PHOTO BY SCOTT INDERMAUR ary Carol Garrity, owner of Nell Hill’s Home Emporium and two other shops in Atchison, Kan., is affected by card reward programs as both a merchant and a consumer. Charging Toward ISSUERS OFFER CARDHOLDERS INCENTIVES TO ENTICE LOYALTY ike so many of her customers, Mary Carol Garrity now charges L almost anything she can—including business expenses for her three upscale furniture, home décor and giftware shops in eastern Kansas—to either her Visa or American Express credit cards. As a shop owner of 25 years, Garrity has payment choices along with Andrew seen an increasing number of patrons opting to Ching, assistant professor of pay with their credit cards. She supposes the marketing at the University incentives, such as the cash-back or travel of Toronto. rewards tied to both credit and debit cards, is one “Capturing of the reasons driving this trend. new cardholders “I know it motivates me personally,” says is becoming diffi- Garrity, who just recently started using two air- cult because most line reward cards. consumers already Her enticement: “My girlfriends who own have both credit and businesses get to fly first-class to Europe.” debit cards,” Hayashi A long-time cardholder but recent reward says. “Payment card card loyalist, Garrity is just the kind of con- issuers, therefore, are try- sumer that card networks are hoping to attract. ing to stimulate their exist- Research shows those with reward credit and ing customers’ card usage by debit cards use them more exclusively than providing rewards. It’s an cards that don’t offer rewards, and reward card incentive for consumers.” transactions often replace cash, check and non- And it appears to be working. reward card transactions, says Fumiko Hayashi, a senior economist with the Federal Enticing loyalty Reserve Bank of Kansas City. Deborah Hamilton starts every Hayashi recently analyzed the effects of day with a reward, in addition to her credit and debit card rewards on consumers’ coffeehouse latte. FALL 2006 . TEN 7 Her morning wake-up is Hamilton’s first higher fees to card issuers if their customers use credit card purchase of the day followed by, a reward credit card instead of a non-reward “Everything! Everything goes on the card,” she credit card or other payment methods. says, which gets her that much closer toward Merchants aren’t allowed to reject reward card another Southwest Airlines ticket. payments if they accept the network’s non- With the exception of her mortgage and reward card, nor can merchants price-discrim- car payments, although she tried, Hamilton inate based on the payment method used. pays for all purchases big and small with her “As a result, the more customers who use Visa. And as a result, the single, 55-year-old reward credit cards, the higher the merchants grandmother in Kansas City, Mo., racks up may mark up their retail prices in order to off- five or six plane tickets a year. She’s traveled to set higher fees,” Hayashi says. “Although Napa Valley, Mexico, the Caribbean and the reward credit card holders are partly compen- Bahamas, among sated for higher other places. retail prices through A “fanatical” reward credit card holder of 15 years, D eborah Hamilton starts every day with rewards, other con- sumers aren’t.” Compounding Hamilton says only the cost of reward death will part her a reward, in addition credit card fees on from her card. And to her coffeehouse latte. merchants, and pos- then her kids will sibly their customers, fight over her airline Visa and MasterCard points, she jokes. recently introduced It’s this loyalty Her morning wake-up interchange fees that that card issuers are apply only to reward striving to achieve is Hamilton’s first credit cards. These in hopes of gaining credit card purchase of fees, which are a per- users who would centage of each trans- have otherwise paid the day followed by action that the mer- with cash, check or “everything!” chant pays to the another card. card issuer, are higher It’s been report- than non-reward ed that many card issuers that launched new credit card interchange fees. The fees are the rewards programs have seen increases in spend- same for reward and non-reward debit cards. ing on their cards. However, it is unlikely Accepting credit cards is increasingly chal- reward receivers are simply spending more, but lenging for a smaller business whose volume of are using their reward card in lieu of other pay- sales can’t easily offset additional interchange fees ment methods, Hayashi says. like a chain merchant could, says Scott Baird, manager of Georgetown Furniture, a family- Footing the bill owned and operated furniture store in the west- Reward card issuers target middle- to high- ern Missouri city of Liberty. income consumers rather than low-income earn- “It doesn’t benefit the merchants at all,” ers, who don’t qualify for high credit limits, or Baird says. “It’s kind of a deterrent. We appreci- possibly cards at all. As a result, low-income ate the business … but I would rather see some- earners may be affected beyond just rewards. one use a check or the (store’s) finance plan.” Card programs and the merchant fee struc- The majority of the store’s customers do ture may distribute income from low-income to pay with a credit card or via the store-offered high-income consumers, Hayashi says. finance plan, Baird says. It’s tough to say, This is due to many merchants paying though, how many of those card purchases are 8 FALL 2006 . TEN PHOTO BY CHRIS SCHOENHALS TO ACCUMULATE REWARDS, Deborah Hamilton or finance charges, those card users are paying, (right) of Kansas City, Mo., uses her credit card for at least in part, for the rewards. For debit card every purchase possible. It’s this kind of loyalty that issuers, revenue is generated from both inter- card issuers hope results from reward programs. change fees and account holders. T O B Y C H R I S PHO SCHOENHALS Just like consumers, merchants and card issuers are motivated by reward cards. Their tied to rewards and exactly how much that enticement: customer loyalty. costs Georgetown Furniture. “One percent here and 1 percent there— ‘Cost of doing business’ it’s small, but they can add up,” Baird says. The average consumer in the United States But Baird, an avid fly fisherman, loves his has five to seven credit cards, says Ben Woolsey, personal card: a Visa with Cabela’s rewards. He marketing director of CreditCards.com, a web- recently redeemed points for tackle from the site for consumers to research and compare outdoor recreation mega store. offers from leading card networks in the “It is difficult to say who actually pays