For many fintechs, debit cards act as their monetization engine. As users spend, they pocket part of the interchange fee. To encourage users to swipe more, we're seeing a resurgence of rewards programs around debit card usage -- something that waned after the financial crisis of 2008 and new regulation that capped fees for debit cards.
Tearsheet's Sara Toth Stub recently published 'Programs without gotchas': Startups get more creative with rewards programs for debit card holders. We invited Sara on to the podcast to talk about what she was hearing in rewards land, what's new with incentives around debit cards, and where this may all be headed.
Initial pullback from debit cards rewards
Due mainly to reforms following the financial crisis, we've seen debit cards from traditional banks pull back from cash back and other rewards programs. These reforms capped the interchange fees you could charge on debit card transactions -- there wasn't a lot of wiggle room to offer rewards.
Meanwhile, credit cards continue to offer generous and competitive rewards programs for earning airlines miles or cash back -- anything you can think of these days.
Fintech leads a resurgence in debit card rewards programs
Fintechs and challenger banks are leading new rewards programs in the debit card space. Over the last year, we're seeing big names offer cash back on certain purchases and sometimes cash back across the board. I think this is happening because there's more competition in the space. There's also a growing demand among customers -- especially younger ones -- to use debit cards rather than credit cards. They want rewards but they want to get them in with debit.
Another thing worth mentioning is that there are a lot of apps out there that you can link a debit card or credit card to -- apps like Dosh, Drop and Bump. Those apps allow people to earn cash back at many brands. Sometimes, it's cash back; Other times you can earn gift cards. From my research, we see loyalty and rewards programs everywhere -- from clothing retailers to Starbucks. It's definitely something customers expect and it's an important form of marketing retainment for customers.
Innovation?
At this point, there's not so much innovation. It's more keeping up with the competition. It's like fintechs are relying on previous innovation. I believe Venmo works with Dosh. I guess we're seeing an increasing number of partnerships with existing technology in the background -- different entities are linking up in a way the feels new to the customer.
Rise of the super apps
Square's Cash app has a program called Boost, which gives generous cash back deals. Only one Boost can be active at a time, but you can swap them. Venmo has cash back, too, but at certain retailers like Target.
An important thing to note about this as well is that there are limits. The Venmo cash back deal with Target is 10 percent, I believe. There's a maximum of $10 back. So, it's not like you can spend thousands of dollars at these merchants and get all that cash back. It's important to read the fine print with the cash back offers.
There's a Canadian startup Koho which offers a debit card with 0.5 percent cash back across the board. But that's pretty rare. More often, we see fintechs partnering with merchants on special deals. N26 just announced some deals -- 15 percent cash back with Booking.com and 50 percent with Lime scooters. But they're making partnerships and sharing the costs of the deals with the partner. It's not just the bank or startup absorbing this through the interchange fees.
Creative rewards
We do see some creativity out there. Acorns offers something it calls Cash Forward -- it's money invested into ETFs. Stash allows its users to earn cash back at specific brands but instead of cash back, consumers earn fractional shares in the brands' stocks that they shop at.
Brex is a credit card aimed at startups. It's credit -- not debit -- but it follows along the same lines of these tailored programs. They're working with partners to get money back for things that startups spend money on, like ride sharing programs, software, and coffee shops.
What's driving debit rewards programs
I think most experts would say that customer demand is driving and encouraging companies to offer rewards that seem generous and rewards that seem easy to redeem. I think I read in the PwC report that credit cards spend $31 billion on rewards programs per year (2016). I guess they see it was worth it.
So, fintechs and digital banks also see the need to compete. As there are more options, there are many payment apps trying to draw customers. We're way beyond the days where it was just PayPal.
Looking ahead with debit rewards
Many of the companies I talked to said they would see more in the space -- this was just the beginning. It's still a relatively new and emerging thing. They all seem to be saying that customers are demanding and are hard to keep. They want to provide them value and a reason to stay.
One other thing that several firms mentioned was part of an underlying theme in fintech and payments: customers want more transparency and less fees. They mentioned that with these rewards programs, they're also trying to play on the theme of increased transparency. So, rather than accruing points that need to be redeemed, many of these programs are promoted as automatic cash back the moment a customer spends it. That's another theme we'll see.
Flexibility and tailor-made programs are also a theme. These firms are focused on where their customers spend money and try to put together the biggest deals in the space where they spend the most money.