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‘Programs without gotchas’: Startups get more creative with rewards programs for debit card holders

  • Rewards programs were generally used for credit card holders.
  • As more fintechs launch debit offerings, there are introducing new incentives, as well.
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‘Programs without gotchas’: Startups get more creative with rewards programs for debit card holders

A growing number of fintechs are now touting rewards, including instant cashback and deep discounts, for spending via debit cards in hopes of recruiting new customers and keeping current ones. While many of the rewards programs are basic cash-back deals, some are more innovative, offering things like shares of stock and deep discounts at certain retailers. With few traditional checking accounts offering cash back on debit card spending since the 2010 Dodd-Frank reforms limited interchange fees, these rewards programs are another opportunity for startups to differentiate themselves from the standard financial services.

Mobile payment service provider Venmo recently launched an automatic cash-back program when users make purchases with its debit card at certain merchants. The money is deposited into Venmo accounts as soon as customers make purchases, and can be used to pay friends or merchants via the app, or transferred to a bank account or debit card.

“We created a program without any required opt-ins, difficult redemptions or gotchas,” a spokesperson for Venmo said. The offers, including 5 percent cash back when shopping at Target, and 4 percent at Dunkin Donuts, will be changing periodically, with new ones being added, the spokesperson said.

Venmo’s program follows the rollout of mobile payment provider Cash App’s Boost, where users paying with Square’s Cash Card can select among cashback offers at certain merchants, or in certain categories, such as coffee shops or grocery stores. Users have access to one boost at a time, which they can use every few hours; they can pick a new boost every 24 hours. The deals can offer as much as 20 percent cashback, but often have maximums of $10 or $20.

Rather than cashback, microinvesting app Acorns calls its new rewards program for its debit cards 'Found Money', and explains the concept as 'cash forward'.  That’s because rather than depositing money in a user’s checking account, Acorns deposits its rewards into its users’ long-term investment accounts, including ETF portfolios.

“We noticed that most traditional rewards programs encourage customers to spend more,” said Babak Farrokh-Siar, vice president and head of national business development and brand partnerships at Acorns. “We developed Found Money to help people invest more instead.”

Microinvesting app Stash also offers stock rewards for debit card spending, but rather than putting money into a general investment fund, like Acorns does, it gives users fractions of shares in the brands where they are shopping.

Others, including Brex, which offers corporate cards aimed at startups, have developed points-based rewards programs often used by standard credit cards. But by offering more points for certain categories often used by startups, including rideshares and software expenses, the program is more tailored to its users than a standard bank credit card, said Marco Mahrus, vice president of payments at Brex.

“We built our rewards program from the ground up, which means we can custom tailor the value proposition by industry vertical and deliver value where customers care the most,” Mahrus said. 

The Canadian startup Koho gives users of its debit card 0.5 percent cash back on all transactions, and up to two percent in certain categories.  While the program sounds standard, the company said its simplicity is key in attracting customers in a world where most banks no longer offer any cash back on debit spending, reserving such rewards for credit cards only.

“We also found that many rewards programs are not transparent, and rely on users not cashing out,” said Aaron Cheng, vice president of product at Koho. “Our app gives our customers full transparency not only over all their spending and banking, but also over other aspets of financial life, including rewards.”

A report from PwC said that rewards is an area where traditional banks and credit card issuers -- who spent $31 billion on rewards in 2016 -- are falling behind fintechs and mobile spending apps.

“Understanding consumer behavior will be critical for banks going forward if they wish to redesign effective rewards programs that actually acquire and retain customers,” the report said. 

“Among other actions, banks need to invest in advanced analytics and do away with cumbersome redemption processes that now ignore mobile-led consumer behaviors.”

Meanwhile, fintechs said this is likely just the beginning of an increasingly competitive and creative world of new rewards programs.

“It remains to be seen what happens, and what, if anything, becomes the standard,” said Nicolas Kopp, US chief executive of N26, the European mobile bank. The bank just launched a debit card rewards program in the United States, with offers like 15 percent cashback on Booking.com and 50 percent off rentals of Lime electric scooters.

“But people are looking not just for empowerment in banking, but in other financial services as well, including rewards.”

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