Issuers Enhanced Debit Rewards In 2010, But Future Remains Murky

The past year saw debit card issuers introduce rewards programs to the marketplace and card networks extend their brands with direct-to-consumer offers such as MasterCard Marketplace and Visa Extras. But the debit-rewards landscape likely will change drastically under the Federal Reserve Board’s proposed new debit card interchange rules, a new report suggests.

Mercator Advisory Group’s report lists the top 50 debit card rewards programs based on purchase volume (see report).

Only JPMorgan Chase & Co. has announced its intentions to phase out its debit-rewards programs. Beginning in February, Chase no longer will offer a rewards program to new debit card customers (see story).

Mercator expects other banks to announce changes to their debit card rewards programs in the coming months. “I can’t imagine an issuer that isn’t going to be looking closely at the efficacy of those programs and if there is really a cost benefit to them,” Patricia Hewitt, the report’s author, tells PaymentsSource.

At issue is the Fed’s proposal to cap debit card interchange at 12 cents per transaction. One industry study predicts issuers stand to lose some $11.8 billion in revenue as a result (see story).

Some issuers moved ahead with new rewards programs in 2010 despite the pending changes that will affect their debit card revenue, the report says.

Hewitt pointed to the partnership between MasterCard Worldwide and Delta Air Lines Inc. that created a multi-issuer airline debit card rewards program, a first for the industry. But only SunTrust Banks Inc. thus far is issuing the card (see story).

Debit card issuers in 2010 generally failed to adequately market rewards initiatives, benefits and features, the report found.

Mercator examined issuers’ websites and often had to dig deep to find information about rewards programs. “By burying information three or more links deep on a site, financial institutions are missing key opportunities to connect to a consumer when they’re in a browsing mode,” Hewitt writes.

Hewitt suspects issuers use their marketing resources for rewards programs if they are “coupled to their brand.” For example, customers of Citizens Financial Group Inc.’s Green$ense rewards program received a debit card made from recycled material and are rewarded for conducting electronic instead of paper transactions.

Credit unions that offer debit-rewards programs stand to benefit from regulation changes, the report suggests. Financial institutions with less than $10 billion in assets are exempt from the Fed’s interchange cap, and many credit unions fall under that floor limit.

Exempt credit unions potentially may end up with a greater income streams from which they can support more-competitive reward programs, Hewitt writes.

But consumers likely will not switch from large financial institutions to credit unions just for such perks, Hewitt says. Mercator’s research suggests debit rewards have little sway with consumers seeking a new bank.

Rewards will not disappear, but they will look different in the next two years, Hewitt believes. She suggests issuers waive monthly checking account maintenance fees as a reward for frequent debit use.

“We’ll certainly see a shift in rewards programs, as they’ll be much more focused on [customer-bank] relationship and have more qualifications to participate, such as a minimum number of monthly transactions and bill-pay,” Hewitt adds.

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