Pending debit interchange rate rule-changes have thrown many card issuers into a quandary about strategies for existing debit card rewards programs, panelists said at SourceMedia’s ATM, Debit & Prepaid Forum in Phoenix, Ariz.
Issuers’ overall interest in launching new debit card rewards programs has waned over the last year amidst rising economic and regulatory uncertainties, Inderpreet Batra, a principal with the Boston-based consulting firm Oliver Wyman Group told attendees on Oct. 4.
The biggest question mark is whether banks will be able to fund debit card rewards programs after the Federal Reserve Board issues new debit interchange rules next year that many expect will result in lower rates.
“A lot depends on what the Fed does with debit interchange rates,” Batra said, noting that some issuers may decide to scale back or eliminate existing debit rewards programs that are primarily funded by debit interchange.
But Batra said that even with the uncertainties surrounding future funding of debit rewards programs, “there can still be a positive business case” for many issuers supporting debit rewards because of the popularity of debit payments and the product’s central role in customers’ relationships with banks.
“Even if the economics of (debit) is less favorable than it used to be, it doesn’t mean it’s not worth rewarding that customer (for initiating debit card transactions),” Batra said, emphasizing debit’s importance in attracting and keeping bank customers.
Card issuers may consider finding alternative sources of funding for debit rewards, such as merchant-funded programs, which are gaining favor among some issuers, Batra suggested.
Moreover, many banks have also failed to adequately promote existing debit rewards programs, Batra said, citing data from the 2010 Debit Issuer Study Discover Financial Services’ Pulse PIN debit subsidiary conducted last year (
The data show that in programs where as many as 75% of bank customers were automatically enrolled in a debit rewards program, as few as 9% of customers have actually visited the rewards program’s website and registered to receive rewards.
“Even though (many banks) are enrolling customers, they are not driving high engagement in using debit card rewards programs,” Batra said.
Indeed, it seems to take “constant” promotion to keep debit customers interested in participating in debit rewards programs, Cindy Smith, senior vice president, bank card products and services at Salt Lake City-based Zions Bancorporation, told session attendees.
Smith said that Zions’ merchant-funded debit rewards program, launched in 2005, has been “extremely” popular overall with consumers, but when the bank cut back on promoting rewards during the economic downturn, consumer participation in the program declined.
Participating merchants also respond positively to Zions’ promotion of its debit rewards program. “For a smaller merchant, getting promotion (exposure) through the bank is a big deal,” Smith said.
Broadening debit rewards programs to cross-promote other bank products could be a key to success in the future as the economics of funding rewards programs changes, Lynn Heitman, senior vice president of credit and debit cards for Minneapolis-based U.S. Bank, a unit of U.S. Bancorp, told attendees.
Issuers may consider expanding debit rewards to provide variety and incentives for customers’ overall activity at a bank, Heitman said, but she cautioned that while some issuers are offering unique, “experiential” rewards for high-end credit and debit customers, such programs are not feasible for mainstream users.
Before tweaking existing debit rewards programs, issuers should take a close look at their customer base to make sure they are rewarding customers for profitable actions and behavior, Batra said. “Not a lot of financial institutions can tell how profitable (debit) rewards are for them,” he said.
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