In this report
Overview
Debit rewards deceptive

Debit rewards: More glitter than gold

Last reviewed: July 2009
Gift/prepaid card pie chart
How we pay
Debit cards are becoming the payment method of choice for in-store shoppers. Since 1996, debit-card use has increased 20 percent a year, accounting for one-third of all point-of-sale transactions.

Sources: The Federal Reserve, the American Bankers Assn./Dove Consulting. Data are from 2005, the most recent year for which figures comparing all payment choices are available.

Illustration by Bob Eckstein

Of the nation's top 50 banks, more than 64 percent offer at least one reward program designed to lure customers to use signature debit cards. And consumers are urged to use them for the smallest purchases to monthly bill payments.

A recent direct-mail promotion from Wachovia, for example, urges consumers to use the bank's Visa Check Card "for ALL of your everyday purchases." Those who enroll in the rewards program—which gives one point for each dollar spent on a signature-based transaction—also receive 5,000 bonus points, which the flyer notes is "more than enough for your first reward!"

Indeed it is: 3,500 points will get you a Starbucks Card worth $5, which translates into a penny in rewards for every $7 you spend. By contrast, credit cards that offer 5 percent cash rebates for some categories of spending give rewards that are 35 times more valuable.

Wachovia's one point per dollar spent is actually relatively generous in the debit universe. Several banks offer only one point for every $2 spent. A Visa Extras roundtrip airline ticket from the U.S. to Europe would require 200,000 points—or $400,000 worth of spending on those debit cards for a ticket with a value capped at $1,100.

Sweetening the deal

In what may signal a new frontier for debit cards, however, Capital One Financial is introducing a new MasterCard debit card that consumers can link to any bank account they choose—not just a Capital One account. The card will offer rewards almost as generous as credit-card programs, giving about 46 cents in reward value per $100 of spending, compared with 65 cents for credit cards and 10 cents for other debit cards, according to an analysis by the Aite Group, a financial industry advisory firm. The card is being offered to some Capital One credit-card holders, who can pool rewards from their credit cards and the new debit card, earning the same level of award no matter which card they use.

If this new twist on debit catches on, analysts expect other issuers will have to sweeten their rewards to try to woo customers away from the competition.