Rewards programs helped rev up credit card usage; can they do the same for debit cards? Marketing experts at BAI’s Retail Delivery Conference & Expo say the initial signs appear favorable.

“Rewards programs are proving to be highly effective in motivating light users of debit cards to use them more often in place of checks and cash,” said Stacey A. Pinkerd, senior vice president of consumer debit products for Visa USA. “Consumers today have come to expect rewards for use of their credit cards and they are beginning to expect debit cards to have rewards too.”

Pinkerd’s comments came in a presentation Wednesday afternoon entitled “Debit Cards—The Next Generation.” He was joined onstage by John Owens, senior vice president of debit and prepaid products for Minneapolis-based U.S. Bancorp.

Only about 10% of debit cards in the market today are tied to a rewards program, according to Visa, but that has increased from only 2% in 2002. Pinkerd said 14 of Visa’s top 15 debit card issuers now offer a reward with at least some of their cards.

Rewards can vary substantially from cash back to points that can be redeemed for airline travel, hotel visits or merchandise. “What is being used to reward card users is all over the map—which is a good thing because it gives consumers a choice,” Pinkerd said.

U.S. Bank, for example, has more than 3 million, or about 80%, of its debit card customers on a rewards program, according to Owens. He said these rewards come in four categories: cash back, merchandise, airline mileage and affiliation membership. In the latter case, funds are donated to a charity supported by the card user.

Owens said cash back is by far the most popular type of reward with the U.S. Bank’s customers. However, he added, the bank has found airline miles to be the most successful in motivating customers to use their cards and in attracting new accounts.

Owens cited the following as keys to a successful debit card rewards program:

• Involvement by branch personnel in selling consumers on using their cards to obtain rewards;
• A clear understanding on what the card issuer hopes to achieve through the program—i.e., increased fee revenue, higher customer retention and deposit acquisition;
• A sound financial justification showing that the additional revenue derived from the fees or new accounts is greater than the cost of paying for the rewards;
• Continued communication by the bank to remind customers to use their cards.

Pinkerd said the last point is especially important, since banks often introduce rewards programs with a lot of fanfare but don’t follow up. The risk is that customers will forget about the program until it is time to cash in the reward points, he said. That means the bank is paying for rewards on purchases that consumers would otherwise have made without any benefit from increased card use.

“One example of this is cash back programs where enrollment is free,” Owens said. “Often the cash back is automatically deposited to a customer’s account once a year. Because a lot of customers don’t read their statements closely, they might not even notice that they received a reward. Then the bank is paying out rewards with absolutely no benefit."

Instead, he suggested, banks should require customers to redeem points for the cash, which reminds them that they are receiving this reward from the bank because they used their debit cards.

For more on debit card marketing, see “Cash Today, Debit Tomorrow—How Banks Can Benefit” in the September/October 2006 issue of BAI’s Banking Strategies.

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