The Faulty Logic Of Dropping Debit Rewards Programs

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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.

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