12 minutes
CUs may need to join merchants and product makers in rewards offered before purchasing decisions.
A sea change is coming in the card payments industry—and it will make current reward card programs obsolete in a few years, warns payments consultant Richard Crone, founder of Crone Consulting LLC, Santa Clara, California. Not revamping programs, he says, will be “a self-liquidating decision.”
The catalyst for change is a March 2024 settlement announcement in the long-simmering litigation war between the card brands and merchant groups over interchange. The settlement, pending likely court approval, will give merchants a four-basis-point cut in merchant processing fees for three years, a flat-line guarantee on interchange rates for five years and a seven-basis-point cut in fees below the current average, Crone explains.
These changes, Crone notes, favor merchants but are not a game changer for CUs.
Rather, the game changer is a green light for “tender steering.” That means merchants can steer payments to the medium of exchange (tender) of their choice, driving settlement to the least expensive tenders and away from the most expensive tenders. The settlement explicitly expands tender steering, Crone reports, by allowing it in cases where it was not allowed before.
Tender steering is not new; some vendors have a cash price and a higher credit card price. Some don’t take American Express. Some don’t take cash at all. But these are “very primitive, blunt forms of tender steering,” Crone says.
Sophisticated tender steering is precise, scientific and practiced currently by only a few players like PayPal, Amazon (does anyone even bother to wait for a card refund on returns these days instead of accepting the instant Amazon Gift Card balance?), Apple, Target, Walmart and Starbucks.
Tender steering will give merchants “dramatic leverage to alter consumer payment preferences,” Crone insists. To the extent that CUs are funding card rewards from interchange, he predicts that funding will be drying up. CUs will have to “sweeten” their rewards programs with merchant rewards and manufacturer rewards to compete.
Cronote notes that Chase has already has grasped the implications and doubled down on its Chase Media Solutions business to compete with Cardlytics and provide merchant-funded rewards.
The March settlement is not the only disruptor on the horizon. Congress is again considering the Credit Card Competition Act. “We’re fighting it,” reports Cody Banks, SVP/product enablement and growth at CUESolutions provider Velera, based in St. Petersburg, Florida. “The bill would hurt credit unions.” Whether it will pass is unclear, but “we’re paying close attention.”
That bill “would kill the funding for credit card rewards programs and allow retailers to pocket the savings from lower interchange fees,” rages The Points Guy (What is the Credit Card Competition Act? - The Points Guy), an online advocacy site. “Consumers would lose out on rewards, purchase protection and fraud protections while retailers add to their bottom line.”
The Act might pass. The settlement is a fait accompli.
The March settlement also greenlights collective bargaining, which seems to reward merchants but could also benefit credit unions. The transformation will involve a lot of negotiation, Crone notes, and scale players will have clout. That favors collective action by CUs. They have a host of collectives—credit union service organizations, corporate CUs, card processors, leagues—that conceivably could become leaders, he suggests.
“The settlement will provide another decade of runway for preserving the heritage economics for Visa and Mastercard and all their issuing and processing stakeholders,” he optimistically concludes.
Deep Pockets
Rewards will flourish in the new environment. In fact, there will be $30 billion more in savings to spread around, Crone says. But the rewards will be doled out based on what the consumer buys, not how they pay for it.
The dominant players will be the merchants and the providers of consumer packaged goods. In fact, the CPG folks, Crone points out, have the deepest pockets and currently provide 95% of all advertising and promotional spend in the economy.
Credit unions currently have four potential partners to link them to such networks, Crone says: Cardlytics, Kard, PrizeOut and PayPal’s Honey.
Honey is the sweetest partner, Crone quips, because it has a deep inventory of the more lucrative CPG-sponsored, SKU-level offers that command higher promotional rates from advertisers. The others are limited to merchant-funded rewards and thus offer “inventory-starved rewards.”
The new style of merchant-involved rewards programs can be glimpsed in a collaboration of PrizeOut and $1.7 billion Interra Credit Union, Goshen, Indiana, explained in this YouTube video.
“By leveraging CPG-sponsored promotional offers worth at least $250 annually per person,” Crone predicts, digital wallet platforms such as PayPal, Venmo, Google Pay, Apple Pay and merchants using their own branded payment options, such as Walmart Pay and Starbucks, will “outspend issuing banks and outbid them on consumer incentives.”