for United States. these rewards,” Hayashi says. Reward programs are driven by card com- Even if reward card use is fully funded by petition. By offering incentives, card issuers interchange fees, that doesn’t mean the actual build loyalty and extend the lifespan of the rewards are paid by merchants. card, which may offset the expenses of offering Merchants may impose the cost of the inter- the program. change fees on their customers by raising prices. To ensure consumers reach for their card If that’s the case, the customers are actually pay- versus another form of payment, issuers are ing for the rewards. And how merchants and offering countless reward programs as incentive. their customers share the costs of interchange “Rewards have become a cost of doing fees depends on price elasticity of supply and business” for the credit and debit card indus- demand for goods and services, Hayashi says. tries, Woolsey says. If credit card rewards are funded by interest Beyond airline miles and cash-back FALL 2006 . TEN 9 options, these days, rewards range from mer- Many reward cards are co-sponsored by chandise (Disney products and Starbucks cof- merchants in an effort to offset the added fee, for example) to gasoline rebates (like the expense of accepting this type of payment Chase PerfectCard Platinum MasterCard) to method while building customer loyalty, savings in a child’s college fund (like the Citi Hayashi says. Often rewards are greater when Upromise Card.) the card is used at the co-sponsor merchant’s Rewards have increasingly become an location. Additionally, the cardholders may expectation by cardholders, who are more receive discounts or free merchandise from the savvy about receiving value in each transaction, sponsoring merchant, such as Target. Both says Jennifer Schulz, vice president of con- incentives may cause cardholders to shop there sumer credit products for Visa USA. rather than at competitor stores such as Kmart “(Visa strives) to create reward programs or Wal-Mart. that are relevant to their customers’ interests Small merchants might not be able to and lifestyles and ultimately foster customer issue co-branded cards, but may join issuers’ loyalty,” she says. reward programs by offering discounts on their In the early 1980s, Visa introduced one merchandise to increase sales and gain cus- of the first mainstream reward programs, the tomer loyalty. AAA Visa card. It wasn’t until about a decade Because all merchants who accept cards later that Visa, and other issuers, began pay higher fees for reward cards anyway, it may be advantageous for individual merchants to partner with a card issuer, Hayashi says. Collecting rewards Cars with license plates from states all around the Midwest circle the block surround- ing Mary Carol Garrity’s main store in down- PHOTO BY SCOTT INDERMAUR town Atchison. Shoppers—mostly women— are eager to get inside Nell Hill’s, the eclectic “home emporium” Garrity named after her grandmother. Inside, customers make their way to the cash register, knickknacks in one hand and their plastic card in the other. After his wife, Jo, selected a few things for their kitchen back home in Topeka, Ken Edwards paid for her purchases, like he does for the majority of their purchases, with a Discover reward credit card. When choosing their credit card, one fea- MARY CAROL GARRITY (LEFT) helps customers make ture was most important to the Edwards cou- furniture selections for their homes. As a seller of large- ple: Discover’s cash-back reward program. purchase items, Garrity sees most of her customers pay with credit cards. “Well, you can always use cash,” Ken says, adding that as long as it’s convenient and Discover offers this reward, he’ll use the card. partnering with merchants, which has result- There are several factors to consider when ed in significant growth in the reward card choosing a reward program debit or credit market. Now, roughly half of consumers in card, Woolsey says. Cardholders need to con- the United States have at least one reward sider terms of the rewards, interest rates, annu- credit card of some type. al fees and other member benefits. 10 FALL 2006 . TEN Many cardholders don’t realize some conditions of reward programs can negate the rewards the cardhold- PHOTO BY SCOTT INDERMAUR er receives, Woolsey says, adding it’s the reward aspect that often affects R ewards have increasingly become an expectation by cardholders, who are more savvy about receiving value in KEN EDWARDS OF TOPEKA, Kan., pays for his wife’s each transaction. purchase with his cash-back reward card. He says as long as he gets rewards, that card will be his preferred pay- ment method. credit and debit cards more often than older consumer behavior. As a result, cardholders use consumers, as do those with higher education. their cards exclusively in hopes of maximizing The credit card market will eventually their purchases. reach a saturation point—again. After a large Hayashi’s research shows reward programs number of high-income earners hold reward entice both credit and debit card holders alike. cards, issuers will target first middle- and then The choice to use a reward credit card versus a low-income earners, Hayashi predicts. reward debit card is often a matter of prefer- “Right now, issuers are competing for con- ence, just like the type of reward program cho- sumers,” Hayashi says. “And this will keep sen. A possible determinant of consumer pay- increasing rewards.” ment choice is using a debit card to avoid car- rying a balance on a credit card, or reduce T interest costs on a credit card balance. BY BRYE STEEVES, SENIOR WRITER Consumers who carry a balance on their credit cards use debit cards more often, and those who don’t tend to use credit cards more often. Regardless of whether a debit or credit card F U R T H E R R E S O U R C E S is used, consumers with either a reward debit or PAYMENT CARD REWARDS PROGRAMS AND reward credit card use this card more exclusively. CONSUMER PAYMENT CHOICE And consumers who receive rewards from both BY FUMIKO HAYASHI AND ANDREW CHING debit and credit cards distribute their transac- tions more equally between the cards. www.KansasCityFed.org/TEN There are distinct groups, in addition to income levels, who most use reward card pro- grams, according to Hayashi’s research. Generally, female consumers tend to use debit cards more frequently than male con- sumers, while Asian-Americans use credit cards COMMENTS/QUESTIONS are welcome more exclusively. Younger consumers use both and should be sent to email@example.com. FALL 2006 . TEN 11
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