More banks offer rewards

CLEVELAND — A trip to the islands for paying the water bill. Free coffee and pasta dinners for grocery shopping. A clothing store gift card for picking up dry cleaning.

Suddenly mundane errands have gotten more rewarding.

A growing number of banks, looking to get more out of their existing customers, are offering “rewards” programs that allow consumers to accumulate points that can be cashed in for a variety of items. Rewards are given for such everyday tasks as writing checks, paying bills online and using debit cards.

The banks make money on more transaction fees and by getting customers to try new services.

Cleveland-based National City Bank is the latest to join the rewards club with its new “Points” program that allows debit card users to earn points for each transaction, writing checks and for opening new accounts. The points can be cashed in for rewards ranging from a Starbucks latte (2,000 points for a $5 gift card) to a four-day Caribbean cruise (420,000 points.)

The bank, which has a renewed focus on its consumer segment, could use the boost from more fees. National City saw profits drop 29 percent last year to $1.9 billion.

David Bowen, senior vice president for consumer and small-business deposits at National City, said banks must find creative ways to get more out of existing customers because there’s little room for new customer growth, particularly at regional banks like his. National City has 1,100 branches in the Midwest.

Greg McBride, an analyst for Bankrate Inc., said rewards programs are a growing new trend in the financial services industry even though they have been around at grocery stores and other retailers for a while.

“It was just a matter of time before loyalty programs found their way into financial services. From the bank’s perspective, the idea is to make your bank the consumer’s first choice for additional needs,” he said.

The $134 billion industry, which has been facing stiffening competition from credit unions and rising costs associated with signing on new customers, saw profits grow nearly 10 percent last year, according to the Federal Deposit Insurance Corp.

Bank One, Bank of America and Citigroup Inc., the nation’s largest financial institution, have launched similar consumer programs in the last year.

Tracey Mills, a spokeswoman for the Washington, D.C.-based industry group American Bankers Association, said the goal is to increase business with existing customers, who typically use different banks for different kinds of accounts.

Banks are using rewards programs and other initiatives such as personalized banking to push customers to have two or more relationships at one bank — a checking and savings account plus a home loan, for example.

Those customers “have more loyalty so they’re less likely to switch banks,” Mills said.

“It’s also more expensive to find a new customer than it is to market to the current customer so it’s a cost effective way to grow business,” Mills said.

Ed Mierzwinski, consumer program director for Washington, D.C.-based U.S. Public Interest Research Group, said encouraging more debit card use instead of cash is not a good thing. Banks usually earn between 1 percent and 2 percent of the purchase price in transaction fees.

“Banks use rewards programs to switch consumers from paying with cash to paying with plastic so that the banks can earn more fees from merchants. The result is that all consumers pay more.”