By Robin Sidel and Ron Lieber. The Wall Street Journal. November 25, 2005 (from: Sun-Sentinel Co.)
It has been more than a decade since banks began issuing debit cards, but they are still trying to figure out how to design viable rewards programs for the fast-growing payment method.
The efforts have been complicated by intense competition for banking customers, huge growth in debit-card usage and the simmering tension between merchants and banks over the fees that financial institutions charge for accepting plastic. Those fees are crucial for the banks, which use them to fund rewards programs that are aimed at keeping their customers.As a result, the nation's largest banks now offer a hodgepodge of rewards programs to debit-card customers.
Some carry annual fees. Many offer rewards only to customers who authorize a purchase with a signature instead of a four-digit personal identification number, or PIN. It can take anywhere from one to four dollars of spending for debit cardholders to earn a single rewards point, frequent-flier mile or penny of a cash refund."
Debit rewards are a struggle for the banks," says Chris Allen, senior manager at Dove Consulting, a division of Hitachi Consulting. "
And a clear winning debit-rewards strategy hasn't emerged yet."
There are more than 234 million debit cards in use in the United States, generating more than $60 billion of sales each month, according to CardWeb.com, which tracks debit data.
About 36 percent of the nation's banks that issue debit cards offer rewards programs with them, up from 24 percent in 2003, according to Boston-based Dove. For the first time, Visa USA Inc. expects its 10 largest debit-card issuers to offer a rewards program by the end of the year. The theory behind debit rewards is the same as credit-card rewards programs: build loyalty by giving the customer something in return for using the card. In the debit programs, many of the rewards echo the "everyday" types of purchases that people make with those cards: Customers of KeyCorp can earn a $25 gift card to Old Navy for 5,000 points or a three-night Caribbean vacation for 70,000 points.
U.S. Bancorp offers several debit rewards programs, including one that lets people enter a drawing for a Harley-Davidson motorcycle each time they spend $1 on a signature-based transaction.Unlike credit cards that allow consumers to pay their bills at the end of the month or carry a balance, debit cards are linked to existing bank accounts.
When a cardholder makes a purchase with a debit card, the funds are automatically withdrawn, typically from a checking account. The payment method is especially popular with consumers who use debit cards as a budgeting tool -- they can spend only the money that is already sitting in the bank.
For the card-issuing banks, debit represents a new revenue stream at a time when profit growth from credit cards is slowing due to intense competition among issuers. By offering rewards programs tied to debit, the banks are encouraging consumers to use plastic at times when they would ordinarily be paying for a purchase with cash or by check.
The problem, however, is that the banks earn less money from debit cards than from credit cards, which can include finance charges, late fees and annual fees. Debit cards usually don't have many consumer fees associated with them.Furthermore, banks earn bigger fees from merchants on credit-card transactions than debit-card payments.
Merchants pay an average 1.6 percent for a credit-card transaction, compared with 1.3 percent on a debit card requiring a signature and about 0.8 percent for a PIN-based debit transaction.Those interchange fees vary widely based on the type of card being used and the kind of purchase being made on it. Interchange at a gasoline station, for example, is less than interchange at an upscale restaurant.
In recent months, merchants have sued Visa, MasterCard International Inc. and the card-issuing banks over increases in those fees. The financial institutions, for their part, accuse the merchants of steering consumers to PIN-based debit transactions, which often don't carry rewards, because they carry lower fees.Debit rewards "is a continuing evolution and we're entering a new stage of growth in the debit marketplace," says Stacey Pinkerd, senior vice president for consumer debit products at Visa.
The card association, which sets interchange fees for its member banks and also provides rewards programs for them, says that debit-card use rises as much as 30 percent after cardholders enroll in a rewards plan.
[Copyright © 2005, South Florida Sun-Sentinel]