Tender steering will be huge, Crone says. He illustrates: If Walmart were to move just 1% of its payment volume from the highest-cost tender (a typical CU rewards card) to the lowest-cost tender (a prepaid gift card), they would save $783 million a year. Under the same scenario, Amazon would save $1.5 billion and Apple $1 billion.
Tender steering won’t happen quickly, Crone predicts. This gives CUs time to get a rewards strategy in place that lets them interact with the member before the member makes a purchase. “Credit unions will have to play in the offer space if they want to have a fighting chance to compete.” This will necessarily happen through a digital wallet.
The minimal platform, he suggests, would be PayPal. The best would be Apple Pay, Google Pay or Samsung Pay. Some CUs still don’t support digital wallets because of the cost, but without one, they will be left behind when tender steering grows.
Getting Ready
How are credit unions with strong traditional card rewards programs preparing for the new era? “Merchants are increasingly providing card-based discounts offered through online portals,” reports Rick Conyers, AVP/credit card products at $165 billion Navy Federal Credit Union, Vienna, Virginia. “We have a Member Deals portal that can connect members with merchant discounts seamlessly.”
Globally, rewards are growing quickly in “dynamic earn categories,” Conyers reports, where reward rates provide the most value based on personalized spending. “We want to help members earn the most value.”
Velera offers “rewards in a box” programs—templates that embody popular rewards programs but allows for customization. “It usually comes down to how rich CUs want their points to be and what features they want to offer,” Banks says.
Funding depends on each credit union. Most of it comes from interchange and interest fee income charged on unpaid balances, Banks notes.
“The settlement with merchants, as it is stated, will not impact our current credit card rewards program,” says Todd Lindemann, SVP/payments at $8.6 billion Redwood Credit Union, Santa Rosa, California, “even though our rewards are 100% funded by interchange.”
But he considers the settlement another compression of interchange. “Though designed to benefit smaller merchants, the big box stores have more to gain from settlements like this,” he points out.
Redwood CU gets just a fraction of interchange from big box stores—0.47% from Amazon transactions, 0.37% from Costco transactions and 0.75% from Walmart transactions, he reports. If the trend continues, “it could impact all financial institutions’ ability to offer credit card rewards.”
Best Practices and Trends
Navy Federal CU has the scale and resources to set the best-practice standards for current credit union card rewards programs. According to a recent Forbes Advisor rating, four of the eight best credit cards issued by CUs are Navy Federal CU cards. $34.8 billion PenFed (Pentagon Federal Credit Union) and $12 billion DCU (Digital Federal Credit Union) also show up often in such listings.
So what is Navy Federal CU doing? It has $29 billion in credit card outstandings in six different programs, all built internally, Conyers explains. “We’re constantly testing and adjusting to be sure that we offer the right rewards and promotions for the various member segments using internal data and direct interaction with members.”
The result is a suite of credit cards, Conyers reports. “For members seeking rewards, our cashRewards card earns 1.5% rewards on everyday purchases, while our More Rewards and Flagship cards deliver double or triple points on categories important to members such as groceries, dining and travel.
“We also offer our Visa Platinum card which carries an industry-leading low-rate—0.99% introductory APR for 12 months and then 11.24%. That card is intended to help members pay down debt. Our nRewards secured card is a great option for those trying to build credit.”
Secured cards are backed by a secured deposit, Conyers explains. As the member shows “healthy financial behaviors,” the line of credit can be increased, with portions of it unsecured. “When they’re ready to ‘graduate,’ we upgrade them to our unsecured cashRewards card.”
When members choose rewards, “cash is king,” Conyers observes. Most members choose statement credits, but gift cards become popular during the holiday season and travel redemptions increase heading into summer, he reports.
Nationally, before COVID-19, travel rewards were very popular, Banks notes, but preferences change. Now 70% of redemptions are cash back. Cash, gift cards and travel are the most popular rewards now.
“Lately we’ve seen that members want to manage the cost of their streaming services,” Conyers reports. “We have a series of digital engagement offers to incentivize adding those recurring charges to a NFCU card.”
Performance Metrics
Card programs must comply with sophisticated, automated, secure networks, so they have to be standardized to a degree, and Navy Federal CU works with a card processor, TSYS. But that does not constrain its ability to craft original and distinctive programs, Conyers says. “We control the features, the rates, the promotions. We hold and own it all.”
Inventing and introducing segmented card rewards programs is a start, but an issuer needs to monitor and adjust programs once they are operating. What performance metrics does Navy Federal CU use to see what’s working as planned, what may be exceeding plan and what may be falling short?
