Copyright (c) 2005, Dow Jones & Company Inc



Copyright (c) 2005, Dow Jones & Company Inc. Reproduced with permission of copyright owner. Further reproduction or distribution is prohibited without permission.

“Wall Street Journal”, Nov. 17, 2005

Debit-Card Issuers Pile on Rewards, and Fret, By Robin Sidel and Ron Lieber,

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 competition for banking customers, growth in debit-card usage, and the 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. And 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 U.S., generating more than $60 billion of sales each month, according to , which tracks debit data.

Some 36% of the nation's banks that issue debit cards now offer rewards programs with them, up from 24% in 2003, according to Boston- based Dove. And 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% for a credit-card transaction, compared with 1.3% on a debit card requiring a signature and about 0.8% for a PIN-based debit transaction. Those so-called 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% after cardholders enroll in a rewards plan.

In addition to big ranges in rewards value that are attached to debit-card transactions, the "price" of a reward in points may vary wildly from issuer to issuer. Wells Fargo & Co. gives out one point for every four dollars spent and then gives away $25 gift cards in exchange for 2,500 points. Wachovia Corp., meanwhile, gives out one point for every dollar charged on a debit card, but its $25 gift cards require the redemption of 10,000 points.

Programs like Wachovia's might look better to consumers who keep a close eye on their points tally, while plans like Wells Fargo's can look best to consumers who are scanning the rewards catalog trying to figure out how much they will need to "spend" to get their free stuff. In either case, however, a dollar of spending yields one quarter of a cent in terms of the value of the reward.

Credit-card reward programs are much more lucrative for consumers. Banks can be more generous since many big spenders end up as debtors who pay 20% interest each month, which helps fund the freebies. Also, debit-card issuers needn't be as generous with rewards since they usually aren't competing with every other big bank the way that credit-card issuers slug it out on a national scale. Many people pick their banks based on convenience, interest rates or account fees; debit rewards are simply a nice add-on.

Review by Alexandra Fedyukova Baker:

The above article introduces and compares loyalty reward programs for debit and credit cards. Loyalty reward program is a good example of lock-in strategy. Banks try to keep the customers by providing them with free stuff or money rewards. On the one hand, the credit card reward program was in place for a quite a while now and proofed itself as a good way of bringing in new credit card holders, keeping them, and eventually getting them into debt. On the other hand, debit rewards’ programs are continuously evolving and depends on many variables. The article suggests that debit cards fees that bank charges merchant for accepting the plastic are critical for building rewards’ programs for the consumers. In addition, merchant fees vary dependent on how customer accept the charges” by using PIN, or by signing the receipt. Since signing the receipt gives larger fees to the banks they encourage debit-card holder to sign the receipt by offering reward programs.

Overall, reward programs are a good way to lock in the consumer and keep him or her for a long time. Loyalty reward programs proved themselves through the airlines, credit cards, and finally debit cards. Loosing the consumer would bring bigger losses to the company than giving something back through the loyalty program. For the banks debit card reward program can also bring in more customers. When a person is making a decision on which bank to open an account he or she looks at the availability of the ATM machines in the area, interest rate, and now – reward program.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download