New Reward Programs Coming to a Card Near You

Traditionally, banks have paid for reward programs with fees they earn elsewhere in their business. But the Credit CARD Act of 2009 and interchange and overdraft fee reform all cut into this revenue. The type of reward program that's going to take over in the future will instead be driven by merchants.

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The Credit CARD Act of 2009, as well as the interchange and overdraft fee reform, have cut significantly into what banks earn from the cards consumers use every day. Analysts predict banks will respond by cutting reward programs, especially for debit cards (in fact, some already have). But there’s a new kind of reward program that’s poised to fill that vacuum, and it’s probably going to look a lot different than the rewards you’ve seen in the past.

That’s because the new type of reward programs will be funded by the retailers where you use your card, not the banks. Here’s how it could work: The banks will start sifting through you debit and credit card purchases to determine where you shop. If your shopping record shows that you buy a lot of books or visit a particular fast-food brand for breakfast every day, they’ll reach out to their network of merchants with this data and see if any of those merchants are offering discounts. Some could be for any shopper. Some discounts could be specifically set up for that bank’s customers. The discounts will be highlighted on a shopping site set up by the banks. Access certain retailers’ websites from a link on the card issuer’s site and you get the discount on your purchase.

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Compared with a traditional reward program, the biggest difference here is that you’re getting incentivized to buy more stuff rather than being rewarded for dollars you’ve already spent, explains Madeline Aufseeser, senior analyst at consulting company the Aite Group. But people in the industry say the goal isn’t just to get you to spend more — it’s to let you save money at places you already shop. “Merchants give out all kinds of coupons and offers today, but this new model is much better,” she says. “These offers are going to be richer in value to the consumer. They’re going to be relevant to what the consumer has historically done.”

For the customer, discounts to places you already shop seems like a no-brainer; who wouldn’t want a discount for doing what you’re going to do anyway? But why would a retailer offer a discount to someone who is already a customer. Because they think it will get you to spend more. And, you know what, it usually does.

“Merchants have gotten a lot more sophisticated because they want new customers and incremental spend,” says Alan Goldstein, managing director of ALG Partnership Marketing. “These programs do work. They do drive incremental spend.”

Retailers also like this reward structure because although they absorb the discount you get and generally pay a kind of “finder’s fee” to the bank or reward-management company for connecting them with customers, they only pay when you buy. There are no traditional marketing expenses like paying for coupons to be printed or coordinating an e-newsletter campaign. Aite Group’s Aufseeser estimates that both banks and third-party companies that manage these programs will each collect $1.7 billion from these programs by 2015, while the total amount cardholders spend as a result of these incentives will be more than $115 billion.

Aufseeser predicts that this model will become dominant in the debit reward market and that credit card issuers might layer this kind of reward program with a more traditional points or miles program. In time, the programs are likely to get even better at understanding what discounts you want and what you don’t want. Companies like BillShrink allow you essentially rate their coupon offers. Say you don’t like it rather than just ignoring it, and the system will remember and stop sending you offers from that brand in the future. And BillShrink is also trying to make it economical for banks to offer a little of what they used to — reward travel points or cash back — along with the new merchant-driven coupons.

As the market matures, more vendors like BillShrink will begin to add social, mobile and location-based elements and begin to incorporate existing loyalty programs into their platforms. You know how you have to remember to give your customer card to the cashier when you visit a store today? In the future, that could all be automatic. ALG’s Goldstein says he expects the market to shift more to short-term offers, rather than the “always on” reward programs that are common now.

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So is there any down side to these innovations? First of all, expect more pressure and tricks to try to get you to spend your money. Banks may become the new Groupon, hitting you with daily deals trying to get you to shop. Weren’t banks supposed to be the one part of this economy that likes savings?

Second, privacy. BillShrink’s Satyavolu says the company only uses anonymous information — that is, they only know what you buy, not how old you are, how much you earn or any other personal details. But Evan Hendricks, editor and publisher of Privacy Times, isn’t convinced. He says there really aren’t any laws on the books that stipulate what private companies can and can’t do with data about where you shop. “It’s only one subpoena away from being used in a court case or a law enforcement investigation,” he says. Consumers do have the right to opt out, but few do.

Neither of those things are likely to stop this switch in reward programs. Banks and retailers are hungry for a new revenue stream and targeted marketing, respectively, and we consumers are positively addicted to our coupons, discounts and deals.

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