently released additional findings of its 2010 Debit Issuer based on a survey Boston-based management consulting firm Oliver Wyman Group conducted among issuers in February and March. Earlier findings from the research suggested fraud and regulatory pressure are key challenges for financial institutions this year (
Pulse says 58% of issuers in 2009 still offered some type of rewards program, up from 53% in 2008. However, only 17% of survey participants said they are considering launching a debit rewards program in 2010, down from 24% last year.
Though debit interchange regulation was not on the agenda when the study was conducted earlier this year, financial institutions were already beginning to anticipate downward pressure on debit revenue and were therefore more hesitant to fund debit rewards programs, Tony Hayes, partner at Oliver Wyman, tells PaymentsSource.
Analysts say card issuers are now bracing for losses in debit card revenues from a combination of new regulatory pressures, including debit interchange and losses from debit card overdraft fees (
Financial institutions also are hesitating to launch rewards programs because issuers “question the effectiveness of debit card rewards programs and whether they really drive incremental card use,” Hayes notes. The “combination of lower expected revenue and uncertainty about effectiveness ... is (reducing issers’) interest levels in reward programs,” he says.
Despite declining interest in launching new debit card rewards programs, many issuers continue to promote such programs. Some 36% of issuers in the recent study still identified rewards programs as a growth opportunity, with some believing rewards programs help to increase overall debit volume, create competitive differentiation and strengthen cardholder relationships, Pulse says.
Plus, “if the bank across the street offers a rewards program, then it increases the motivation for other banks to also offer rewards programs,” Hayes notes.
Overall, “cardholders enrolled in a rewards program tend to spend more on their debit cards. Additionally, debit rewards customers tend to be better banking customers as they have higher profitability, are more loyal and are less likely to close their accounts,” Hayes says.
According to Pulse, 72% of issuers plan to make strategic moves this year to improve debit card portfolio performance. Key tactics include increasing the cards’ penetration, activation and usage among consumers and small businesses.
A growing number of financial institutions also are deploying instant issuance technology of debit cards, enabling cardholders to receive a debit card at the branch when opening a demand deposit account instead of receiving their card later in the mail, Pulse says.
Some 35% of issuers in 2009 offered instant issuance in most or all branches, up from 28% in 2008. Moreover, financial institutions considering implementing instant issuance increased to 36% in 2009 from 26% a year earlier.
Despite higher issuing costs related to instant issuance, financial institutions benefit because “once the card is put directly into a consumer’s hands, the cardholder is more likely to use the card immediately rather waiting for it to arrive in the mail,” Tony Hayes, partner at Oliver Wyman, tells PaymentsSource.
Instant issuance also gives issuers the opportunity to demonstrate debit card usage by encouraging new customers to make their account-opening deposit at an image-enabled ATM with the help of a branch employee, Hayes adds.
About 30% of survey respondents said that small-business debit cards are a top growth area this year. Pulse defines as small businesses as those generating up to $10 million in annual revenue. It estimates the small-business debit card segment comprises only 6% of the total debit card market.
Several issuers have indicated they plan to conduct direct mail campaigns directing small-business owners, according to Pulse.
In order to stimulate small-business debit card activity, direct mail campaigns may be effective “not to acquire new customers but to promote debit usage to existing bank customers,” Hayes says.
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