Cards Shift to Thrift

CUNA’s CU360/E-Scan Newsletter
February 19, 2010 | COMMENTS

It's a sign of the times: The credit card industry is moving away from lavish rewards programs that encourage consumer spending to features that promote thrift and savings.

Behind the trend is a stressed consumer—and a bleak economic landscape with rising unemployment and mortgage foreclosures. In better times, most issuers relied on attractive perks and rich reward programs to spur card usage. But that was expensive and was based on an economy in which consumers were encouraged to keep spending. Today's sluggish economy requires a different approach.

Leading the way, San Antonio-based Security Service Federal Credit Union is the first financial institution to debut MasterCard's Money Manager—a new budgeting feature that institutions can add to their debit card programs and eventually to their credit cards. The feature enables cardholders to track expenditures by category and by household members. They can also designate specific projects or events and track expenses related to these projects.

“MasterCard Money Manager gives our members a simple and convenient way to create a budget and then track how and where they're spending,” says Keith Sultemeier, executive vice president and chief financial officer at the $5.2 billion credit union. It first offered the product to its employees, with plans to make it available to all debit card holders early this year.

Money Manager is just one of the new approaches geared toward customer retention rather than increased spending. Many offerings provide budgeting tools and more convenient payment choices, which are important features during times of austerity.

Take, for example, the Blueprint card—introduced last fall by JPMorgan Chase and profiled recently in the Bank Administration Institute's Banking Strategies magazine. Blueprint's feature can be integrated into existing customers' credit card accounts to help them manage spending, pay down balances, and pay off major purchases.

During a two-and-half-year card user study, Chase found that consumers wanted more control over their card spending and better tools to help them manage their money and pay down debt. Many people have a system in which they use multiple credit cards for different types of purchases—for everyday spending, big-ticket purchases, and revolving balances, for example. Blueprint offers a way for cardholders to do everything they want on one card.

Currently, many consumers can download their transaction data into consumer software, such as Intuit's Quicken, but that requires them to do a lot of data sorting, notes Trish Preston, vice president of U.S. debit cards for MasterCard Worldwide. With Money Manager, the transactions are automatically sorted into the proper category, and cardholders can create their own categories in addition to the common ones provided.

One Money Manager feature likely to attract financial institutions is that the budgeting capabilities will only be available on purchases made with the MasterCard debit card, for which the institutions receive interchange revenue on each transaction, according to Preston . “This should stimulate the use of the card product as opposed to paying with cash or checks because consumers won't get the same features on those other transactions,” she says.

Contactless Innovations

While Chase and MasterCard are focusing on budgeting tools, U.S. Bank is piloting a number of different card offerings, mostly with contactless payments-oriented innovations. One is an instant-issuance debit card. With this program, customers are immediately handed a fully functional card just printed at the branch. The card includes contactless transmission—a feature frequently used for purchases at gas stations, convenience stores, and fast-food restaurants.

Other U.S. Bank pilot projects:

• Testing automatic money transfer from Visa debit cards, which enables funds transfers from customers to the account of a friend or family member so long as both parties have a Visa prepaid debit card issued by the bank.
• Issuing a bank debit card that can be used to make contactless purchases from vending machines and other point-of-sale units throughout a corporate campus and as a building-access device.

Other innovations seem to be responding to negative consumer sentiment concerning the card industry. Last fall, Bank of America introduced its Basic Card, which features one interest rate for the life of the account, no over-limit fees, and the same rate on all transactions, even balance transfers and cash advances.

Innovation is also occurring in the rewards area, where issuers including Citibank are adopting simpler benefits, such as free Sony music downloads, that will appeal to certain demographics. “This type of benefit appeals to a younger audience that's not able to earn high point totals,” Scott Strumelo, an analyst with Auriemma Consulting Group, tells Banking Strategies . “It appeals to consumers' desire for immediate gratification. You can get rewards with fewer dollars spent rather than needing to accumulate points over months or years,” he adds.

Another type of rewards program, talked about but not yet seen in the market, involves card issuers teaming up with retailers to offer immediate discounts at the store when cards are used. With such a model, big banks would team up with national retail chains, and community banks or credit unions could work with smaller, local retailers. Financial institutions could then provide a list of participating retailers to their cardholders to earn the rewards.

This concept is expected to gain traction in the near future because it has a lot of appeal to both banks and retailers. Banks like the fact that retailers pay most of the cost of the rewards and retailers like the fact that they're paying out only when they receive a direct benefit.