Debit cards received significant attention in 2011 after the Durbin amendment in the Dodd-Frank Act set the maximum interchange fee for a single card transaction to 21 cents plus .05% of the purchase charge. Large banks responded by removing debit card rewards programs and introducing debit card usage fees. The new fees were not popular with the public and the large banks soon reversed the fees due to customer complaints and a reduction in new account openings.
Then merchant-funded reward programsappeared as a derivation of the rewards program and resulting fees. In this program, a local merchant works with a bank or credit union to offer a discount/reward to the consumer for the merchant’s product or service. The amount of the discount and the time it is redeemable will vary. It’s a like a coupon that is later credited to the consumer’s account. The consumer sees the offer in their online banking interface and must accept or add the special reward to their account. When the consumer uses their debit card with the merchant it triggers the discount to be paid back into the account from which the debit is withdrawn.
It works for financial institutions because it gives them a lower cost to service the debit rewards programs. Instead of funding a percentage reward on each transaction, the financial institution is only paying an agreed portion of the administrative overhead to manage the program. The Merchant pays the discount to the consumer and in some cases a referral fee back to the financial institution.
Merchants are able to target consumers in a specific customer segment and collect information about which segments are attracting the most customers. Of course they also win by selling extra goods and services. But with the marketing data they can collect will help them better target customers for future promotions. The Merchant reduces their financial risk because they only pay a referral back to the financial institution if the customer completes a transaction.
I brainstormed to think of some ideas for how the program administrators might tweak the program in the future to see if will gain greater usage and adoption by consumers. Here’s my list:
* Allow the customer to deposit their reward earnings to a savings/money market account. I think this is more of a psychological play for the FI than a practical win for the consumer. No one will get rich off of the debit transactions that they earn. But it’s favorable to promote healthy savings habits and this would be an easy way to throw a few extra dollars that way.
* Allow the customer to designate a charity to receive their reward earnings. The idea is to be able to pool customer rewards together for a more significant charitable contribution. It gives the customer a sense of working with their community (fellow account holders) to help a worthy cause. It’s also a good way to promote how the financial institution is supporting a local cause.
* Setup debit card usage tiers that earn discounts on other products and services from the financial institution. Examples include reduced closing costs on a mortgage, reduced loan rate, an increased rate on a CD, etc. The idea is to use the debit card program as a loyalty builder that provides leads to other products and services within the financial institution.
I see the program in action every week because my credit union is a participating financial institution in the program. I’m not a big debit card user but I like how the program is structured because it provides something for the consumer, merchant, and financial institution. That’s a win-win-win for everyone.