Debit card rewards programs at credit unions will survive the coming downturn in debit card interchange, but they will have to change and broaden their foundations in order to remain a part of credit union programs and services, card executives and consultants say.
"I think debit rewards will remain because Americans simply love rewards programs of all sorts," said Bill Lehman, a card consultant for Card Services for Credit Unions, the association of credit unions which process their card transactions with FIS. "Rewards programs have moved out of the credit card space and debit space and are now in retailers and online spaces because American consumers love them and have come to expect them," he said. "Their economics are what are likely to change a bit."
The future of debit card rewards programs has been in question ever since Congress included the so-called Durbin amendment to last year's financial services reform law which capped debit card interchange for card issuers with greater than $10 billion in assets.
The amendment included an exemption for debit card issuers with fewer than $10 billion in assets, but there were questions about whether card processors or the major card brands could or would put a dual interchange schedule in place to support the exemption. Visa executives told CUSO and network executives on Jan. 7 that the brand would put a dual interchange schedule in place in time for the advent of the interchange cap, but many small debit issuers have feared that downward pressure on debit card interchange would continue whether their interchange was protected or not and this economic pressure was seen as imperiling debit card rewards programs.
But Lehman and other analysts and executives said that debit card rewards programs are too well established and have too much support to disappear, although they might ask their debit cardholders to accrue rewards points more slowly.
"Maybe their base might move from one point for every two dollars spent to one point for every three, four or even five dollars spent," Lehman said. "But the program's goals of increasing and building on member loyalty and affinity will remain."
Rewards programs have not yet achieved the same penetration into credit union debit card programs that they have into CU credit card programs, according to Robert Legters, vice president of loyalty services at FIS. FIS processes the credit and debit card transactions for roughly half of all card-issuing credit unions.
Legters reported that about 175 CU debit card programs currently carry some sort of loyalty or rewards points system and that others have remained in the pipeline to add such programs.
Like Lehman, Legters stressed the importance of looking at debit cards against the broader context of strengthening overall member loyalty to the CU and helping to promote other cross selling opportunities from both sides of the rewards equations.
In addition to allowing members with a certain reward point balance to receive, for example, small breaks on the interest rates of some loans, such as auto or personal loans, a rewards program can also encourage members to move to other loan products.
"Having a strong rewards product in place can let a credit union offer rewards points for taking out an auto loan, using online bill pay, signing up for paperless statements or other behavior it wants to encourage," Legters remarked.
Tom Gandre, group executive with PSCU Financial Services, also expects debit rewards programs will remain strong and said that relationship rewards that could help build member loyalty to the credit union overall would also likely continue to grow.
PSCU is a payments CUSO that works with credit unions that process their card transactions on the First Data Corp card platform and also provides other card support and bill-pay products.
Gandre expected debit card rewards to continue, in part, because debit cards have not yet won the competition with checks and cash and, in an unusually ironic twist, many could take on a local character as CUs partner with local businesses or franchises to offer consumer loyalty programs.
Leaving aside the question of interchange, Gandre said, both card issuers and merchants should remember they are better off because of debit cards.
"Both have benefited and still benefit from consumers using debit cards to pay for things and that reality should pave the way for increased cooperation to drive transactions," he observed.
But Howard Polack, a senior analyst with Aite Group, a financial services consultancy, said that credit union debit programs might see an uptick whether or not they carry rewards programs.
Polack noted that credit unions and community banks may be among the few places where debit cards might be available without consumers having to pay a fee for their use or facing other account restrictions and that should make them popular with or without rewards.
But he also predicted that other cards and payment products could become more popular among issuers eager to get around the debit interchange cap. Prepaid debit cards, in particular, could become popular, especially for institutions with customers that do not want to pay fees or cannot meet the account minimums. Those accountholders would be issued debit cards that they could load in advance from their own accounts and then use at points of sale. This would be attractive to large issuers because prepaid cards face no interchange cap.