Debit Does Loyalty ... Successfully

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For financial institutions, credit card rewards programs are no-brainers. Stable credit card portfolios are big money makers, whether they are private label or branded Visa, MasterCard, American Express or Discover. There are late fees, over-the-credit-limit fees, revolving-balance interest fees, ATM withdrawal fees, benefit package fees. And in a recession, the fee income on credit cards likely is higher than usual.


When put side by side with credit cards, debit cards seem a weak partner for loyalty programs. Debit card transactions, like credit card transactions, are captured by bank issuers, so there is a wealth of data on customer purchase patterns and preferences already in the hands of financial services providers. Technologically, a debit card loyalty program is easy because it is all electronic and built on existing hardware.


But debit portfolios do not have fees aplenty. There are no late payments or revolving-balance moneymaking opportunities. It is hard to believe a debit card issuer could do so much as break even if it tacked on a rewards program.


Au contraire, said Charter One Financial Inc., a 450-branch bank based in Cleveland with footprints in Chicago, Detroit, upstate New York and Toledo, Akron and Canton, OH. And it is not alone. Chase Manhattan Bank, New York, extended its Continental Airlines OnePass co-brand agreement to its debit card program a few years ago, and US Airways has extended its co-brand relationship with Bank of America recently to offer a new Dividend Miles Visa check card on which cardholders earn 1,000 miles after the first purchase and one mile for every $2 in purchases. Customers earn more miles for purchases from US Airways.


So how does the seeming challenge become a success? This is how Charter One, a regional bank with $37 billion in assets and $23 billion in deposits, has done it.


Most members of Charter One's Mega Rewards pay $15 a year for the opportunity to earn points for purchases. High-balance account holders are not charged for membership in the loyalty program.


One point is awarded for every dollar withdrawn from the checking account through a signature-based purchase -- ATM transaction amounts do not qualify for rewards. The minimum award level is 1,500 points, for which customers can receive a modest gift such as a sports watch or pen and pencil set. The top awards can be had for 25,000 points and include computer scanners and airline tickets. The bank plans to extend Mega Rewards to its business debit cards and offer higher point-redemption levels with office suppliers, travel and entertainment options among the awards.


Membership spans all demographic groups. Noninterest-bearing deposit accounts at the lower end are more profitable than credit cards, and the highest point-earners have healthy household incomes and spend $2,000 to $4,000 a month in debit purchases.


There is nothing extraordinary about the program's structure, but the results are anything but ordinary for a debit loyalty program, many of which have rolled out only to be shut down. Provident Bank, Cincinnati, introduced Merit Valu in mid-1996 and killed it a year and a half later. The program had no fee and offered discounts at partner merchants. Discounts were determined and likely funded by the merchants, so the program could not have been expensive for the bank to operate.


Despite Charter One's responsibility for Mega Rewards program funding, it has managed not only to stay alive but to thrive.


The results. "Conservatively speaking, we've increased gross dollar purchases $250 billion to $300 billion in 2001, and we're just ramping up," said Dave Bowen, senior vice president of retail product management at Charter One. (The program launched in November 2000.)


Participants are 50 percent more active users of their debit cards than nonmembers, and the 620,000 members tend to spend an average of $40 more per month in debit transactions.


All of this spending means increased interchange income for the bank and increased retention of all banking relationships. "Points are the incentive not to leave Charter One," Bowen said. Mega Rewards' success is indicating that Charter One will extend the average life span of its customer relationships not only through customer satisfaction but cross-sales of banking products and nonbank opportunities to earn points -- "a further endorsement of the program," he said.


Debit cards are not a stand-alone retail banking line of business. They are a value-add to a checking account, a primary bank relationship. The average household has two relationships with its primary bank and spreads its other financial services business over other providers, said Ralph Harrison, president of The Harrison Co. LLC, Aurora, CO. With a debit loyalty program, "consolidation of business is job one."


As Mega Rewards members exhibit loyal behavior, they are targeted to take on other payment options such as online bill payment. Bonus points are given only for the first month or two, and as more transactions become electronic transfers, the bank saves money not only on check-based transactions but also on point awards.


The bigger picture. "Banks have to give customers a road map," said Harrison. "If a promise is a good promise, and reward and recognition are there, loyalty programs don't have to be costly."


Consumers generally understand that debit card and credit card reward dynamics may be different, said Chris Theoharides, president of Advantage Consulting Group Inc., Massapequa, NY. Because consumers will accept a lower reward funding rate on a debit card, for instance, he believes debit loyalty will boom, whether co-branded as Chase and Bank of America offer or proprietary like Charter One's route.


Banks have checking accounts a little longer than five years, on average. Even in this amount of time, as Charter One invests the balances, overdraft fees, ancillary fees and Mega Rewards annual fees, "we're making money all day long," Bowen said, and the cost of points is less than the interchange revenue generated.


Keep in mind. "Every customer starts as a one-relationship customer," Harrison said. "No matter who you are and how small you are, there's value... Ten years from now, your top 20 percent will come out of the 80 percent" dismissed today by most banks as unprofitable.


"Quit worrying about crunching numbers and market to customers," he said.


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