Debit card rewards often play second fiddle to perks associated with their credit card cousins. But astute banks are fine-tuning their approach.
Debit cards are a popular way to pay. Consumers between the ages of 18 and 24 use debit for 31% of their payments, while consumers between the ages of 25 and 54 use debit for 33%, according to 2023
Though debit cards aren't as profitable for banks as they once were due to interchange fee caps, they remain important, said David Shipper, strategic advisor at Datos Insights. Debit cards keep consumers loyal to a particular account. "If they're using the debit card, they're active with the checking account, and in general, the checking account is the core of the relationship," he said.
Here's what banks need to know about the changing landscape for debit card rewards.
Why rewards are important
Consumers like using rewards cards. Notably, cash-back and redeemable points for specific merchandise, travel or entertainment are the most prevalent factors motivating debit card use, according to a 2024 study by Javelin Strategy & Research. That's followed by money-saving offers or discounts for using a debit card.
If a consumer is considering opening an account, debit rewards can also be an incentive, though there are limits to how far people will go for them, Shipper said. "Having some incentive is valuable when people are shopping around. But I don't see anyone switching banks because they see a debit card offer," he said.
Nonetheless, debit card rewards could also become more important to consumers as
Consider competitive realities
Making money off of debit cards is harder these days. That's thanks to the Durbin Amendment, part of the Dodd-Frank Act, which established a cap on debit card interchange fees charged by banks with over $10 billion in assets. The Federal Reserve set the maximum interchange fee at 21 cents plus 0.05% of the transaction amount plus an additional penny for fraud-prevention costs. There's a
Given the changed economics, many large banks have eliminated cash-back rewards for debit cards, said Elisa A. Tavilla, director of debit payments at Javelin. But while debit cards aren't as profitable as they once were, banks need to consider the competitive realities that could prevent their card from being top of wallet, she said. "Banks need to be innovative to compete with fintechs" and other competitors, she said.
Discover, for example, offers a cash-back debit card that provides 1% cash back on up to $3,000 in debit card purchases each month. PayPal offers a debit card with 5% cash back on up to $1,000 spent on a selected monthly category. Venmo also offers up to 5% cash back on its debit card at participating merchants on qualifying purchases. Holders of the Current Build Card can earn points in-store and online for food and grocery purchases, which can later be redeemed for cash, according to the fintech's website.
Notably, cash-back is the most motivating factor to use a debit card more often, with 52% of respondents saying this would motivate them to use a debit card more often, according to the Javelin report.
Focus on merchant rewards
Banks that don't want to fund rewards programs might consider partnering with merchants that are willing to offer discounts and other perks to consumers for debit card use. Merchant-funded rewards are a great option because merchants fund the incentive and banks can sometimes gain some revenue depending on the arrangement, Shipper said.
There are several examples of this in the market today. This month Wyndham Hotels & Resorts launched a rewards debit card. Points can be redeemed for a wide range of rewards, including free nights at more than 60,000 hotels, vacation club resorts and vacation rentals globally.
The Delta debit card issued by Truist is another example. It offers cardholders one mile in rewards for every $2 spent using the Delta SkyMiles Debit Card. There's also the Disney Premier Visa card from Chase that offers savings on select merchandise, dining and experiences at Disney locations in the U.S. Cash App also offers a debit card with access to exclusive offers, concert presales, special events and more.
The downside of merchant-funded rewards is that the perks aren't available through every merchant, Shipper said. Consumers may also have to click special links to activate offers, so people don't always get the rewards they think they're going to get.
Unlock other incentives
Banks may also want to consider offering one-off incentives to encourage debit card use. For instance, consumers who use their card 10 times in a month might get some amount of cash back that month, Shipper said. There is a cost to the bank, but "spend and get" programs are nonetheless popular.
"They're really good ways to get consumers to move up to another usage band," he said.
