Big payoff: customer rewards are no longer limited to debit or credit-card usage. Some banks today are experimenting with programs that provide incentives for the utilization of wide variety of financial products and transactional behaviors.

• Author: Stewart, Deb
• Position: Fundamentals: Customer Reward Programs

What is the goal of a reward program? According to Dr. Xavier Dieze, marketing profession at the University of Pennsylvania Wharton School of Business, the answer is, "To effect behavior, to have customers become more engaged and be willing to work to earn the reward."

Banks today are making widespread use of customer rewards. The practice is expected to grow even more in the future. Banks use these programs for a variety of reasons: to increase the number of debit or credit transactions, encourage account acquisition, improve retention or drive specific product demand.

In this article, we'll look at three basic types of reward programs:

1. Debit-only: Programs intended to increase demand for debit transactions, and potentially impact acquisition and retention of checking customers through a variety of different rewards.

2. Debit and credit: Programs intended to increase demand for both debit and credit transactions.

3. Comprehensive product: Intended to impact a variety of product purchase and transactional behaviors.

We will look at the market in general, examine a leading program in each category, and look into future reward trends.

Rewards today

Steve VanFleet from RewardsNOW, Dover, N.H., frames the rewards market in the aggregate. "The credit-only market is largely mature with only some remaining smaller financial institutions adding programs. Visa has published that over 50 percent of credit cards have rewards activated. Debit cards are still growing, with 32 percent of cards having rewards, and are expected to grow beyond the 50 percent threshold we've seen in credit cards. It's getting easier for banks of every size to offer these programs as processors such as Metavante and CO-OP are providing rewards support through third parties such as RewardsNOW for debit, credit and programs encompassing other bank products.

"The biggest change we've seen in the market is enhanced flexibility in what you reward for--desired consumer behavior needs to drive reward structure. Behaviors ranging from account acquisition, card or line activation, spending during a given period, spending a certain number of times, buying a product or multiple products--all of these behaviors are supported by the right reward structure. Normally a program starts with debit and credit, then bill pay is added and it grows from there. We also see more financial institutions using points promotionally to keep their programs fresh while controlling costs. For example, offering double points for a limited time for certain activities or for buying from certain merchants," he adds.

"More banks are using rewards statements as a key communication tool, and everyone is looking for merchant-funded options. A great application of merchant funding is to temporarily double reward points at a specific merchant and have the value of the 'doubling' funded by the merchant. That approach builds a better relationship with the merchant and offsets the cost of your program."

The types of rewards that a consumer...