For today’s consumers, finding ways to save money is a top priority. Faced with inflation and average credit card interest rates exceeding 25%, a growing number of shoppers are tightening their belts and seeking immediate, tangible value.
As a result, consumers don’t view loyalty and rewards programs as just a nice-to-have anymore. Rewards have become an important financial tool that today’s value-seeking customers expect and rely on to help stretch their budgets.
The rewards funding gap
While consumer demand for rewards is high, the traditional funding models for rewards programs are breaking down.
Banks and card issuers have historically relied heavily on interchange fees to fund cashback and rewards programs. But consumer habits are shifting: driven by a desire for financial control and debt avoidance, debit card spending growth is now outpacing credit card spending growth.
This shift has created a funding gap for rewards programs.
Unlike credit cards, which can generate up to 3% in interchange revenue per transaction, debit interchange fees are compressed because they are capped by regulations such as the Durbin Amendment. Compared to richer credit card interchange fees, debit transactions often yield only $0.23 to $0.46 in gross interchange revenue for issuers.
With other prospective compression on funding methods for rewards programs, such as potential regulatory fee caps and more possible changes to credit card interchange rates on the horizon, banks are getting to the point where they simply cannot afford to self-fund rich rewards programs using the credit-era playbook.
Funding these programs internally would be an expensive endeavor that could risk cannibalizing customer acquisition budgets.
Banking loyalty programs could risk being scaled back or scrapped entirely when budgets tighten further, potentially causing damage to the bank’s reputation or, worse - causing customer attrition.
The merchant-funded reward model
To survive this economic squeeze and continue delivering the value consumers demand, loyalty program providers and financial institutions must pivot to a new model: merchant-funded rewards.
In a merchant-funded model, the financial institution collaborates with retailers rather than subsidizing the cost of customer rewards, themselves.
By integrating online shopping tools (e.g. browser extensions or other helpful digital shopping assistants), banks can connect their customers with personalized deals from thousands of merchants.
When a consumer makes a purchase, the merchant pays the bank a small commission for the referred sale.
The bank then uses this commission to partially fund the customer’s cashback reward, while simultaneously receiving a new, incremental revenue share back.
The merchant-funded win-win-win
Ultimately, merchant funding transforms loyalty programs from an unsustainable internal cost center into an externally-funded revenue generator. It creates a powerful "win-win-win" ecosystem:
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consumers get the savings they demand
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merchants gain attributable sales
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banks unlock a sustainable way to fund world-class rewards without damaging their reputation - or their bottom line.
