Loyalty reward programs have long been primarily the province of credit cards, but rewards for debit programs are emerging as a big opportunity for financial institutions to stand out in this competitive space.
During a PaymentsJournal podcast, Jeri Scheel, Senior Director of Product Strategy at Fiserv, and Brian Riley, Co-Head of Payments at Javelin Strategy & Research, spoke about the advantages of offering loyalty reward programs for credit and debit cards—and how financial institutions can benefit from taking this two-pronged approach.
The Current State of Loyalty Programs
Credit and rewards programs have been synonymous for quite some time, and those programs are one of the first things customers seek when they apply for a new credit card. Rewards have become an expected feature and are no longer just another perk for card issuers to offer.
“Whether it’s consumers or businesses, a credit card is expected to have rewards,” Scheel said. “But the real opportunity for financial institutions is to think about how to tie in rewards on the debit side because it can really set them apart from their competitors.
“They’re a differentiator and determine which card gets top-of-wallet status. In fact, research has shown that 68% of people with a credit card have more than one, 90% of those have a go-to (card) that they use most often. And a majority, 71%, of multiple card users choose their credit card for the opportunity to accumulate rewards.”
These data points highlight how much rewards are table stakes for credit—and how financial institutions can leverage that information when thinking about rewards within the debit space.
But launching a rewards program for debit in a haphazard way, such as simply applying a cut-and-paste credit rewards program, is not the right approach. Financial institutions must be more strategic.
“Finding a way to make it work well on the debit side of the house is important,” Riley said. “When Dodd-Frank was coming out and after the Great Recession, a lot of the interchange went away. Therefore, all those programs died up quickly. A lot of debit issuers have found it hard to make that work on that side of the house.”
How FIs Can Benefit from Loyalty Programs for Debit
The most important way to determine whether a loyalty program for debit cards will benefit financial institutions is to look at spending patterns.
“For the debit side of the house, what we have seen is debit users spend more than credit card holders just in general, regardless of rewards,” Scheel said. “Debit card holders without rewards spend about $13,000 a year. Credit card holders in the same period only spend $4,000. The dollar value you’re starting at is already higher.
“The percentages are greater on the credit side, but the total dollar value is better on the debit side. In the debit space, if I’m spending $13,000 a year without rewards, just offering a rewards program may increase my spend by 25%, which is certainly nothing to shrug at, but it takes me up to $16,000 a year growing that interchange on the debit side.
“And then if you get them to redemption—which shows that they’re engaged in the program— their average spend for the year is $21,000, almost double where you started with no rewards. That’s how financial institutions can really drive usage and spend and ultimately revenue and stickiness for their cardholders.”
Retention is crucial and should be the main focus for financial institutions. As Riley pointed out, it’s about more than booking an account. It’s having a lasting relationship with the customer and being able to get into the vertical integration of the household budget. “Having that balance of credit and debit with that relationship is good,” he said. “Being able to harmonize where the reward strategies are will have a long-term play in how that account performs with the institution.”
Similar to how merchants must provide a variety of payment method options to keep and retain loyal customers, card issuers must offer a variety of redemption options.
“Loyalty participants are engaged in a loyalty program due to how they can redeem,” Scheel said. “Roughly 40% of folks have said they pick a rewards partner because of where they can redeem their points. Another interesting stat is 60% would prefer to use their points at the point of sale instead of cash back, so cash is always king. But offering a differentiation of redemption options and making them relevant to your cardholders is absolutely critical.”
Most Preferred Rewards by Cardholders
Most cardholders seek out the best rewards program before applying for a credit card. And in the end, consumers earn points because they want to eventually use them.
“Whether it’s a trip to Hawaii (or something else), we save up,” Scheel said. “Travel redemptions tend to be very high in Q3 and drop off in Q4, and that’s because people are traveling in Q4, so they book the travel in Q3 with their points. Conversely, gift cards tend to be purchased more often around Q4 because they’re shopping for the holidays.”
The growing trend that card issuers must be aware of is where consumers prefer to use their redemptions. Use at the point of sale is growing in popularity, Scheel said.
“We experienced a shift in Q4 last year of about 6% of the redemptions that typically had been for cash had shifted over to pay with points,” Scheel said. “People prefer to be able to spend at a place where they were going to spend anyway, but getting that extra benefit of using their points instead of always having to use cash.”
The Bottom Line
Establishing card loyalty programs within the debit space holds a lot of opportunity, as the spending value tends to be considerably higher. By adding a rewards program, spending amounts can increase even more dramatically.
Financial institutions should examine their card portfolio holistically and look across the different sectors to target market each.
When it comes to forming key partnerships, it is important to offer a wide range of redemption options. You should also be free to market and communicate these available options to your customers regularly.
