Many U.S. financial institutions are starting to experience a decline in transaction account ownership and debit card usage. This negative trend is concerning for banks and credit unions alike, particularly in light of the fact that the decline in account ownership is specifically more common among wealthier and younger populations.
Slow debit card growth
There seem to be several factors contributing to slower debit card growth. The move to EMV chip cards was expected to bring higher debit card usage since reissuance tends to trigger top of mind popularity for the consumer again. But that hasn’t been the case. The Mercator Advisory Group’s 2016 Annual U.S. Debit Rewards Review found that by the end of 2015, only 30 percent of cards had been reissued, with most institutions opting to reissue on the standard reissuance cycle. The report also points to the rise of card-on-file payments, which spiked in popularity during the holiday shopping season in 2015, as a contributing factor to lower debit card usage. Shoppers largely favor credit over debit for online shopping, thanks to fraud and security concerns and the havoc they can wreak on checking account balances. And with younger consumers increasingly using reloadable prepaid cards to manage finances, debit cards are increasingly being cut out of the transaction loop.
But the news isn’t all bad for debit card usage. The Mercator report also finds that rewards programs are highly effective at driving debit card loyalty. Survey participants indicated that those with debit rewards are more likely to use their debit card. And a majority of the top 25 banks in the U.S. continue to use a rewards program.
Some financial institutions have let their rewards programs fall by the wayside in light of increasing operational costs associated with managing multiple rewards programs. Add in the expense of EMV over the past two years, and the overall decline in revenue, and it’s not hard to understand why many have discontinued their rewards programs. Nonetheless, points based reward programs are effective, and should be streamlined or restructured rather than abandoned. Especially when used to strengthen the relationship between the institution and the consumer.
Points based debit reward programs
One of the most effective rewards program models is a points based system, where the account holder is rewarded for performing certain behaviors that strengthen the relationship between the financial institution and the customer. Points aren’t reserved solely for debit card purchases, but are expanded to include certain one-time activities like opening an account or downloading a mobile app. And, points can even be awarded for recurring activities like bill pay and direct deposit. Offering rewards for multiple behaviors, in addition to debit card usage increases a customer’s awareness of their point balance, and incentivizes further point accumulation. But more importantly, it reinforces their relationship to the bank or credit union.
With a points based reward system, a financial institution can shift point values and reward levels to achieve desired consumer behaviors and accommodate fluctuating budget concerns. In this way, multiple facets of a financial institution can benefit from the same rewards program, strengthening the overall relationship between the institution and the customer. The point values and reward levels can also be altered to reinforce targeted promotions for products, behaviors, and services.
Merchant-funded debit networks
Many financial institutions use merchant-funded debit networks to offer cash back or discounts on certain purchases from a merchant sponsor. It’s one way of alleviating the cost of a rewards program, since the merchants essentially pay for the rewards. But keeping cardholders interested in the products and discounts takes a significant amount of effort and may not be as effective with younger cardholders. The Mercator study highlights the particular effectiveness of points based reward programs for Millennials.
We can look to the U.K. for further evidence of the effectiveness of rewards programs. Financial institutions in the U.K. are also experiencing tight interchange margins due to regulatory pressure and an explosion of new competitors in the market. Despite intense pressure on cardholders to switch account providers, the institutions that implemented strong rewards programs saw significantly less churn than expected.
Vantiv offers a highly customizable, yet easy to manage rewards system for financial institutions of all sizes. Contact us to learn more about what you can achieve with Vantiv.