NEW YORK -- Debit card rewards aren't dead yet. They're just undergoing a transformation.
Several major banks in the past year ended or scaled back their debit rewards programs. They've cited a new regulation that will soon curb the revenue they can squeeze from checking accounts.
To compensate, a few banks have already started teaming up with retailers to offer revamped programs that reward customers for spending at specific stores. Under one program, for instance, customers can get a $5 rebate for using their debit cards to spend $25 or more at BestBuy.com.
The migration away from traditional rewards programs -- where customers typically earn a set cash back rate on all purchases -- is a response to the changing business environment. Starting in October, a regulation will cap the fees banks can collect from merchants whenever customers swipe their debit cards. These fees generated $19.7 billion in 2009, according to the Nilson Report, which tracks the payments industry.
Now banks are beginning to promote what they call merchant-funded rewards.
How they work
The basic goal of merchant-funded rewards is to encourage customers to spend at specific stores. But the programs can vary so it's important to understand the terms when shopping around.
Chase rolled out a program just last week to replace the traditional cash back rewards it ended earlier this summer. The new version offers customers varying cash back offers when shopping through the bank's online mall, which has more than 600 retailers.
Some customers are also emailed limited-time, in-store cash back offers based on their location and spending habits.
For example, one offer is for 15 percent back at the restaurant chain Ruby Tuesday until Sept. 30. Another lets cardholders earn 2 percent back at Sunglasses Hut.
Chase says not all customers will get e-mails with the personalized offers.
At the online bank Ally, by contrast, the rewards work more like the daily deals offered on sites like Groupon and LivingSocial. For example, customers can currently get $5 back for a purchase of $50 or more at Target.com. The most that can be earned during the promotion period is $5, no matter how much is spent.
As with the Chase program, the offers are only available for a limited time, usually a few weeks.
It should be noted that these rewards programs may not be as broad in scope as you might expect. Ally's program was introduced just last month and offers deals at 23 retailers so far. And some of those deals -- such as 1-800-Flowers and Fandango Online -- may not be businesses you regularly patronize. The bank says it's working to bring more retailers on board.
In other cases, the breadth of the program may not be clear before signing up. BB&T, a regional bank based in North Carolina, rolled out a merchant-funded rewards program this year as well. But the bank declined to say how many retailers it's working with. Its website simply states that customers can earn up to 25 percent back on purchases at participating retailers.
Still, one of the upsides of these new rewards programs is that you're typically automatically enrolled. So even if you didn't know your bank offers a discount at a particular store, your account would automatically be credited if your purchase qualified.
The future of rewards
Banks want to keep checking account customers happy with rewards. But that's not the only reason they're offering these new rewards program.
Retailers pay the banks a fee or share a portion of the profits whenever customers act on an offer. This is expected to help banks offset the loss in revenue from swipe fees.
The financial research firm Aite Group estimates that banks will reap in $1.7 billion a year in revenue from these merchant-funded rewards by 2015.
So even if you prefer the traditional rewards program, merchant-funded programs may soon become the industry norm, according to Alex Matjanec, founder of MyBankTracker.com
As the programs evolve and more retailers get involved, Matjanec said he expects offers to become increasingly tailored to a customer's spending habits. Some consumers may prefer this format over the traditional debit rewards programs.
A study by Aite this summer found that about 30 percent of customers enrolled in merchant-funded programs end up redeeming at least one offer. And the study's author, Madeline Aufseeser, expects that figure could rise significantly once more retailers join the programs and the offers become more customized.