Durbin’s Lasting Impact On Rewards

By Pete Rizzo (@pete_rizzo_)

A newly released white paper from MasterCard has revealed a clear picture of how both the 2008 financial collapse and the signature regulation it spawned have impacted the payments sector. Notably, the issuer found that Durbin and the Great Recession caused a seismic shift in how banks incentivize loyalty programs. 

“Traditionally, gift certificates in cash represented the lion’s share of redemptions in loyalty programs,” Bob Grothe, vice president of strategy, analytics and global loyalty solutions at MasterCard, told PYMNTS.com in an interview. “But, they fell to less than half of the redemptions in the last several years and gave way to the rise in popularity of bank products (Jump to 0:10).”

As consumers renewed their focus on long-term financial wellness, what’s-in-it-for-me (WIIFM) loyalty programs – where cash, airline and merchandise incentives were touted – became less popular and less profitable for banks. But, that doesn’t mean loyalty programs became less robust as a result of the shift. MasterCard’s findings suggest Durbin may have allowed certain banks to bolster their offerings and retain more loyalty dollars than ever before.

For an in-depth review of the current state of loyalty and MasterCard’s new white paper, “Rewards in Interesting Times,” PYMNTS.com spoke to Grothe in an exclusive podcast to learn more.

A Rise In Responsible Banking Behaviors

One of the biggest shifts in loyalty marketing since Durbin and the Great Recession, according to Grothe, has been the rise of responsible banking. Many banks saw an opportunity to better market their products and services. By using bank product loyalty tools instead of gift cards or airline redemptions, Grothe said banks were able to grow assets at the bank while deepening customer relationships.

A Look At The Numbers

The white paper supports the claim that bank products and services have become an integral part of loyalty programs. Since 2008, banking product redemptions have increased by 23 percent, rising to 36 percent of banks’ rewards costs in 2012.

MasterCard also illustrated how quickly the shift occurred. The white paper showed that in 2008, 57 percent of MasterCard-operated systems were offering banking products, such as savings deposits, as redemption options. By 2010, this figure had risen to 88 percent.

Not All Loyalty Programs Benefitted

While some loyalty programs did adapt and prosper, MasterCard’s data indicates debit rewards programs, which had been “plentiful” prior to the recession, have been all but wiped out by the law’s interchange fee stipulations.

Citing a study from PULSE, MasterCard indicated that as of 2012, 50 percent of regulated debit card issuers with a reward programs have ended this service. Another 18 percent said they planned to do so in 2012.

However, Grothe was quick to stress that with every hardship comes opportunity. Many issuers that were exempt from Durbin due to their size have been allowed to maintain robust debit card rewards programs, creating a true differentiator for these issuers.

“These issuers are going to continue to have a marketing advantage, since the economics of the amendment allow them to reward for every purchase where the card is used,” Growthe said. “And in the vacuum where big banks have shut down their programs, these exempt banks are going to continue to have an opportunity to market reward programs that are now true differentiators (Jump to 4:00).”

Loyalty After Durbin

Still, the law did more than simply reshape the market. Grothe suggested that it has allowed loyalty programs to do what they’ve always done more effectively: target high-value customers.

“Gone are the days where we produce a single set of features and simply stand it up for clients,” he told PYMNTS.com “We’re looking further and further out to see where we can hyper-focus on a targeted set of consumers that drive more revenue for our partners.”

But, these were just a few of the lessons MasterCard learned from its report.

For more data and insights into how the last five years have changed loyalty and what we can expect from the future, download your full copy of “Rewards in Interesting Times” here.

*If you have trouble with the audio player above, click here.