How Can Banks Afford to Provide Rewards for Debit Cards?

Many banking and credit card companies today offer rewards programs with their cards, and there are even debit card rewards programs designed to give you points or even cash back for spending your own money. Banks have many reasons for offering these rewards programs — not only can they strengthen relationships with existing customers, but they can also draw in new customers and improve the bank’s stature within the community.

Debit card rewards programs can vary dramatically, from the very basic programs that offer cash back for using the card, to highly-customized rewards programs that allow consumers to earn points for each purchase and redeem those points for specific merchandise or at certain stores.

How Can Banks Afford to Offer Rewards Programs?

Credit card companies make money through late fees, annual fees, interest on unpaid balances and other charges associated with the use of their cards. This is the price for the convenience of a revolving line of credit. Credit card rewards programs are designed to encourage customers to use their cards by paying them back a certain percentage of every purchase made.

Bank debit card reward programs are similar, but because consumer’s debit cards are linked to their checking accounts and funded by their own money, banks do not have access to the same kind of income that credit card companies do.

One of the primary sources of income for banks that offer rewards programs is through merchants that accept debit card payments. Merchants have traditionally paid an average of 44 cents per transaction for the convenience of accepting debit card transactions. However, the Dodd-Frank law slashed that amount by 50 percent, which dramatically undercuts the banks’ profits.

While many banks have opted to institute usage fees for their debit cards, others have begun working with merchants in order to continue to provide their customers with valuable rewards and benefits. According to the New York Times, these card-linked offers tend to be targeted directly to a cardholder’s specific interests and allow cards to be used at participating merchants to earn cash back, points, airline miles or other desirable rewards.

How Common Are Debit Card Rewards Programs?

Although debit card rewards programs can be beneficial to consumers and banks alike, many banks have slashed their programs, and some have dropped them completely. Still, other banks require their customers to fulfill stringent requirements before they can cash in their rewards.

Although some programs have been left unchanged, others only offer rewards on signature purchases rather than purchases made using personal identification numbers, or PINs. Some banks simply place caps on the amount of rewards that can be earned, or they add fees to debit cards that offer rewards programs.

Still, while more banks are adding restrictions, over half of the programs in Bankrate’s 2011 Debit Card Rewards Study placed few or no restrictions on their account-holders and added no extra fees for using the program, which can make a rewards debit card a smart and even lucrative way to access bank account funds.

Are Debit Card Rewards Programs Worth It?

With the debit card reward program landscape changing, is it still in the consumer’s best interests to stick with debit cards? In most cases, the answer is yes. One major benefit associated with the rewards debit card is that it can still offer a decent return, particularly on purchases a consumer would need to make anyway. Nearly three-quarters of programs currently in use charge no extra fees and return up to 50,000 points, 80,000 miles or more than $100 cash every calendar year.

Consumers whose banks have dropped or severely restricted their debit card rewards programs still have options. Becoming more financially savvy in this new economic climate is essential to locating the best available deals and programs. Credit unions often offer free or low-fee debit cards with many of the same benefits and services that banks offer. Online banks tend to have lower overhead costs, and while they may lack the convenience of local banks, they generally offer free checking accounts and debit cards as well as higher interest rates on other accounts.

This article was written by Chad Fisher, a freelance writer who covers a wide range of topics, including debit card rewards programs. Mr. Fisher recently uncovered some very sound financial information on life insurance products on the Kanetix website.