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You Don't Need a Credit Card to Earn Rewards

Prepaid, reloadable debit cards are often a complement to a checking account, rather than a replacement, a new study shows.

Prepaid, reloadable debit cards are often a complement to a checking account, rather than a replacement, a new study shows. JASON REED / Reuters

Debit card reward programs are still going strong at many of the nation's largest financial institutions, according to a new report from the Mercator Advisory Group. A majority of the country's top banks and credit unions offer debit card reward programs: 14 of the 25 largest banks and 13 of the 25 largest credit unions.

"Debit cards are an important product for financial institutions because it's that daily representation of the bank's brand to their customers, so they want to make sure their customers continue to use their debit cards," said Sarah Grotta, Mercator's director of debit advisory service.

A few years ago, it looked like these programs were about to disappear. But in today's competitive marketplace, where checking accounts are no longer a must-have financial product, banks and credit unions want to reward their loyal customers and keep them from leaving.

The dos and don'ts of debit cards

Mercator found that about 90 percent of American adults have a checking account, a drop of five percent since 2012. The biggest declines took place in two of the most sought after customer groups — affluent households and young adults, the report noted.

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Fewer checking accounts mean fewer people with debit cards tied to those accounts. Remember: Banks and credit unions get a fee every time there's a debit card transaction.

It seems these loyalty programs can motivate the use of debit cards. One in three people with a debit card that offers rewards told Mercator they paid with their card because of the rewards.

"People love rewards," said Matt Schulz, senior industry analyst at CreditCards.com. "The industry is so competitive that banks are trying to do anything they can to attract new customers and keep their current ones happy. And a lot of times they're using rewards to do this."

A checking account customer may also want to apply for a credit card or use other services from that bank or credit union.

"People want to feel valued," said John Jordan, client experience and programs executive at Bank of America. "It's a way to grow business and get referrals and make people want to do more business with you. It's much easier to keep a customer and reward a customer you have than try to go out a find a new one."

Some Internet-only banks, including Discover Bank, Bank of Internet USA and Bank5 Connect also offer debit rewards. Mercator called Discover Bank's program "the most lucrative" for consumers. Customers earn 10 cents for each debit, bill pay or check transaction.

"Adding rewards increases loyalty, and that in turn pays for itself for the company and allows us to offer a strong product," Brian Hughes, senior vice president of deposit products at Discover Bank, told NBC News. "It's really the same lesson we learned on the credit card side of our business."

Debit reward programs are changing

Many banks and credit unions saw their revenue drop dramatically several years ago when Congress limited the fees large financial institutions could charge merchants to process debit card transactions. To cut costs, many banks and credit unions eliminated their reward programs.

These loyalty programs are making a comeback, Mercator's survey shows. But they're also changing, as financial institutions look for ways to reduce the expense of running them.

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"They're stepping away from points programs and moving toward merchant-funded programs," Grotta told NBC News. "So the rewards provided to the consumers are ultimately coming from merchants, not necessarily funded by the financial institution. "

The switch to merchant rewards is most notable at banks. More than half of the big banks surveyed by Mercator have moved away from points-based programs.

Here's how it typically works. A customer enrolled in the reward program is directed to an online or mobile site to view discounts — on special items for a limited time — offered by local or national merchants. If that item is purchased, the cardholder either gets a discount on the spot or the cash deposited in their account the following month.

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Mercator found that some banks are expanding their debit rewards to non-debit transactions. Eligible activities might include downloading the bank's mobile app or opening a new account. They can also include recurring transactions, such as direct deposit, remote check deposit and online bill payments.

Rating debit rewards

How do debit rewards stack up against credit card rewards?

"Debit cards simply don't hold a candle to credit cards when it comes to rewards," said Odysseas Papadimitriou, CEO of the personal finance website WalletHub. "Many credit cards will give you hundreds of dollars just for signing up and spending normally."

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Rewards credit cards typically have annual fees, often waived the first year. But some debit rewards programs also have a monthly or yearly fee. Credit cards also have more fraud protection than a debit card. All of this does not mean debit card rewards are unimportant.

"Despite the advantages of credit cards, there remains a subset of consumers who prefer to use debit cards for most purchases, typically to avoid even the possibility of debt," Papadimitriou said. "Rewards are an important consideration for such high-volume debit card users."

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.