THUMBS DOWN: Debit Rewards Programs Stalled

Wall Street Journal,

With slowing profit margins due tofierce competition among credit cardissuing banks, companies are now offeringrewards programs for debit cards inan attempt to attract customers to usetheir plastic rather than cash or check.According to the 36% of banks that issue debit cardsoffer rewards programs, up 12% from 2years ago. While some carry annualfees, many offer a reward for purchasesmade only with a signature and notPIN-based transactions. Yet debit rewardsprograms, which allow card usersto redeem points for such items as giftcards or even trips, remain a struggle forbanks, and a winning strategy forrewarding customers for loyalty has yetto emerge. One of the problems islinked to the very nature of debit cards.Whereas credit cards allow a grace periodfor repayment, debit cards are linkeddirectly to the consumer's bank account,a direct payment that does notallow for reliance on America's greateststandby—debt. The fact that institutionsearn more money from credit cardtransactions than debit card transactionscompounds the issue. Not only docard issuers receive finance charges andlate fees for using credit cards, but merchantspay on average 1.6% for everycredit card transaction, compared with1.3% for signature-required debit transactionsand 0.8% for PIN transactions.This 0.8% difference in fees betweendebit and credit, which funds rewardsprograms, could explain the less-than-stellardebit rewards programs.