Rewards Come Roaring Back…with a Big Twist

lions-roarIt’s funny (but not in a ha-ha way) how far-reaching the effects of the Durbin Amendment are for customers, who largely know very little (if anything) about the legislation.

One such example was the disappearing act of debit card reward programs, which declined by 43% from 2010 to 2012.1 But that trend has reversed dramatically. The “PULSE 2014 Debit Issuer Study” finds that 47% of financial institutions (FIs) offered a debit reward program in 2013, a 47% lift from 2012.1 That’s a complete about-face and all signs point to continued full-throttle growth. This is largely due to a major shift in how these programs are structured.

A key takeaway for community financial institutions: Americans are coming to expect these rewards, even shopping the benefits of varying programs. In fact, The Wall Street Journal reported 88% of North Americans say rewards for banking activities are a top priority (the highest score in the study).2

So it’s becoming a table stake to attract and retain account holders. But not just any program. Details are below, but to avoid burying the lead, here are four keys to a successful program:

  1. Don’t pay for the costs of the rewards; other parties will happily do so for you.
  2. Offer equal rewards on PIN- and signature-based transactions.
  3. If you issue credit cards, have your reward program work on both debit and credit purchases.
  4. Offer rewards for any purchase, anywhere.

Shifting Costs Yields a Win-Win-Win

The previous dip in debit rewards was a direct result of the Reg II interchange cap placed on most banks, which made the programs too costly. The primary driver in the resurgence is an overwhelming industry trend of shifting the cost of the rewards away from the financial institution. A common method is tying the program to rewards redeemable at retail locations, with either the merchants or third-party reward providers paying for the cost of the rewards. The cardholder wins with discounts on things they buy; the financial institution wins with increased interchange revenue and cardholder satisfaction; and the merchants win with increased customers and larger spend per purchase.

How prevalent is this shift? 55% of financial institutions issuing a rewards program had a merchant program in 2013, up from 38% in 2011. Meanwhile non-merchant programs dropped from 62% to 39% over the same period.1 Quite simply, why would a community bank or credit union incur the expense of the rewards when they don’t have to? Especially when there are other parties who will happily do so to gain a seat at the revenue-generating table.

Make It Easy To Earn (aka, Signature-only Rewards Is a Sinking Ship)

Pre-Durbin, to cover reward expense FIs everywhere steered account holders to choose signature instead of PIN for debit transactions — to the point of frequently only offering the rewards for signature-based transactions (which yielded far greater interchange profit).

While FIs under $10 billion in assets were spared Durbin’s interchange cap, they weren’t entirely spared the effects. For FIs over $10 billion, the interchange revenue per PIN- and signature-based transactions was $0.24 and $0.23 respectively. Factoring in the lower costs for PIN, these large banks reap $0.21 in net margin per PIN transaction compared to $0.14 for signature.1

Why does this matter for credit unions and community banks that are exempt from this cap? Because for the first time, the big banks are on the same side as retailers in favoring—and pushing for—PIN transactions. Those are two powerfully influential forces on driving consumer behavior. Couple this with the fact that PIN is more convenient for and popular with consumers anyway, and it’s clear that a signature-only reward program is not going to appeal to cardholders.

This may be unfortunate, since the net margin per transaction for exempt FIs (under $10 billion) is very different at $0.24 for PIN and $0.35 for signature.1 But it is reality. The sheer volume of PIN transactions will have to make up for lower margin. That, and the fact that rewards tied to PIN transactions will keep your card at the top of your cardholders’ wallets. Whereas a card without them will find its way out of their wallet.

Double Your Wallet Share With Debit & Credit Rewards

Americans are enrolled in an average of 10.9 loyalty programs, and are active in 7.8 of them.3 While some of these are tied to individual retailers, many are programs tied to the multiple debit and credit cards that individuals have at multiple institutions. To win the battle of the wallet, make your cards the easiest to use at the most locations.

It’s no coincidence that the three characteristics below, which cardholders revere, are all in the above list in how to successfully propel adoption and recurring use of your loyalty program.

  1. If you issue credit cards, have your reward program work on both debit and credit purchases.
  2. Offer equal rewards on PIN- and signature-based transactions.
  3. Offer rewards for any purchase, anywhere.

The fourth key to a successful program — don’t pay for what you don’t have to — is just common sense.

This article originally appeared in CU Insight & CB Insight.

1Pulse, “2014 Debit Issuer Study,” June 2014
2The Wall Street Journal, “Consumers Say More Rewards Is Their Top Demand From Banks,” August 2014
3Bond, “The Loyalty Report,” 2014

Dante Dominick

Danté Dominick is an award-winning marketing and content strategist with specialized knowledge for the financial services industry. He has helped over a hundred community financial institutions improve their image, creative assets, user experience, and content – and looks forward to the next hundred!