Three years after big banks started pulling the plug on debit
card rewards programs, many small banks and credit unions are
finding surprising success in offering similar rewards to their
The big guys' departure, prompted by federal regulation limiting
their merchant fees, left room for the banking small fry, who see
the obvious: Debit cards are in everyone's pockets, accounting for
nearly 50 percent more noncash transactions than credit cards. And
who doesn't like to earn rewards for spending money?
"There is some renewed interest in this," says Ron Shevlin,
senior analyst with research and advisory firm Aite Group. "It is
surprising, because a lot of people didn't forecast that there
would be this shift back to credit that would prompt the need for
more competitive debit reward programs."
Small banks and credit unions offering rewards for debit say it
fits well with their customer-focused philosophy. While the rewards
are typically meager compared to those that come with credit cards,
smaller financial institutions are maintaining or expanding their
of Aite Group research says most credit unions and small banks view
debit as their biggest chance for growth. Among those with a debit
card rewards program in place, 60 percent said the program helped
"They're recognizing they have to do something to protect that
revenue stream, and make debit cards competitive to the credit
side," he says.
Debit is king
Between 2000 and 2011, the use of debit cards took off, growing
from 8.3 billion transactions in 2000 to more than five times that
number by 2011. In 2004, the number of debit card payments eclipsed
credit card payments, and debit has been the favored form of
payment ever since.
The 2007-2008 recession contributed to the growth. When it hit,
consumers came to see debit cards as a financially sensible way to
live within their means.
While debit cards remain popular, their surge has been slowed by
industry changes. In 2010, the landmark Dodd-Frank financial reform
legislation included a provision known as the Durbin Amendment, a
measure favored by retailers because it directed the Federal
Reserve to cap the fees that big banks charged merchants for debit
card transactions. The regulations, which took effect in 2011,
capping large banks' debit card transaction
at half their former level.
The rules applied only to financial institutions with assets of
more than $10 billion.
With debit cards becoming less profitable, the big banks quickly
cut back on debit card rewards
. Instead, they moved to
juice credit card reward programs
, which tended to target more affluent customers. Credit card fees
were not capped as part of the Dodd-Frank regulations.
Since then, the rate of credit card use has grown while debit
card growth has slowed. Prepaid cards have been taking off but
still lag behind those two.
Nevertheless, studies show that consumers prefer using debit
cards to credit cards. According to a
2013 Consumer Payment Choice Study
by the payments processing company TSYS, 49 percent of those polled
said they preferred to pay by debit, while 34 percent said they
preferred credit. Eleven percent said they preferred paying by cash
Rewards ramping up
Instead of following the lead of major banks, some small banks and
credit unions stuck with debit card rewards.
"In the last few years, many people expected to see a bottoming
out of rewards offerings, but it didn't come to pass," says Ron
Mazursky, director of Mercatur Advisory Group's debit advisory
service. "Most of them seem to have kept the rewards programs
going, because it's come to be expected by the consumer."
In recent months, he says, he has talked to three or four times
the usual number of small- and medium-sized banks looking to
connect with vendors offering rewards programs.
"Smaller financial institutions generally have been slow to
adopt rewards programs, but we've actually seen a ramp-up of the
number of banks looking into adding rewards programs now," Mazursky
At Hanscom Federal Credit Union in Massachusetts, the
institution's MemberPoints reward program has been popular with
customers since its debut in 2007, says Steve Silva, the credit
union's vice president of marketing.
Hanscom, with more than 53,000 members and $1 billion in assets,
has stuck with the program because it seems like a good fit for the
credit union's focus on offering an appealing checking account.
Members earn 1 point for every $2 when they sign a receipt, or 5
points per transaction when they use a PIN.
The reward catalog offers a variety of merchandise. Silva says
gift cards and digital downloads are the most popular. A $50 gift
card to a Shell gas station or Lowe's Home Improvement goes for
9,990 points -- the equivalent of 2,000 debit card transactions or
spending $20,000, which would be a 0.25 percent return. In
contrast, the standard return for rewards credit cards available to
people with excellent credit is 1 percent or more.
"I can't say that this program really drives them in the door,
but it's one of those added benefits," Silva says. "People say,
'Oh, really? I get points just for using my debit card, and I can
redeem for a gift card or travel or merchandise?'"
He says he realizes Hanscom is bucking the big banks. "A number
of financial institutions went away from debit rewards because they
felt it was costly," he says. "We felt there was some value, and we
return that back to the members."
Room for growth
Still, Hanscom is in the minority. Only about one-third of
financial institutions offer rewards tied to debit cards, according
to Aite Group research.
At Directions Credit Union in Ohio, Julie Linch, senior vice
president of retail delivery, says the institution has signed on
with national companies to run debit rewards programs. Consumers
are increasingly expecting rewards, but they want other things,
too, such as free checking.
"It's a piece of the program, it's not the main driver of the
program," she says.
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