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Debit card rewards offerings grow more diverse

But the rewards remain meager compared those of credit cards

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After years of languishing in near obscurity, debit reward cards are now coming into vogue. Debit card rewards offerings grow more diverse

Major banks have offered debit reward cards for years. But until recently, they were a poor cousin to flashier rewards credit cards, which enticed customers with visions of international plane tickets and lucrative cash-back offers.

Now, though, with credit harder to come by and consumers wary of taking on new debt, debit cards -- and reward programs tied to them -- are gaining in popularity. In 2009, 45 percent of consumers said they had a debit reward card, up from 34 percent in 2008, according to a survey by First Data, while the share of credit rewards programs fell.

Cards, confusion proliferate
For consumers, the proliferation of rewards programs tied to debit cards can be confusing, experts say, because banks have taken a number of different approaches in designing reward programs. Some are straightforward cash-back offers, others are tied to checking accounts or similar products, while some have complex relationships with retailers that offer discounts.

"Financial institutions see the opportunity in promoting debit, but the rewards component of it is something that financial institutions seem to take different positions on," says Patricia Hewitt, director of the Mercator Advisory Group's debit advisory service.

Of the nation's top 100 banks, 50 offered a debit rewards card in 2009 -- triple the number from three years earlier, according to a December study by Aite Group, a financial services advisory firm. By 2013, Aite expects reward debit cards to account for 40 percent of debit card spending, up from 29 percent in 2009.

You might think large numbers of customers flocking to debit cards would be a boon for banks. But in reality, the shift has created a quandary when it comes to rewards: Banks make less money on transactions with debit cards than with credit cards, so they have less to spend on debit card rewards.

Harder to stand out
Plus, as more banks offer debit reward cards, it becomes harder to stand out, says John Hansen, director of consulting services for Hitachi Consulting's Financial Services Industry Practice. Few people will actually switch banks just for the rewards on a debit card.

"As large and small banks offer these kinds of programs, it has become more of a commodity," he says. "It's more about retention [of customers], not a differentiator."

Still, banks have found the programs useful in encouraging customers to use their cards. And even if the rewards are relatively meager, consumers like the idea of receiving something for using a card they might have used anyway.

Jay Poynter, a 47-year-old food products salesman from Charlotte, N.C., says he likes the convenience of debit cards, and he enrolled in Bank of America's "Keep the Change" program. The program rounds up the customer's charge to the next whole dollar, sticks the difference into a savings account and matches it at 5 percent, up to $250 a year.

When he first signed up for it, he says he assumed it was a "gimmick," but now he likes tracking his expenses in whole dollar amounts, and the little bit of money is nice, too.

"It's just a habit I've gotten into," he says.

3 major categories of debit rewards:
With so many options and more on the way, here's what you need to know about the major categories of debit rewards:

1. Cash-back debit rewards
Survey results consistently show that consumers are most interested in receiving cash. An Aite Group survey found that 75 percent of respondents were interested in a cash-back card, more than any other category.

However, you won't be getting as much cash back as if you used a cash back credit card. For instance, several credit cards -- including American Express's Blue Cash and Chase's Freedom cards -- offer 5 percent cash back on certain categories of purchases, with no limits.

In contrast, Bank of America's Keep the Change -- one of the most well-established debit programs, with 12 million customers -- caps rewards at $250 a year. Perhaps the most rewarding cash-back debit card is from Internet bank PerkStreet Financial, which offers 1 percent cash back with no limit.

2. Merchant-funded debit rewards
Experts say one of the hottest areas in debit programs is the emergence of rewards paid for by retailers. One example is Mall Networks, which works with Chase and other banks to run an online shopping site with more than 600 retailers that offer big discounts. The banks like those programs because the rewards are paid for by the retailers, and the retailers like them because they win new customers.

In April, MasterCard launched a similar program -- called MasterCard Marketplace -- for debit and credit cardholders. Recent popular offers included up to 70 percent off an assortment of steaks and burgers from Omaha Steaks (including four free chocolate molten cakes), up to $875 off Lenovo laptops and up to 50 percent off Reebok shoes.

3. Debit rewards for particular interests
As with credit cards, debit cards are seeing a proliferation of programs linked to niche interests.

Tapping into the growing market for environmentally friendly options, Citizens Bank, which operates in the Northeast, offers a program called Green$ense, which gives customers 10 cents every time they pay without paper -- such as making a debit card purchase or have an automatic payment charged to their debit card (capped at $120 a year).

And because the federal Credit CARD Act of 2009 limited the availability of credit cards to college-age students, issuers are rolling out debit reward cards aimed at that audience. For instance, this month, Iowa-based MetaBank unveiled its Campus Dough DebitSmart Visa card, which offers discounts at retailers geared to college students, with updates and offers available on Facebook and Twitter.

DEBIT CARDS' MOST COVETED REWARD: CASH
Cash is king when it comes to the most-favored type of debit reward, according to a December 2009 Aite Group survey, "Financial Services Rewards Programs: The Quest for Profitability.". The data show the percentage of rewards cardholders interested in the following rewards.
75% Cash back as percentage of spending
69% Rebate on groceries
65% Rebate on gas
57% Points for merchandise
55% Points for gift cards
50% Points for future purchase discounts
48% Free item at store or restaurant after purchasing a certain number
47% Points toward free trips on an airline
44% Points for discounts at restaurants
44% Points toward free nights at a hotel
29% Points for tickets to special events
23% Earn contributions to charity

The future: more individualized, more fees?
Going forward, debit reward card programs will probably try to appeal to consumers by becoming more relevant to an individual's buying habits. Using sophisticated software, companies hired by banks have started mining purchasing data to create specially designed offers. For instance, if you bought a pizza last month, you might soon get an offer for discounted pizza when you go to pay your bill online.

"The key is giving customers something that's meaningful to them so they can get some recognizable rewards," says Robert Christiansen, senior vice president of ARM Loyalty, which is developing a system in which debit customers can bid on gifts from a $5 gift card to a trip to Hawaii.

Another trend, though, might not be as consumer-friendly: Christiansen says banks are likely to start charging higher fees to offset costs of debit reward programs.

See related: 6 ways to choose the right debit card rewards program, Personal finance predictions for 2010: Rewards cards, Credit card issuers shift rewards to platforms

Published: May 4, 2010


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