Citizens Bank is one of several financial institutions in the area now offering debit card rewards programs. Available to both consumer and business customers, Citizens’ MegaRewards program allows debit card users to accumulate points that can be redeemed for a variety of items such as camcorders and vacation packages.
Free airline miles, gift certificates and DVD players are some of the items credit card companies offer consumers. Other credit issuers offer percentage-based money-back programs to entice use of their cards. In recent years, credit card issuers have made charging purchases a rewarding experience by offering a range of gifts after a consumer spends enough money. Now banks are taking notice and beginning to offer rewards programs for debit cards.
Maine-based TD Banknorth began a slow rollout of its debit card rewards program last year. Beginning with business accounts, the bank subsequently offered the rewards to consumer accounts in New Hampshire and Maine at the beginning of this year. About a month ago, TD Banknorth began making the rewards program available to its Massachusetts customers.
The new concept, however, has yet to take hold with consumers in the Bay State and the bank has not seen an influx of new account applicants. However, the bank has not yet marketed the program in the state.
“We haven’t had a big splash in Massachusetts,” said Susan Coward, senior vice president of electronic banking at TD Banknorth.
The business customers, however, have responded positively to the rewards program.
“From Visa’s perspective, we’re doing better than the national average,” Coward said.
A recent research study found that consumers are likely to respond well to debit card reward programs eventually. Synergistics Research Corp., a provider of marketing research for the financial services industry in Georgia, conducted the survey, “Marketing Debit Cards – The New Reality” in May and June, polling 1,000 consumers 18 of age and older.
Overall, slightly more than one-fourth of respondents said they had some type of enhancement with their debit cards. The survey asked which rewards, rebates or discounts would cause consumers to use their cards more. Nearly 40 percent identified discounts on gasoline as an incentive that would work well. More than one-third cited a cash rebate based on their purchases. Coupons or rewards points for discounts on merchandise or services, combined points with a credit card and contributions to an investment or education account were all concepts endorsed by more than one-quarter of those surveyed.
One-quarter of respondents also reported discounts or incentives on other banking services, free travel accident insurance, contributions to charities and airline frequent-flyer points would provide incentive for them to use their debit card more often. One-fifth cited a catalog of gifts to be redeemed by points and free long-distance phone minutes would increase their debit card use. Overall, about half of all debit card users say they would use their cards more in response to receiving rewards.
“In comparison to credit cards, debit card reward activity is relatively low,” said Bill McCracken, chief executive officer of Synergistics. “However, significant numbers of users would increase their debit card activity in response to rewards, and providers should certainly, at a minimum, incorporate some type of basic reward program into their debit card programs. Practical or everyday rewards such as gasoline discounts or cash rebates are most popular.”
Currently, TD Banknorth offers rewards that range from Starbucks or Blockbuster video gift cards to vacation trips.
“It runs the full gamut,” said Coward.
Follow the Leaders
Because the program is relatively new, Coward said it will take the bank some time to realize how debit card rewards are different from credit card rewards. For instance, most debit card purchases are smaller than credit card purchases. Because of this, it can take longer for consumers to accumulate enough points for a reward. TD Banknorth plans to push customers toward billpay. Coward said if consumers pay their mortgage this way each month, the reward points will be more substantial and add up faster. She added that the chances of a large purchase, like $2,000, being put on a debit card is less likely.
“Credit [card purchases] still tend to be that much higher,” said Coward.
Coward said there should be more low-end reward options for consumers to feel the debit card is worth having.
Other creative possibilities exist that might benefit both consumers and debit card issuers. Coward said there is a possibility that the rewards could one day be earned if the bank makes a mistake on a consumer’s account or they could receive double points by purchasing goods or services through specific merchants.
TD Banknorth plans to start a marketing campaign in 2006 for its debit card rewards.
“We’ll do a lot of promotion about it in 2006,” Coward said.
The bank wants to get the word out because it is trying to push its customer base toward a specific type of transaction, one that is more lucrative for the bank.
“We really do drive our customers toward more signature-based transactions,” Coward said.
With a signature-based transaction, the bank earns more money for higher dollar sales, instead of earning a flat rate from a PIN (personal identification number) transaction, which is approved when the consumer enters a numeric code linked to the debit card. But Coward said the jury is still out regarding whether debit card reward programs ultimately will be profitable for banks.
Meanwhile, Charlotte, N.C.-based Bank of America is offering another type of reward program with its debit cards. The bank’s “Keep the Change” initiative allows customers to save money. The amount of every purchase a consumer makes with their debit card is automatically rounded up to the nearest whole dollar and transferred from the customer’s checking account into their savings account at the end of the day. For instance, when purchasing a coffee with a debit card, 15 cents would be transferred if the cost of the coffee was $1.85. The bank will also match 100 percent of the “Keep the Change” transfers for the first three months. After that the bank will contribute five percent a year. The maximum match is $250 annually.
Bank of America also offers debit cards that provide airline miles for specific airlines: Alaska Airlines, US Airways and America West.
The Bank of America GM Visa Check Card is another way the bank is offering card perks to consumers. When this debit card is used for signature-based purchases, consumers get 2 percent in earnings that can be applied toward the purchase or lease of a new GM car, truck or sports utility vehicle.
Rhode Island-based Citizens Bank offers its consumer and business customers rewards for using their debit cards. With the bank’s MegaRewards program, consumers can compile points to receive items ranging from camcorders to tropical vacations.
Many of the larger regional and national banks have begun offering debit card rewards and some industry watchers say the smaller banks will soon follow.
“Local banks will follow the leaders in the industry,” said Stephen Moore, a partner at Boston-based law firm Kirkpatrick &Lockhart Nicholson Graham. “[Right now] you’ve got larger, regional banks offering rewards programs.”
Moore said banks are offering the debit card reward programs because they are seeking to increase deposits and debit cards are linked to core deposit accounts.
“It’s basically a mechanism to draw deposits and retain customers who can move [away from the bank] these days,” said Moore.
While Moore said the rewards programs are not profit centers, a bank can use the programs to retain or attract enough deposits to increase capital for lending purposes, as long as those increased deposits outweigh the cost of rewards. Some banks, he said, have already learned what level of rewards make such programs profitable, while others are still making adjustments.
