Monday, December 20, 2010

What's Next for Debit Rewards?

At a time when banks are trying to catch their breath from the reduced fee income impact of Reg E, the government has proposed a cap on interchange income that could equate to a 70%-80% reduction in fees that a bank can collect as part of debit card transactions. In travels across the country, it is clear one of the first casualties of these regulatory changes has been the reconfiguring or elimination of Free Checking at the largest banks.

Will these changes also eliminate debit card rewards programs that are funded by interchange fees?

Earlier this month, JPMorgan Chase Bank announced that they will be phasing out their debit rewards programs. It is clear in talking to bankers that almost all other financial organizations that offer rewards programs are also evaluating their options as we enter the new year. Even if the proposed limit of 12 cents a transaction is increased (as has been discussed over the past few weeks) banks will need to respond in a way that has the least impact on an increasingly disgruntled customer base, while still compensating for some of the lost funding.

Beyond changes to the checking account offerings already implemented or planned at most banks, potential changes to reward programs could include one or more of the following:
  • Elimination of a reward program already in place: A difficult option given that many consumers enrolled and active in reward programs are the higher value relationships at a bank. Some banks are considering the elimination of rewards programs for only certain categories of accounts (i.e. Free Checking). 
  • Assessment of an annual fee for reward-based debit cards: Some organizations already have an annual fee that is waived for the first year of enrollment.
  • Reduction in the value of point/reward interrelationship: This is an option that impacts the most active and loyal rewards program participants the most.
  • Introduction of a relationship-based reward program: Changing a points based reward structure to a program like Bank of America's 'Keep the Change'  provides additional flexibility since the foundation is around an expanded banking relationship.
  • Introduction of a merchant-funded reward program: Shifting the cost of the rewards program to the same merchants who will benefit from the change in interchange regulations, hyperlocal rewards program companies like Bling Nation (that recently signed an agreement with PayPal), transaction history rewards company Cardlytics (that recently signed an agreement with ClairMail for immediate mobile reward notification) or one of several other merchant-funded programs may either replace or supplement current rewards offerings.
The last option above can actually be a revenue generator for banks since the merchant not only funds the reward, but usually pays the bank a marketing fee.

Any of the changes to reward programs discussed above will require significant customer communication to avoid a negative customer experience at a time when many household checking accounts may also be changing. It will be the role of bank marketers and product managers to try to retain the loyalty of some of the most valuable households who have enjoyed the benefits of these rewards.

At the same time, it will be important to heavily promote the use of debit and credit cards to help offset some of the impact of these regulations. The benefit is not only the increase of interchange income from increased transactions, but also improved retention achieved from the more engaged customer.

If you have a rewards program at your bank, I would love to know how you are planning to respond to this most recent challenge originating from a supposed consumer-focused regulation.


  1. The rewards programs may be driven by the retailer consumer behavior at the POS. This increases the tension between debit and credit cards for consumers who have both options.

    If retailers start driving payment changes at the point of sale then it will be very hard to change that with bank loyalty programs. I am also curious what people are planning.

  2. If retailers start to initiate payment change at the register, they would be in violation of their agreements with the credit card processors.

    Retailers need to be smarter. With debit cards, only offer a pin-paid when it financially in their favor. Do not allow a debit card user to select credit unless the transaction is below the threshold, a round the $15.00 level, above that Debit only.

    Retailers need to smarter; there are loads of ways to same money on Debit and Credit card processing.

  3. I think this further opens the door for non-financial services companies (wireless, retailers) to cobrand debit cards more exclusively and fund rewards programs independent of the bank. For banks, this puts their programs back to just being an easy way to access customer's cash without carrying it in your wallet - still a valuable proposition for many.

  4. The best way to handle this situaton is to change the operating model and move towards merchant funded programs with a combination of instant gratification based on the resency, frequency and monetary value.