Use transaction data to take full advantage of debit rewards, provider says.

• Position: Marketing News

Banks today are struggling to figure out how to obtain the maximum profit and loyalty potential from debit cards, says Scott Grimes the founder and CEO of Cardlytics, an Atlanta-based provider of targeted, card-based merchant-funded rewards technology.

Debit cards currently reign as the most dominant payment vehicle in the United States, with 70 percent of consumers relying on the cards for everyday purchases, he points out. Likewise, consumer use of online banking is at an all time high, with 55 percent of Americans regularly utilizing online banking--25 percent on a daily basis.

Despite this growth, however, banks have struggled to unlock the potential of either channel in terms of profit or increased customer loyalty. "As a result, many banks view online banking as a cost center and debit cards as a utility feature of the DDA," says Grimes.

While banks know that debit rewards can be a tool for strengthening loyalty and online engagement, the fact is that debit interchange is lean, running around 100 basis points. Banks have faced one of two choices: provide rewards less valuable than what credit card offerings have conditioned consumers to expect or don't offer the rewards at all, Grimes says.

A more viable alternative is to use debit transaction data in conjunction with local merchant rewards, says Grimes. "Transaction data is the epicenter of the next generation of rewards. Looking at what people spend their money on is the most logical way to determine what has value to them. Banks have more of this data than anyone." And, research confirms that consumers are comfortable with this data being used, so long as they get something of value in return, he adds.

Today's rewards programs, however, don't work this way. Rather, banks and merchants partner to provide customers with generalized, nontargeted offers.

Merchants today are comfortable with the idea of making offers based on transaction data. Why? Transaction data allows them to precisely reach customers and measure their response based on how they spend. And, they are willing to pay for the cost of the rewards program in exchange, because the number of consumers in the banks' systems represents an advertising channel equivalent in reach to search advertising (Google, Yahoo!, Bing). Ina recent research note, TowerGroup's Brian Riley recommends that...