TD Bank's recent cash-back rewards promotion was exceptionally generous, but the company said that convincing more customers to use their debit cards was well worth the expense.
"TD is actually losing money," said Sunil Kirpalani, the head of debit card and operations for the Cherry Hill, N.J., unit of Toronto-Dominon Bank. "It's done to spread the message of debit and using debit."
TD offered customers up to $50 back for signature debit grocery purchases last quarter.
Observers say the promotion was "very generous," and underscores how some banks are willing to take a short-term loss to get consumers in the long-term habit of using debit cards for everyday purchases.
Banks say that investing now can boost their income from interchange fees for years to come.
"Many studies have shown that once consumers start using the card at the point of sale, they will continue to do so," said Lee Manfred, a partner at First Annapolis Consulting Inc. So it makes sense for TD to offer "some pretty rich rewards" for a limited time.
The TD promotion ran from Jan. 17 to March 7. For every $100 spent on groceries during that period, customers who enrolled in the program could receive $10 in gift cards, up to the $50 limit.
TD chose groceries, a recession-proof expense, because many consumers still pay with cash and checks rather than plastic.
"Clearly the intent is to increase activation and usage among their existing base," Manfred said. "That's really going to be the name of the game in debit going forward."
Most deposit customers have debit cards linked to their checking accounts, but "only 60-ish percent of those are active users at the point of sale," he said. "The growth is not going to come from new issuing, it's going to come from getting people to use the card more frequently."
For TD and Visa Inc. — which Kirpalani said helped fund the promotion with "marketing dollars" — another goal is to convince cardholders to sign for debit purchases rather than to use their PINs. (A Visa spokeswoman would not comment beyond saying that it "is not funding the cash-back element of the promotion.")
Signature debit purchases are more lucrative for banks, because they carry a higher interchange rate than PIN debit. Most banks offering cash-back debit rewards do not offer them for PIN debit.
"That's what this is all about: How do you modify spending behavior?" said Philip J. Philliou, a partner in the consulting firm Philliou Selwanes Partners LLC.
What's attractive about tying rewards to grocery or gas purchases is "they're frequent," so more conducive to reinforcing new behavior, he said. "If you can change someone's behavior, the payoff could be quite significant over the long term."
Kirpalani, who was a debit product management executive at Bank of America Corp. before he joined TD in January, agreed.
"When are we going to make money back? Maybe two, three years from now," he said. But even in the short term, the promotion encouraged TD customers to spend a little more money to qualify for the rewards. Customers who were close to the $100 target added a few extras to the grocery cart, Kirpalani said.
Kirpalani would not provide projections for the additional debit business TD expects to gain over the long term. But, by mid-February, the promotion could already be considered a success. More than 58,000 customers registered their debit cards for the promotion during the first three weeks — exceeding TD's projections for customer enrollment during the entire seven-week program.
B of A, which has covered similar ground for five years, pays customers up to $250 a year through its debit rewards program.
For cardholders who enroll, B of A's Keep the Change program rounds up each purchase to the nearest dollar and deposits the extra cents into a savings account.
For the first three months, B of A matches the deposits in full; after, it matches 5%, until reaching the $250 annual limit.
About 12.5 million B of A customers have signed up for the program since 2005, according to a spokesman, Don Vecchiarello.
"Keep the Change encourages increased cross-sales, deposit growth and relationship-strengthening, which has financial benefit for the bank," he said.
In 2008, Wachovia Corp. introduced a similar program, Way2Save; a spokeswoman for Wells Fargo & Co., which bought Wachovia at the end of that year, said it plans to keep the program.
Occasionally JPMorgan Chase & Co. offers limited-time Commuter Cash promotions in New York City, with the Metropolitan Transportation Authority.
In one such promotion this spring, JPMorgan Chase cardholders who enroll either their credit or debit cards can earn $10 back for every $150 spent on subway or commuter train tickets. The promotion runs March 1 to May 15 and has a limit of $50 back.
Debit cardholders who sign for their purchases are eligible; PIN-based debit transactions are not.
Neither JPMorgan Chase nor the MTA would discuss the funding arrangement for the cash-back rewards. A spokeswoman for JPMorgan Chase said in an e-mail that the goal is to get customers to favor their Chase debit or credit cards over any others in their wallets. She said the promotion also increases awareness among noncustomers about "the unique added value" that Chase cards can provide for commuters.
Cash-back rewards are more common on credit cards than debit cards. Rewards are largely funded by interchange fees, which are higher for credit than debit.
Still, the use of cash-back debit rewards has been rising in recent years. According to a study that the consulting firm Oliver Wyman conducted last year, the number of banks offering self-funded cash-back rewards on debit cards increased dramatically between 2006, when 5% of issuers offered such rewards, and 2008, when 24% offered them.
The number of issuers offering merchant-funded cash-back rewards, which are generally less expensive for banks, has also increased, from 11% in 2006 to 24% in 2008.
But Tony Hayes, a partner in Oliver Wyman, said that the coming restrictions on overdraft protection might stymie experiments with debit cash-back. A new overdraft rule taking effect July 1 bars banks from providing overdraft protection, and charging the related fees, on automated teller machine withdrawals and debit card purchases, unless a customer opts in for the service.
"The profitability of debit card programs will decline," Hayes said. "As a result, we would expect to see far fewer cash-back programs tied to debit."
