This is the first holiday season in which Waterbury-based Webster Bank has heavily promoted its debit card rewards program.

During the weeks before the holiday shopping season started full-force – and now, in the midst of it – banks like Providence-based Citizens Bank have been spending a big chunk of their advertising dollars to tout their debit card rewards programs. The programs, like Visa Extras, typically award points to customers who use their debit cards for signature-based transactions.

Rewards have become more popular among banks in New England in the past year or so. Middletown-based Liberty Bank is taking part in a holiday sweepstakes through MasterCard that gives customers who use their debit cards a chance to win a home.

Waterbury-based Webster Bank started offering debit rewards about a year-and-a-half ago, through the Visa Extras program. The program has been popular and has prompted customers who are enrolled to use their debit cards more, said John Weeks of Webster Bank.

Credit cards, which are typically huge money-makers for banks, have long come with a variety of rewards. Debit card rewards programs are a relatively new phenomenon, however.

But a recent study from Needham, Mass.-based TowerGroup found that card rewards of any type can come with a cost in terms of a bank’s bottom line.

“Since 2000, the bank card industry’s dependence on rewards programs to attract and retain customers has increased significantly,” according to a statement from TowerGroup. “While rewards have become an essential aspect of bank card business strategy and help increase card usage, customer retention and margins – they come with a cost to the institution in terms of overall profitability.”

This is the first holiday season in which Webster has heavily promoted its debit card rewards program. So far, the bank has found that people who were considered infrequent users of their debit cards – meaning they used them fewer than five times a month – increased their usage almost 100 percent after enrolling in the program. People who were considered heavy users – those who used their cards more than 12 times a month – increased their usage by about 40 percent, but the boost has mostly been on lower-ticket items, Weeks said.

‘Delicate Balance’
Banks stand to make some money by encouraging users to sign for their purchases rather than using PINs, or personal identification numbers. When a customers signs for their purchases, banks charge merchants significantly more than when customers use their PINs. According to Consumer Reports, for a $100 sale, a merchant would get charged 77 cents if a customer signed for their purchase, while they would get charged 25 cents for a PIN-based transaction.

PIN-based sales also can cost banks more if there is any fraud. When customers sign for their purchase, the transaction gets processed through the credit card company and does not go directly to the bank. In the case of Webster customers, they are then protected by Visa’s zero liability program if there are problems with the transaction. But with PIN purchases, the bank has to shell out the money in case anything happens.

It remains to be seen how profitable the debit card rewards program will be for banks.

“It’s still up in the air,” Weeks said.

The Visa Extras points, which can be redeemed for items like iPods and restaurant gift certificates, are good for three years. The net effect on Webster so far has been minimal, Weeks said, but if everyone who has earned points cashed them out tomorrow, there would be a huge impact to the bottom line. Most rewards programs are great at getting customers to spend more, but the impact to the bank’s income is still being assessed.

“It’s a very delicate balance,” Weeks said.

The bank has seen a large increase in people enrolling in the program, though.

“We, like every other bank, are looking into is it worth, what it could cost us in the very near future,” Weeks said.

Portland, Maine-based TD Banknorth also has a debit card rewards program, and the bank also has seen an increase in debit card use as a result.

“Those people who sign up for it, they love it,” said Jeff Nathanson, TD Banknorth’s director of corporate communications. “It’s one of the programs where you get something for what you are doing anyway. We initiated it in 2004. I think we are certainly, in our footprint, one of the larger providers of this.

“I think that in general what we can say – and I don’t have access to the specifics – I can tell you that the trend we are seeing is that more and more consumers are relying on debit cards,” he said. “The number of checks actually written is going down. Use of debit cards to pay for purchases, online transactions, it is definitely a trend that is continuing.”