Big payoff: customer rewards are no longer limited to debit or credit-card usage. Some banks today are experimenting with programs that provide incentives for the utilization of wide variety of financial products and transactional behaviors.

What is the goal of a reward program? According to Dr. Xavier Dieze, marketing profession at the University of Pennsylvania Wharton School of Business, the answer is, "To effect behavior, to have customers become more engaged and be willing to work to earn the reward."

Banks today are making widespread use of customer rewards. The practice is expected to grow even more in the future. Banks use these programs for a variety of reasons: to increase the number of debit or credit transactions, encourage account acquisition, improve retention or drive specific product demand.

In this article, we'll look at three basic types of reward programs:

1. Debit-only: Programs intended to increase demand for debit transactions, and potentially impact acquisition and retention of checking customers through a variety of different rewards.

2. Debit and credit: Programs intended to increase demand for both debit and credit transactions.

3. Comprehensive product: Intended to impact a variety of product purchase and transactional behaviors.

We will look at the market in general, examine a leading program in each category, and look into future reward trends.

Rewards today

Steve VanFleet from RewardsNOW, Dover, N.H., frames the rewards market in the aggregate. "The credit-only market is largely mature with only some remaining smaller financial institutions adding programs. Visa has published that over 50 percent of credit cards have rewards activated. Debit cards are still growing, with 32 percent of cards having rewards, and are expected to grow beyond the 50 percent threshold we've seen in credit cards. It's getting easier for banks of every size to offer these programs as processors such as Metavante and CO-OP are providing rewards support through third parties such as RewardsNOW for debit, credit and programs encompassing other bank products.

"The biggest change we've seen in the market is enhanced flexibility in what you reward for--desired consumer behavior needs to drive reward structure. Behaviors ranging from account acquisition, card or line activation, spending during a given period, spending a certain number of times, buying a product or multiple products--all of these behaviors are supported by the right reward structure. Normally a program starts with debit and credit, then bill pay is added and it grows from there. We also see more financial institutions using points promotionally to keep their programs fresh while controlling costs. For example, offering double points for a limited time for certain activities or for buying from certain merchants," he adds.

"More banks are using rewards statements as a key communication tool, and everyone is looking for merchant-funded options. A great application of merchant funding is to temporarily double reward points at a specific merchant and have the value of the 'doubling' funded by the merchant. That approach builds a better relationship with the merchant and offsets the cost of your program."

The types of rewards that a consumer can work toward has also greatly expanded in recent years. Rewards have expanded to include charitable contributions, 529 account contributions, travel rebates (without blackout dates), local merchant gift cards and banking benefits. "There is not one consumer type ... banks need to find the balance between the right range of reward choices and not having choices become overwhelming," VanFleet recommends.

"The other really significant change we've seen in the market is flexibility in the way that small banks can present their brand. With many third-party providers supporting rewards programs' private label 24/7 live call-centers, seamless rewards access through the bank's Web site, and customized welcome kits and reward statements, well branded programs are now available to smaller institutions," says VanFleet. "Anda great side benefit is that the smaller bank sees enhanced purchasing power on their rewards by working through these larger groups."

Debit Only

Profile: Bank of America Keep the Change Account

Institution: Bank of America, Charlotte, N.C.

Asset Size: $1.1 trillion

Reward programs focusing on debit cards carry a variety of structures, traditional points structures, cash rebates and a variety of others. Bank of America has chosen to keep the reward of a financial nature with its Keep the Change account.

The account rounds every debit purchase up to the nearest dollar and deposits the balance into a savings account. So, if you spend $1.52 on your debit card, your checking account will be debited for $2 and the $0.48 balance will go into savings. Bank of America will match the amount and sweep it into savings, explains Jonathan Wilk, the bank's savings and investing product executive. "This is a breakthrough product with multimedia support. This debit- rewards feature differentiates the Bank of America checking account and helps customers save money without having to think about it."

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The bank launched the Keep the Change savings program in October 2005 after reviewing customer feedback asking for more ways to save. To date, more than 5 million of the bank's customers have saved a total of more than $500 million in "loose change" through the program.

Bank of America will also match 100 percent of Keep the Change savings transfers during the first three months after enrollment and 5 percent thereafter, up to a maximum of $250 per year. Matching funds are paid to cardholders' savings accounts annually after the anniversary of enrollment on accounts that remain open and enrolled.

Debit and Credit

Profile: Zions Rewards

Institution: Zions Bank. Salt Lake City

Asset size: $43.8 billion: 135 locations in Utah and Idaho

Zions Bank has taken a 100 percent merchant-funded approach to its rewards program. The bank has developed a network of 1,700 community retailers throughout Utah and Idaho who offer cash-back incentives for making purchases with a Zions Bank debit or credit card. These merchants offer 3,700 cash-back opportunities to Zions' customers. For example, a pizza and games merchant may offer $5 cash back on a pizza and $2 off a $10 game spend. Or a merchant may offer 50 percent cash back on the customer's first visit and smaller cash-back offers thereafter. A recent addition of online merchants brings the Zions network to over 2,000 retailers.

The structure of the program is simple for the merchant and the customer. At the time of the transaction, the customer pays the full value of his or her purchase. Customers receive a weekly e-mail showing "earnings" and money is deposited into the account when the transaction is funded by the merchant (typically within 30 days). Average cash back is 9 percent or $4.18 per transaction. Online merchants are accessed through Zions' online banking portal.

