Durbin Amendment Shakes Up Debit Rewards

CUs reshape loyalty programs in anticipation of lower interchange fee income.

May 15, 2012

The Durbin amendment is like a big earthquake: Those closest to the event experience the most severe trauma. Those further away experience less shock but are still left feeling anxious and uneasy.

The obvious impact of Durbin is that it curtails debit interchange fee income for large financial institutions, says Mansel Guerry, executive vice president, administration, at Credit Union 24.

The Durbin amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2012 cut debit interchange fees roughly in half. Although the amendment exempts financial institutions with less than $10 billion in assets (all but three credit unions as of year-end 2011), there’s no mechanism for enforcement or oversight.

That means smaller institutions may lose out over time as market pressures force the interchange fees that smaller institutions receive toward the lower rate. This has led credit unions to re-examine their debit loyalty programs as a potential cost-cutting measure.

“New programs most likely will be classified as premium programs, open only to certain members versus pro-grams open to anybody, as before,” Guerry says. “Nobody has put into place new restrictions and qualifications yet, but they certainly are contemplating them.”

Statistics bear him out. Judith McGuire, executive vice president of product management at PULSE, says her organization’s annual debit card study asks participants about their plans for rewards programs in the post-Durbin environment. It revealed that in 2008, 24% of debit card issuers considered implementing rewards programs. By the first quarter of 2011, that figure had dropped to 6%.

McGuire says credit unions are less likely than other providers to attach rewards programs to their debit cards (50%, compared with 60% of large banks and 55% of community banks). More than half of credit unions offering debit rewards (54%) say they plan to restructure or terminate these programs following passage of the Durbin amendment.

“It’s taking a lot of energy for financial institutions to deal with the uncertainties of Durbin’s final configurations, as well as the mandate to follow the Network Diversity Rules that call for them to establish new network relationships,” she says. “It’s a big burden.”

Here to stay

Still, debit loyalty programs aren’t going away, says Guerry. “They’re prevalent on the landscape. There are so many loyalty programs out there and consumers are so used to them that taking them away would be the equivalent of taking down your roadside business sign. You would immediately lose business and inflict damage on yourself.”

Guerry cites his two sons as examples of savvy consumers. “When I was a credit union CEO they’d tell me, ‘Your program offers this while another program offers that.’ It made me aware that there’s a segment of the public that is always shopping.”

That’s why Michelle Thornton, senior product manager for CO-OP Financial Services, sees opportunity in the post-Durbin era. “We tell credit unions that now is the time to reach out to potential members or current debit cardholders with rewards programs. This is an opportunity to drive new business.”

She says rewards programs “absolutely work” to increase card use. One particularly successful credit union client integrates its rewards program into virtually all touchpoints.

“They post accumulated point totals at the bottom of statements, emboss the word ‘rewards’ on the cards, put up billboards, and remind members with Web banners and statement stuffers,” Thornton says. “They market well and often because they know members will forget if they aren’t consistently reminded.”

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McGuire says the question for credit unions is, if they want a certain percentage increase in debit card use, what do they have to do? “Rewards programs can work if they properly incent members. But credit unions have to be able to measure a program’s effectiveness and ask if their rewards programs are doing what they should.”

She says PULSE has been a proponent of going beyond straight points or cash-back programs to those that look at a member’s overall relationship with the credit union. “Such programs reward members for actions beyond debit card use and in the process tie members closer to the credit union while generating measurable revenue or savings.”

PULSE has developed an analytics tool, “PULSE Debit Dashboard,” to help clients see when and where debit transactions are taking place and for what types of goods and services. The “dashboard” approach creates a user-friendly interface that allows users to drill down into data to help them analyze their rewards programs.

McGuire suggests rewarding members for using automatic deposit, online banking, bill pay, and loans, and for moving outside accounts to the credit union.

“Each credit union is different, and a good rewards program should be flexible enough to fit its specific needs,” adds Thornton, who agrees that rewards can apply to any member behavior a credit union wants to encourage.

Guerry likens the effect of the Durbin amendment to the industry taking a pay cut. “Curtailment of interchange income means credit unions will become more selective in determining whom to offer these programs. A good program will offer—in one word—value, whether it’s in the form of merchandise, cash back, or airline miles. There’s no one ‘best’ approach. Each credit union has to determine what resonates with its members.”

Thornton offers this advice to credit unions offering debit card rewards:

  • Market often and well;
  • Tweak the program as necessary—what worked at one point might not down the road; and
  • Don’t think you can’t afford it. A program such as merchant-funded rewards carries little risk or expense.

CO-OP Financial Services recently launched a standalone, merchant-funded program. The turnkey, cash-back program provides an online portal that awards points and discounts to cardholders for patronizing participating businesses.

Merchants pay for the site and give credit unions rebates for driving traffic to the portal and some brick-and-mortar stores. The rebates pay for the cost of the program and in some cases become a new source of revenue.

“The more you market and publicize your rewards program via all your touchpoints, the more members will use their cards,” Thornton says. “That makes them more engaged with you and more likely to purchase other products you offer. The end goal, of course, is that you make more money.”

Guerry says that even with Durbin’s negative effects, a higher percentage of credit unions will offer loyalty programs five years from now than do so today. “Financial institutions simply have to offer some sort of rewards program.”

Cash is king with rewards

Nearly two-thirds (61%) of consumers would choose cash over other types of rewards when given a choice, according to a national consumer poll by Pinnacle Financial Strategies.

“No preference” was the next most common choice (14%), followed by more interest on deposit accounts (11%), discounts (9%), and airline miles (5%).

In addition, 43% of respondents said they would “definitely” make more purchases with their debit cards if they had a cash-back rewards checking account.

“Research in the marketplace concludes that the best rewards program for any institution to offer is cash-based,” says Pinnacle CEO Joe Gillen, who adds that consumers often become frustrated with points-based programs.

“Over time, the points you need to acquire something increases,” he says. “What you’d get for 10,000 points at the start of a program—when you can’t reach 10,000 points—changes in years two, three, four, or five when the value continues to drop.”

The use of points and miles-based rewards programs are not effective in acquiring or retaining members, Gillen says, because it often takes a long time to earn and redeem the rewards.

“Immediate gratification,” he says, “works better with all walks of life: Members did what you wanted them to do and they’re compensated for it. It’s action and reaction, which is an age-old marketing, value-add concept that always seems to work.”