The Faulty Logic Of Dropping Debit Rewards Programs

Following the announcement that a number of large banks plan to discontinue their debit rewards, it would seem to be a foregone conclusion that these programs will be dropped by a lot more banks.

Unfortunately, the logic behind the discontinuation of these programs is based on short-sighted, if not faulty, logic.

To help you understand why, let’s play Sesame Street’s Which of These Things is Not Like the Other?

A. Airlines
B. Hotels
C. Banks

The answer is C. All three of these industries rely heavily on rewards programs, but only banks deceive themselves into thinking that their programs have to be funded by something called an interchange fee.

If airlines and hotels can justify rewards programs by changing customer behavior (i.e., getting customers to buy more and/or not leave) then why can’t banks?

The answer is: They can.

I’m willing to bet that there’s a segment of banking customers that couldn’t care less about their bank’s branch locations and that don’t stay with their banks because of their “superior customer services” (stop laughing), but instead, stay with the bank because they rack up points when they use their debit card.

These customers might not switch banks, but they’re the group most likely to, if debit rewards programs get killed.

And guess what? This might be hard for the banks to understand, but this segment of banking customers might actually be the more profitable segment of customers. Why?

1) Few banks have a significant share of their checking account customers’ credit card business. If switching purchase behavior from a debit rewards card to a credit rewards card is even an option for consumers who value their debit rewards, the switch in card behavior does most banks little good.

2) Consumers who aren’t in this segment are only more profitable if they’re carrying high balances, and are low cost to serve. High-balance, non-debit card users are generally Boomers and Seniors who are more likely to rely on credit cards than debit cards. While the banks aren’t making diddly-squat on these customers’ credit card activity, they do enjoy the high balances these customers bring. But on the other hand, the future potential of cross-selling these customer retail banking products is limited — Boomers and Seniors account for a disproportionately low share of the demand for banking products.

3) Low-balance, non-debit card users write checks. And the interchange revenue from checks is….?  Oh yeah. ZERO. Last time I looked — and please correct me if I’m wrong — $0.12 per transaction was better than $0.00 per transaction.

So what should the banks be doing (you might want to sit down for this)?

They should be RAISING the rewards on debit cards. They should be giving major incentives to check-writing customers to stop writing checks and start using debit cards. They should be giving online bill payers incentives to pay with debit cards (and working with billers to accept debit cards).  They should give their customers absolutely no reason for switching to credit cards.

Yeah, I know what you’re thinking: Those Gen Yers who make heavy use of debit cards don’t have an option to switch to credit cards. Either their limits are too low, or they’re not getting pre-approved for good offers, or they’ve stopped using credit cards in order to avoid running balances and incurring interest charges.

That’s going to change over the next 10 years. Today’s hard-partying 25-year old, plunking down that debit card for pizza and beer today is tomorrow’s 30-year old, getting married, having kids and saving for their education, looking to buy a home,  needing a minivan to haul the little anklebiters around in, etc. They will have needs for credit cards, they’re just not there yet.

Banks should be driving responsible use of debit cards, with PFM tools to help customers track and manage their spending and their finances, and with merchant-funded rewards/offers driven by and linked to the customers’ debit card activity. Banks can’t do that if the spending shifts from debit to credit, checks, or — god forbid — cash.

At this point, there may still be some bankers who, having gotten this far in the story, will ask “but how will we pay for the rewards?”

To them, I’d like to offer my consulting services.

4 thoughts on “The Faulty Logic Of Dropping Debit Rewards Programs

  1. Ron,

    I agree that banks should not simply drop their debit reward programs, but they cannot leave them as presently constituted. At an average redemption rate of 1/200, the earn rate is simply too slow. A better approach is to bring merchants directly into the program, and allow them to pitch targeted offers to the debit card users, based on past purchasing behavior. As we have seen with companies like Groupon, merchants are willing to offer quite a bit more than 1% off if they know it will drive traffic to their stores. With points, the merchants pay the costs, but the consumer is under no obligation to redeem with them. If you look at Regions Bank, they are ending their legacy points-based system, but are simultaneously rolling out a new merchant-funded system from Cardlytics. It doesn’t have to be so black and white.

  2. Aaron: You and I are on the same page (for the most part). I’m a strong supporter of the merchant-funded rewards approach. But… and I don’t think I’m going to make the Cardlytics of the world happy with this statement…. it’s a bit of a stretch to call “targeted discounts” a “reward.” In other words, it’s possible that you could spend $10k a month using your debit card, but because you don’t spend that $10k on the “right” things (i.e., the categories that merchants in the program are in), then you’d receive no “rewards.” Even at $0.12/transaction, a customer who makes frequent debit card purchases is generating more revenue for the bank than someone who writes $10k in checks (all other things being equal, of course).

    The main point I wanted to make with this post, though, is that banks have got to get out of the box of thinking that the only to pay for a rewards program is with interchange. Other firms in other industries run loyalty programs that aren’t funded by interchange. Banks can, too.

  3. Pingback: In Brief: Video Tellers | Job 2.0 | Remote Deposits | The Financial Brand: Marketing Insights for Banks & Credit Unions

  4. Cardlytics is great, but complex. We’re now bringing on more banks that want simple and affordable connectivity and account acquisition at the lowest cost. So, we launched DebitDeals, a merchant funded, cash rebate that costs the merchants (average) one dollar to get a branded referral from their local card issuing community bank. Plus, a local non-profit gets a slice while the bank is getting (average) of 12 cents more per transaction (non-interchange). I’d love to talk about this…anytime. 216-409-6004

Comments are closed.