Debit Card Raises the Cash-Back Reward

At a time when many banks have become notorious for taking money away from checking account customers, a start-up is planning to double what it’s putting back in account holders’ wallets.

On Wednesday, Perk Street Financial is planning to announce that it will double, to 2 percent, its rebate on every dollar its checking account customers spend when they sign for purchases using their debit card. Anyone with a balance of at least $5,000 at the start of each day will earn the reward, which comes in the form of gift cards to retailers or a Visa gift card that can be used at any merchant. Those with balances below $5,000 will earn 1 percent back.

credit cards
credit cards

Perk Street, which began opening accounts for consumers last year, is not a bank. But it works with Bancorp Bank, a company with protection from the Federal Deposit Insurance Corporation, to offer its accounts. Dan O’Malley, Perk Street’s co-founder, is a veteran of Capital One , and his company has venture capital backing from Highland Capital Partners, a well-established firm.

Still, companies with much more experience have tried and failed to sustain cards that give a 2 percent rebate to customers. Most debit card issuers, if they have a rewards program at all, give away far less than 2 percent. In 2008, Charles Schwab introduced a Visa credit card that offered rebates of 2 percent on all purchases and deposited the money into a brokerage account. Earlier this year, however, Schwab stopped taking applications for new cards after not making as much money as it had hoped from interest charges.

A debit card like Perk Street’s doesn’t even get revenue from customers paying interest because debit card expenditures come directly out of a checking account. So a skeptical consumer has to wonder: how on earth can Perk Street pay this much out and still make money?

The company has a few sources of revenue. The first and most likely the biggest is money from fees merchants pay to accept Perk Street’s debit cards. A bank like Bancorp gets about $1.30 for every $100 that customers spend on their cards when signing for their purchase, according to David Robertson, publisher of The Nilson Report, an industry newsletter. Bancorp gives some or all of that to Perk Street, though neither party would disclose the terms of the deal.

Then, there’s the money to be made from that $5,000 minimum balance. “Let’s say the average balance actually ends up being $10,000,” said Aaron Fine, a partner in the retail and business banking practice with Oliver Wyman. He was speaking in general terms about banking business models because firm employees do not generally comment on specific companies. Bancorp can then make money storing Perk Street’s customers’ deposits in safe investments like Treasury bills or lending that money to businesses. Either way, Bancorp shares some of those earnings with Perk Street, too.

Still, Mr. Fine wondered why a company like Bancorp would share any of this money in the first place. “They could get low-cost deposits in other places, so why pay out some of that revenue?” he said.

Betsy Cohen, Bancorp’s chief executive, said that taking in deposits through Perk Street was less expensive than creating a traditional branch network. Also, the value of a company like hers is based in part on the deposit-gathering relationships it has in place. So it needs partners like Perk Street (it works with health savings account providers and others) to provide a consistent source of funds.

Perk Street also faces the basic challenge of getting people with lots of automated payments tied to their current checking accounts to switch banks. Just resetting the payments can take an hour or two at least, plus a few months of careful observation to make sure that the new ones take and that neither the old nor the new account is overdrawn.

Certainly, debit reward programs at big banks, which often pay well under $1 for every $100 a customer spends, aren’t enough to get people to switch. “It’s not moving the dial,” said Mr. Fine of Oliver Wyman. But a 2 percent rebate might be enough to get people to move. Those who spend $2,000 a month on a Perk Street debit card and have at least a $5,000 balance will earn $480 in annual awards. And that’s before any earnings from the 5 percent bonuses in various merchant categories that the company plans to start offering this week.

There is no fee for a Perk Street account in which there is at least one transaction a month and no limit on rebates earned at the 2 percent rate. Account holders can earn up to $500 a year with the 5 percent bonuses.

Once customers move their accounts to Perk Street, they will find no branches and none of their own A.T.M.’s, though the company has teamed with an A.T.M. network that has 37,000 surcharge-free machines around the country. Customers might also see hiccups in service quality if Perk Street grows quickly as a result of its 2 percent gambit. And those gift cards it gives out can be lost and can be inconvenient to fully drain.

Assuming Perk Street’s business model is sound, its biggest threat may be a reduction in what it earns from merchant fees. The financial overhaul legislation that the House and Senate are haggling over may result in big banks earning less money from debit card merchant fees. Bancorp is not among those banks, but Visa and MasterCard could eventually come under pressure from the big banks or the merchant community to reduce what it pays all banks, no matter their size.

“There is risk there,” said Mr. O’Malley, who would presumably not be making a big effort to give away a 2 percent rebate if he believed a change was imminent.

Or would he? A true cynic might suspect a pump-and-dump scheme: lure people in with a big rebate and then cut it sharply once they have checking accounts set up. Some customers would leave in disgust, but many more would probably shrug their shoulders and stay. Mr. O’Malley said he had no such plans. “A lot of banks, that’s explicitly what they try to do, and it leaves a bad taste in my mouth,” he said.

If you believe him, and given the company name he’d be foolish to try a stunt like that, then you have an interesting choice. I’m not moving my money to Perk Street because I get more than 2 percent back through strategic credit card spending on my Starwood Preferred Guest American Express card, Costco TrueEarnings American Express Card and Schwab Visa.

But if I were a debit card user and could keep a $5,000 balance, I’d probably roll the dice on Perk Street’s model. If it works, it will be one of the richest checking accounts in the land.