Debit Cards: Rise of the Rewards

Visa Inc. (Stock Quote: V) reported last year that, for the very first time, total dollar volume purchases made using Visa-branded debit cards were greater than the total dollar volume purchases made using the company’s branded credit cards. America’s plastic tastes are shifting.

So, why are debit cards suddenly taking off? I asked Dan O’Malley that very question. O’Malley is CEO of PerkStreet Financial, and a former Senior Director at Capital One (Stock Quote: COF). His company offers a rewards debit card that gives customers 2% cash back for the first six months, and 1% cash back thereafter. These are the kinds of rewards typically associated with credit cards, in particular those for cardholders with excellent credit, rather than a debit card for virtually anyone.

“Debit cards have been growing like gangbusters for twenty years, but largely very quietly in the background,” he explained. “So much of the banking world was focused on credit… banks made so much money off selling credit cards, they didn’t want to focus on debit cards.”

He said this all changed five or six years ago, even before the recession hit. O’Malley explained that debit cards benefited from a “huge growth wave” as consumers were finally choosing to spend their money more responsibly.

Some banks began to take notice. JPMorgan Chase (Stock Quote: JPM), for example, now offers a suite of rewards debit cards where you can earn air miles for your debit purchases, although these products come with an annual fee in some cases.

I asked O’Malley about his company’s growth – specifically I asked how many new customers he has gained, but since they are privately held I didn’t get too far. “We don’t really do much marketing,” he told me, since the company is “largely driven by word-of-mouth.”

O’Malley said we wouldn’t be seeing PerkStreet commercials at the Super Bowl any time soon. By not spending money on “traditional” things like fancy branches or ad campaigns, the company is able to offer serious cash back, and superior phone support 24/7. It’s a strategy reminiscent of ING Direct, the popular online banking arm of ING Group (Stock Quote: ING).

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