"Zions' cardholders can receive up to 50 percent cash back on qualifying transactions," explains Rob Brough, executive vice president of marketing and communications for Zions. "Merchants have the ability to change their offers, but not a lot of movement has occurred thus far. Zions also has the ability to change the program for promotional periods. For example we are currently doubling customers' points when they refer a friend to open a new checking account."

"Participating merchants see the program primarily as an acquisition and frequency-of-use tool. Zions promotes the program in a variety of ways. Our Web tools are very creative, utilizing games to introduce the program and to increase usage. Printed merchant directories are used in-branch and distributed through direct mail. Bankcard and direct-deposit account statements feature merchants and direct customers to the Web for more information. Branch-specific promotion highlights merchants in that neighborhood. Merchants are not typically promoting the program at the point of sale," explains Brough.

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The system was built with Access Development, a company that traditionally works with schools to set up rewards programs. Access worked with Zions on merchant recruitment. Recruitment was done with merchant-processing clients and Cash Rewards merchants were recruited for merchant services. Access also provides merchants with detailed tracking of customer usage.

"The objective of the program is to increase debit and credit transactions as well as potentially serve as an acquisition tool. With some history behind us, we also see retention improvements with clients who use the program," explains Brough. "An added benefit for our credit card customers is that they can 'double dip' by earning travel points through our Connect One program, which lays on top of the Cash Rewards program. Merchant funding covers most of the cost of Cash Rewards.

As Brough looks to the future, "The key to continued success will be keeping the program fresh--adding new merchants, expanding online banking, and taking the time to educate customers. There needs to be continuous promotion around the program, we're just starting to see real traction around awareness of the program in the market after two years. The process of awareness building is long and behavior change takes even longer. We need to better leverage the program from a merchant standpoint. And adding business debit credit is a logical jump product-wise, giving us the ability to promote the money-saving value proposition with business clients. We're not looking at any nonchecking reward enhancements at this point, maybe after customers understand the value."

Bank Products and Product Usage

Profile Nat City Points

Institution: National City Bank, Cleveland

Asset Size: $145 billion

National City Points offers consumers and small businesses rewards for using their check cards, credit cards, online bill payment, regular checks and pre-authorized savings transfers (recently added to encourage savings by customers). Bonus points accrue for opening any new deposit or credit account, awarded the first time you use the account.

"Points accounts can be combined by household based on address, which doesn't necessarily equate to signers," explains Tammy McIntosh, senior vice president and rewards program manager. "Accounts can be aggregated across members of the household if they want to earn rewards more quickly or individually if they want to earn separate rewards."

"Early adaptors (those enrolling in March through June 2006) tended to be the bank's 'best customers.' Interestingly, the early followers (those enrolling in July through September 2006) have seen the highest growth in relationship size since that time," explains McIntosh. "When you look at customers who are enrolled in Points versus those who are not, the enrolled customers will have more products-per-household (even among customers who were all high users prior to the program). And the most surprising initial result in the past 18 months is that enrolled customers appear to be twice as likely to be retained as those who do not enroll!"

National City's first significant Points redemption month was May 2007, about 15 months after program inception. Gift cards, merchandise and cash are all being widely redeemed.

The program was introduced to employees first through a teaser campaign (green candy dots). Phased training occurred weekly with promotion extending to an intranet site. Public introduction also took a teaser approach with outdoor boards filled with National City "points." TV and radio supported the launch along with street teams working St. Patrick's Day parades throughout the footprint. Direct marketing and in-branch promotion (along with an e-newsletter) supported the launch. Beginning in mid-July (about three months after the initial introduction) the in-branch focus changed to "how to redeem" points. The marketing cycle presented to customers (and to employees) is an established rhythm of "Enroll, Earn, Enjoy."

"This is truly a message of simplicity," explains McIntosh. "And it continues to develop with our current in-branch focus on how to redeem points."

What's coming next?

RewardsNow's VanFleet predicts, "The focus on debit will continue due to its relationship to the checking account and its role as a natural entree to other bank products (multiproduct rewards). Better analytic tools will be available to smaller institutions through their processors/ third-party providers. And the importance of local merchant networks will continue to grow. Regional banks can more effectively compete with national institutions by leveraging their local merchant networks and developing local programs. Banks need to begin to see rewards programs as marketing tools, not simply a cost of doing business."

Professor Dieze offers this advice, "For these programs to work, the rewards need to be both meaningful and attainable. Optimal redemption is one year; two years is beyond the customer's span of interest. The benefit of a reward program comes with reinforcement (redeeming your points). The benefit never accrues if the reinforcement doesn't occur!"

Banking is a good industry for rewards in that the purchases are significant (not a box of cereal). But, banking is serious business for customers, so be careful with the types of rewards offered, Dieze notes. "The emotions of money need to be reflected back in those rewards. Airlines make rewards meaningful and they are always interesting, since you redeem points for a new adventure. The more hedonic the reward, the more effective, hence the effectiveness of airline programs. Rewards also work best when they are cheap to you--like the airlines."

The three keys: the hedonic nature of the reward, the size of the reward, and the frequency of redemption.

In addition to writing for this magazine, Deb Stewart of Charlotte, N.C., is an independent consultant working for the financial services industry. Telephone: [phone]; e-mail: [e-mail]