The most general metric is top-of-wallet status, Conyers explains. “We want to be primary. We use data to see which rewards programs are getting us that top-dog status.
“We also want to be our members’ principle financial institution, so we monitor new account growth and share of total wallet” tied to card programs, he adds.
On the west coast, Redwood CU has three no-fee rewards credit card programs, Lindemann reports:
- The popular Visa Platinum card, which has 120,000 accounts, 1.1 million monthly transactions and an $88 average transaction with interest rates starting at 8.99% for members with good credit. The Platinum card has a credit-builder subset with rates starting at 17.74%. Rewards are 1 point per $1.
- The Visa Signature card, with 10,000 accounts, 130,000 monthly transactions and a $202 average transaction. This is a richer rewards card, with 1.5 points per $1 and an interest rate starting at 15.99%.
- The Visa Business Platinum card, for business members, with 1,200 accounts, 19,000 monthly transactions and a $67 average transaction. Rewards are 1 point per $1 and the interest rate starts at 13.49%.
Redwood CU owns its card portfolio and processes transactions “in real time on our core system,” Lindemann reports. To monitor performance, Redwood CU uses Visa reporting tools, internal data from its data warehouse and PowerBI reporting.
Getting Creative
Rewards are about gratification. Getting cash back is gratifying but not always the most gratifying option. Credit unions can’t slug it out with Chase to offer the most cash back, so they have to be creative and recognize gratification priorities, says Banks.
For some, fun may be the most gratifying, so free access to game time might be the strongest reward, Banks suggests. For others, it might be supporting a cause; some programs allow rewards to be directed automatically to a chosen charity or environmental organization. For still others, a commitment to controlling debt may be the top choice.
If CUs want to guide members to financial wellness, why not offer a rewards card that takes the cash back earned and apply it to the balance of the member’s mortgage or car loan each month? That, says Crone, “is a great idea, but nobody is doing it.
“I haven’t seen a rewards card used to reduce debt,” he notes. “It would embody CU values. It could be a differentiating kind of reward in a market that lacks differentiation. It could appeal especially to younger members who are active spenders but concerned about controlling their debt.” It could put a card in the coveted top-of-wallet position.
Directing cash rewards to loan balances is certainly feasible, Banks says. But would it be popular?
Redwood CU doesn’t do that “to date,” reports Lindemann, “but we are always looking to improve member benefits and are researching relationship reward options.”
While Navy Federal CU offers a low-rate card meant to help members manage their debt, it does not offer rewards that are applied to loan balances, says Conyers.
There’s a limit to proliferation. “Members like customized programs,” he notes, “but they also like programs that are simple and easy to understand and monitor. We try not to complicate the communications.”
What Behaviors to Reward
What the industry calls card “rewards” is only reward spending, notes Teri Williams president/COO of $700 million OneUnited Bank, Boston, Massachusetts, the largest Black-owned U.S. bank. OneUnited is a community development financial institution, which means that the bank, alongside many credit union CDFIs, see rewards differently.
“We choose not to offer traditional ‘rewards programs’ because they tempt people to overspend to get the rewards,” Williams explains. “That leads to high balances. That’s a disincentive for people to rebuild their credit.” Rewarding credit building, she says, is more rewarding than rewarding spending for people struggling to make ends meet.
So OneUnited offers only secured credit cards—10,000 of them to its 100,000 customers. The security is a deposit equal to the card limit. Secured card programs are rare at smaller financial institutions, Williams says, and are not to be confused with prepaid cards. “These cards report to credit bureaus, unlike prepaid cards, so there’s a record that can lead to a credit rating.
“And to merchants, it appears as a regular Visa credit card, unlike prepaid cards. Cardholders can use it to book travel, rent cars or charge lodging. Many of those merchants won’t accept prepaid cards,” she points out.
The cards are meant to give holders flexibility with the ability to rebuild their credit. There is a $39 annual fee and a 17.99% interest rate on balances.
Does it work? “We’ve had good feedback,” she reports. “Now that the cards have been out there for more than 10 years, it may be time to do a statistical study.”
OneUnited does offer traditional rewards on debit cards. “That’s different,” Williams says, “because the money comes out of the interchange, not out of the cardholder’s pockets.” cues icon
Richard H. Gamble writes from Grand Junction, Colorado.
