Debit card rewards programs are making a comeback
By Allie Johnson
November 11, 2014
If you love the idea of racking up rewards, but hate charging purchases on credit cards, you're in luck: More banks offer debit rewards programs.
“Debit card rewards are now making a comeback,” says Steve Sievert, executive vice president of marketing and communications at Pulse, a debit/ATM network.
In fact, the Pulse 2014 Debit Issuer Survey found that 47 percent of debit card issuers offered a rewards program in 2013, up from a low of 32 percent in 2012. “That's a meaningful uptick,” Sievert says.
Debit card rewards had been all but declared dead after the implementation of the Durbin Amendment, part of federal financial reform legislation passed in 2010, which capped fees larger financial institutions could charge merchants on debit card transactions, Sievert says.
Most banks had used those fees to fund their debit rewards programs, he says. So, after the regulations went into effect, many banks decided it no longer made financial sense to offer debit rewards, he says
A new kind of debit rewards program
So, what's bringing debit card rewards back? It's a new twist on the traditional debit rewards program, and it's based on merchant offers, Sievert says.
In the past, issuers had to pay for the rewards their cardholders earned, he says. But now, merchants are partnering with banks to provide discounts and other perks to debit cardholders, Sievert says.
“(Debit rewards) are a classic win, win, win.”
Steve Sievert, Pulse
“Financial institutions can now offer rewards at a much lower cost,” he says.
In 2013, 55 percent of the debit rewards programs were using merchant offers, according to the Pulse survey. That's slightly higher than the previous year and up from 38 percent in 2011.
“They are a classic win, win, win,” Sievert says of merchant offer programs. The merchants benefit because they can use offers to bring in more business, he says. The banks benefit because they can attract new customers and build loyalty amongst card users, he says. And customers get the rewards.
But merchant offer programs haven't completely taken over debit rewards. “Most institutions are going to offer a variety of rewards programs,” says Madeline Aufseeser, a senior analyst with Aite Group, an independent research and advisory firm.
In fact, the Pulse survey shows other types of programs haven't gone away. For example, about 15 percent of debit card rewards programs in 2013 were issuer-funded cash-back programs.
Banks are using debit card rewards as part of a strategy to attract more customers to their checking products — a market that's very competitive, Aufseeser says, adding that offering variety helps banks appeal to a broader range of customers.
“Different types of consumers are attracted to different types of rewards,” she says.
The future of debit rewards: What can you expect?
What does a merchant-funded rewards program look like? They vary by issuer and by the vendor that the issuer uses to run the program, Sievert says.
For example, some programs let users rack up points for purchases, says Jay Valanju, CEO of Buzz Points, an Austin, Texas, company that provides merchant-funded loyalty programs to banks and credit unions.
In the Buzz Points program, cardholders get points for every purchase made with their debit card at any retailer, and they get extra points for shopping at local merchants, Valanju says. When cardholders hit a certain threshold, which varies by merchant, they can redeem points for virtual (or occasionally physical) gift cards from local or national retailers, he says. “A local coffee shop might offer redemption options starting at $5 worth of points, but with a spa, it might be $25 or $50,” he says, adding that most customers earn enough points to get a gift card every few months.
And some banks' programs don't incorporate points at all but offer cash back on certain purchases. For example, the Prewards program, used by InTouch Credit Union (ITCU) in Dallas and other financial institutions, offers cash back deals — such as $2 cash back on a $10 purchase at the Mexican restaurant Taco Cabana. The cash back gets deposited right back into the customer's checking account, according to ITCU.
Merchant-funded debit rewards programs generally are easy to use and don't require the consumer to have a paper or even a digital coupon. Consumers typically get offers from merchants via email, their bank's website or their mobile phone app. In most cases, a consumer can take advantage of a discount offer automatically just by swiping his or her debit card, Sievert says. “It's usually a really seamless transaction,” he says.
Customers shopping for a debit rewards program should read the fine print and check to see exactly how they can accrue points, Valanju says. Some debit rewards programs only offer points when customers choose “credit” at checkout and sign for their purchases, he says. Others might offer fewer points — say, one point for every $6 or $7 spent — for PIN-based transactions, he says.
“It can be hard to remember to do a signature transaction,” he says. “And you don't want to go to Wal-Mart, buy $100 worth of stuff and not get the points.”