Banks Must Reexamine Risks, Payoffs Of Bank Card Rewards Programs

In 2005, general-purpose (GPC) cards produced 75% of the bank card industry's sales volume. Yet even with a greater number of solicitations mailed by bank card issuers in 2005, only 0.3% of target consumers responded - yielding the industry's lowest historic response rate. This downward trend in response rates has increased the cost to acquire new customers. A graph illustrating consumer's declining interest in bank card offers and the deterioration of response rates can be viewed and downloaded at: http://www.towergroup.com/research/content/page.jsp?pageId=802

As customer acquisition costs continue to rise, the industry's dependence on card designs that include a rewards feature will increase. TowerGroup expects that within five years, 90% of consumers holding GPC will have some form of rewards. Yet these rewards undoubtedly place increased financial burdens on the profitability of bank card programs. TowerGroup believes that 2006 marks a transition year for banks in terms of moving from using rewards programs as a tool simply to attract and retain customers, to being more careful in evaluating the effect of rewards on the bottom line as well as how rewards are delivered.

The new report titled, "Card Rewards: Profits, Pitfalls, and Promises," by Dennis Moroney, senior research analyst in the Bank Cards practice at TowerGroup, analyzes how rewards impact U.S. banks' card programs and bank profitability. At TowerGroup, Moroney's research covers the bank card industry including: credit cards; gift and other prepaid cards; debit cards; and health savings accounts.