The Durbin Amendment has had a number of unintended consequences, which have negatively impacted both consumers and financial institutions. By drastically lowering swipe fees on debit cards issued by larger providers, the amendment cut into banks’ revenues. By doing so, it also eliminated many debit card reward programs, which offered cardholders big benefits they no longer enjoy. However, some have found that these reward programs actually can help offset losses associated with debit transactions by driving acquisition, usage and retention.
The Continuing Benefits of Debit Rewards
It’s no secret that consumers are attracted to debit reward cards. Not only do debit reward cards tend to come without additional fees, modern versions offer big perks that give them top-of-the-wallet status. From a big picture perspective, rewards can help offset attrition losses by allowing financial institutions to solidify relationships with existing customers, while growing their member bases at the same time. A recent study conducted by FIS highlights this point by providing compelling metrics related to the overall performance of non-reward debit cards and reward debit cards from 2007 to 2013. Among the findings, research discovered that:
- Overall, reward debit card programs showed stronger growth than non-reward card programs.
- From 2007 to 2013, reward card programs saw 11.88% growth in the number of transactions, and 11.35% growth in purchase volume of transactions. Meanwhile, non-reward BINs saw 6.95% growth in the number of transactions, and 6.37% growth in purchase volume of transactions.
- During that same period, reward card programs realized 29.77% growth in transactions per active account, and 26.62% growth in volume per active account; while non-reward programs saw 11.87% growth in transactions per active account, and 8.02% growth in sales volume per active account.
By offering reward debit cards to their customers, financial institutions are able to strengthen and grow their membership base, while differentiating themselves from competitors. That said, to run an effective reward campaign, it helps to know what works best.
Best Practices for Debit Rewards
An effective reward program should have key traits that entice consumers without negatively impacting engagement, acquisition and spending behavior. Whether directly or indirectly impacted by past or unknown future regulatory constraints, or simply contemplating the economics, there are several options to consider if desiring to deploy a Debit rewards program such as:
- Be conservative with points earnings to reduce cost of redemptions
- Utilize a segmentation approach and a dynamic (variable) cost model
- Deploy a Cardholder selection (Opt-in) approach
- Offer to “Premium customers” (those who maintain a higher balance or multiple FI products)
- Selectively offer rewards based on cost offset by high-perceived value
- Combine with Credit Rewards strategy including the ability to pool points together
- Offer alternative funding sources:
- Merchant-Funded Rewards: Offering only merchant-funded rewards or having it subsidize your issuer-funded program is a must from an economic standpoint.
- Enterprise Rewards: Expanding the rewards offering outside of a card-only transaction model is a natural extension, promotes a cross-relationship approach, and is more financially viable.
- Potential need to incorporate fees
- Don’t expire points: Statistics show that programs with expirations experience 12% higher redemption at full maturity than those programs without expiration.
- Be sure to conduct ample marketing: An integral part of any rewards program (or any product for that matter) is effective marketing, which ensures that cardholders are fully aware of the benefits of signing on every transaction.
As financial institutions of all sizes continue to grapple with market pressures and regulatory factors, the vast majority are looking for new strategies to expand and retain their customer bases. For many, reward programs in general have proved quite useful; thanks to modern benefits that attract consumers who appreciate real-time rewards and plans they can tailor around their favorite stores. Now it’s just a matter of finding the right model.