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Driving Relationships and Profits with Merchant-funded Rewards

By Bob Giltner

Credit card rewards programs have been around for more than a quarter of a century, driving significant profits to card-issuing banks. Now, increasing numbers of financial institutions are migrating to debit rewards programs, and they’re doing so in partnership with local and national merchants.
It’s a strategy that not only drives debit card usage and deepens relationships, but also creates new revenue source for the financial institution. In fact, this new merchant-funded revenue source has the potential to exceed the revenue from the traditional card interchange model.
Working in partnership with turnkey solutions providers, financial institutions have been shown to generate $62 in additional profit for each enrolled checking account using this new debit profit model. Everything can be automated – from enrollment, to marketing and fulfillment, to regulatory compliance.
By leveraging available data on customer preferences and spending habits, these programs are driving debit card users to participating merchants with promises of rewards those customers want most.
Because rewards are funded by merchants, there is little to no cost per account to the financial institution. Merchants, ever more aggressive in their efforts to force changes to traditional interchange models, benefit from partnering with data-rich financial institutions to drive debit cardholders to their stores, not unlike the arrangements many have with Internet search engines already to direct customers to their Web sites.
There are a handful of companies in the market today offering parts of the back-end solutions that support debit rewards programs, from program design to fulfillment. The best approach is a truly turnkey and integrated solution that leverages sophisticated analytics and the provider’s relationships with local, national and online retailers to drive debit card usage among bank customers.
What’s more, with available secure technologies, there’s no need for financial institutions to share individual customer data or to otherwise infringe on customer confidentiality requirements.
U.S. financial institutions are expected to be spending $18.4 billion a year on rewards programs by 2010, up from $10.3 billion in 2006, according to the research firm Aite Group. Program management costs are expected to rise from $600 million in 2006 to $1.15 billion in 2010.
Debit card rewards programs are marginally profitable at most financial institutions these days. Industry data suggests fewer than 20 percent are truly profitable. Data analyzed by TowerGroup provides one answer: issuers must allocate between 25 and 200 basis points of card spend today to fund rewards points.
With merchant-funded rewards programs those costs are eliminated. Plus, merchants and banks alike benefit by being able to deliver customized rewards based on sophisticated data mining and segmentation practices.

A Different Kind of Rewards Program
Debit rewards programs demand a different business model than traditional credit card rewards programs, because card adoption and increased usage are pivotal to the success of debit rewards programs, not just loyalty.
A well-structured merchant funded debit rewards program offers substantial new revenue opportunities for the sponsoring financial institutions – revenues that could well exceed card interchange. These banks succeed by mining and segmenting customer data to match buyer demographics with merchant offerings. Customers then are driven to participating merchants by the promise of bigger, better rewards.
On average, a financial institution today can expect to earn about 70 basis points on a typical debit card purchase, after accounting for expenses and card network fees. With a merchant-funded rewards program, those earnings get an additional boost from a cut of the rewards value. Some programs on the market today offer card-issuing institutions about one-third of the rewards value for directing consumers to their stores.
Consider the potential, for example, if just 30 percent of debit rewards transactions were driven by a merchant-funded source: upwards of 90 basis points.
Of even greater value to card-issuing institutions, debit card usage also grows along with checking account profitability and transaction revenues because consumers have an incentive to use those cards with greater frequency.
Americans are estimated to have spent $1.4 trillion using debit cards last year, and that number is expected to grow at double digit rates for the foreseeable future as consumers curtail spending with credit cards. With merchant funded rewards, financial institutions can help drive and capitalize on this emerging trend. 

Bob Giltner is a consulting partner for My Rewards (, the leading provider of debit rewards programs for banks with 20 to 250 branches. Bob has more than 24 years of experience assisting financial institutions with a broad suite of profitability and software related engagements and programs. Bob can be reached at 910-254-9383, ext. 227, or at

Posted on Monday, January 19, 2009 (Archive on Sunday, April 19, 2009)
Posted by Scott  Contributed by Scott


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