An Opportunity for Debit Card Rewards

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By Kelli Hobbs 

7 minutes

Credit unions can capture market share—especially among younger generations—by offering more impactful programs.

Recent turmoil in the banking sector hasn’t been kind to smaller financial institutions. Panicked by concerns about solvency and stability, consumers and businesses have moved money at a breakneck pace to the perceived-more-stable megabanks. According to The Economist, since March “ … accounts with balances over the $250,000 federal-insurance limit fell by nearly 5% across the banking system—and by more than 11% at midsized lenders.” Facing a downturn in deposits, smaller financial institutions need a winning strategy for gaining and retaining customers. Our new research shows that strategic debit card rewards programs might be the ticket. 

While credit card rewards have traditionally dominated the rewards market, the research highlights a growing preference for debit card rewards—particularly among Gen Z and millennials. That’s promising news for credit unions trying to compete with megabanks and their robust credit card programs.

Focus on the White Space and Make It Attractive to Debit Card Generations

Consumer sentiment toward credit cards has undergone significant changes in recent years. According to an annual tracker by S&P, global debit now surpasses credit as consumers’ preferred payment card, with 56.2% of consumers preferring debit as their primary payment card in 2022. Relatedly, our research found that 83% of respondents have at least one debit card (that number is higher among respondents ages 18-34, 87%, who are more likely than other ages to have more than one debit card). 

Yet despite the rampant prevalence of debit cards—and increasing preference for using them—people are using their credit cards nearly three times as often when they want to earn their preferred rewards. This white space leaves smaller financial institutions with a golden opportunity to capture market share by offering cardholders (particularly younger generations) more impactful debit card rewards. 

Many consumers are cautious about incurring credit card debt and are seeking alternative payment options, so it makes sense why they are increasingly turning to debit cards. Unfortunately, our research indicates that many debit card programs are underperforming and losing a foothold against larger financial institutions’ extensive credit card programs. By investing in better, more impactful rewards on debit transactions, credit unions have the opportunity to secure and strengthen their place in the market while being smarter with their resources.

It’s Not Just About the card; It’s About the Reward. And Cash Back is King

People play favorites—including with their payment cards. And our research shows the cards most favored and used are those that offer consumers’ No. 1 preferred reward: cash back. 

Our study found that half of respondents ranked cash back as the top benefit of a card reward program due to its versatility. Cardholders reported using their go-to card because of its cash-back feature—beating out all other features, including convenience, preferable interest rates and no annual fees. 

Cash back is a powerful incentive and directly increases consumers’ use of their favorite card, be it a debit or credit card. It can also open marketing opportunities. Tailored cash back offers would increase the likelihood of people shopping with a specific merchant, trying a local merchant for the first time, and/or shopping with a specific merchant instead of their preferred merchant. Additionally, since digital rewards leave a breadcrumb trail through the customer journey, cash-back rewards can provide you with real-time data to better understand how your marketing efforts are resonating with your cardholders.

Card Loyalty Is Present, But Fragile

While consumers regularly use their favorite credit and debit cards, they are also open to switching to another one that offers better cash-back rewards. This tug-of-war creates an ongoing need for card providers to manage nimble, versatile programs that meet consumers’ expectations.

Far more credit card holders have earned cash back from a credit card they own (72%) compared to debit card holders who have earned cash back from a debit card they own (only 24%). Cash back will make more than three-quarters of consumers more likely to stay with their current card provider—but almost six in 10 consumers would switch from their current go-to card to a new card if it offered higher cash-back rates.

Consumers’ fleeting loyalty offers a huge opening for smaller financial institutions looking to compete with larger financial institutions since card preference and use are driven by rewards access and opportunity, not consumers’ preference for credit cards.  

The Strong Case for a Modern Debit Card Rewards Platform

Shoppers are becoming more sophisticated and increasingly plan out their purchases—often based on available merchant offers associated with their cards. Research on the impacts of inflation on shopping behavior found that people are actively seeking out promotions, deals and other ways to save—with nearly 60% planning to use or more frequently use deal-seeking tools (e.g., cash-back offers). Our research found that before they shop, 59% of consumers check for merchant offers associated with their credit and/or debit cards at least occasionally and a quarter do so regularly (i.e., at least 80% of the time). 

Modern debit card reward platforms don’t just offer rewards to consumers; they also offer perks to the FIs managing them in the form of up-to-the-minute transaction data that helps quickly understand cardholder behavior. The technology behind rewards and engagement programs is a critical and rich source of intel that should include tracking when people use promotions to earn rewards, as well as when they redeem points for cash back. 

Regional banks and credit unions can compete with bigger banks if they invest in the right rewards platform and technology that leverages AI and machine learning. Data trails can help provide tech-supported mapping and modeling that shows how people are interacting with brands, the frequency with which they engage, and which types of promotions and offers resonate best. 

Smart cash-back rewards programs drive purchases, capture market share and create ongoing engagement opportunities that help drive revenue and long-term relationships. The onus is on card program managers to ensure their marketing efforts and reward offerings are well-organized and strategic at a holistic level.

A Blueprint for Debit Rewards

Bearing the above in mind, you can successfully leverage your debit card rewards program by following this blueprint: 

  1. Offer cash-back rewards for debit card purchases. Research overwhelmingly shows people want cash back and crave cash-back rewards from their debit cards—so give your members what they want. Not only will you please your cardholders, but you’ll also differentiate your credit union.
  2. Tailor rewards to customer preferences. Use your cardholders’ data to customize reward categories to align with their spending habits, such as groceries, dining or fuel. You can also conduct market research to understand the specific needs and preferences of your target customer base. A customized, data-informed approach is also helpful in better understanding and recruiting new, younger card program members, who are likely to be digitally connected to their reward programs.
  3. Forge strategic partnerships. This includes working with retailers and local businesses to offer exclusive discounts or bonus rewards on debit card transactions. This approach enhances the program’s appeal, helps cardholders stretch their dollars, and fosters community engagement.
  4. Invest in the right technology. Platforms that make your job easier are worth their weight. Look for opportunities to partner with technology providers that offer application programming interfaces or other software tools that help you manage your program smoothly and efficiently. Also look for technology features that provide you with real-time insights about cardholder behaviors.  
  5. Don't overlook the benefit of staying local. While many large reward programs focus on partnering with global brands, forging connections with local businesses is an underutilized opportunity to create lasting loyalty and incremental value for your program. And as a bonus, local businesses are provided with resources that help them compete against more broadly known household name brands. 

As consumers increasingly prioritize cash-back rewards and responsible financial habits, regional banks and credit unions should turn their focus to investing in and optimizing debit card reward programs. There are low barriers to entry and the space is not crowded. By embracing this emerging trend, you can attract and retain customers while gaining a competitive edge—which is always important, but even more urgent at this time of uncertainty in the banking sector.

Kelli Hobbs leads the team responsible for expanding U.S. commercial efforts for Valuedynamx, a leading global provider of curated, data-driven omnichannel purchase rewards. Part of Collinson, a group acknowledged for delivering the world’s most valued travel ecosystem, Valuedynamx combines its expertise across payments, card-linking, affiliate marketing, earning and redemption into a single entity that delivers relevant and engaging solutions for its clients.

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