The power of card rewards

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An interesting perspective in the light of Chase ceasing to accept enrollments for debit rewards cards, effective today (Feb. 8, 2011), is a recent paper from the Federal Reserve Bank of Chicago, “Why Do Banks Reward their Customers to Use their Credit Cards?”, by Sumit Agarwal, Sujit Chakravorti and Anna Lunn. Though the study is specific to credit cards, it’s reasonable to assume that the findings also shed light on consumers’ relationships with debit-card rewards.

The authors write, “Some observers have argued that the recently passed Card Act and recent changes to overdraft access for debit cards in the United States would reduce the ability of issuers to extend rewards. While mandated reduction in cardholder fees and finance charges may potentially affect the level of rewards, we find that rewards have significant impact on credit card debt especially via substitution from another issuer’s credit card suggesting that rewards are an effective tool to steal customers from a financial institution’s competitors.”

The study shows that the rewards need not be significant to have strong impact on card use: “We find that consumers generally spend more and increase their debt when offered one percent cash-back rewards. The impact of a relatively small reward generates large spending and debt accumulation. On average, each cardholder receives $25 in cash-back rewards during our sample period. We find that average spending increases by $68 per month and average debt increases by over $115 per month in the first quarter after the cash-back reward program starts.”

This again shows that, as we’ve pointed out before, financial institutions can benefit from a broader range of rewards, and that they should “Reward more engagements with customers, not fewer.”

For additional perspective on the study, including information not included in the study itself, check out a PYMNTS.com audio interview with the study’s authors at “How Reward Programs Get Consumers to Switch Cards.”

Republished with author's permission from original post.

Bill Brohaugh
As managing editor, Bill Brohaugh is responsible for the day-to-day management and editorial for the COLLOQUY magazine and colloquy.com, the most comprehensive loyalty marketing web site in the world. In addition to writing many of the feature articles, Bill develops the editorial calendar, hires and manages outside writers and researchers and oversees print and online production. He also contributes to COLLOQUY's weekly email Market Alert and the COLLOQUYTalk series of white papers.

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