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How Banks Profit From Their Cash Back Rewards Programs

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How Banks Profit From Their Cash Back Rewards Programs

We have been seeing more banks offering various credit card and debit card reward programs. These are not the generic cash-back rewards that applies to all purchases. The cash back rewards only apply to purchases at specific retailers. This CNNMoney.com article has a insightful review about why we are seeing more of these programs. As you might expect, it's a new way for banks to generate profits. According to the article, the banks are:

selling information about consumers' shopping habits -- how much they spend, where they shop and what they buy -- to retailers, which are using the data to offer targeted discounts via text, email and online bank statements. Each time a consumer cashes in on one of those deals, the retailer pays the bank a nice commission.
Update 7/7/11: CNNMoney.com revised the title and other parts of the article. The above paragraph was changed to the following:
Many of the nation's leading banks are using information about their customers' shopping habits -- how much they spend, where they shop, what they buy -- to make money.

One important concern is privacy. According to the article, the banks claim that no personally identifying information is disclosed to retailers. If that's the case, is it a win-win for the banks, the retailers and the customers?

Recent Examples

Over the last year I've reviewed many of these types of reward programs. One example is the Add It Up program from Bank of America. Bank of America customers can receive cash back when they use their Bank of America credit or debit cards. They first have to select an offer on the Add It Up website which forwards them to the retailers site where they pay with their Bank of America credit or debit card. The cash back is then given to the customers as a credit to their accounts.

Internet Banks have also been introducing their own reward programs. FNBO Direct has its My Deals program; Sallie Mae Bank has its UPromise Rewards Program; and SmartyPig has its Cash Boost. The latest internet bank to introduced this type of program is Ally Bank which launched its Ally Perks program in June. In the Ally Perks program, Ally shows you the potential discounts when you're logged for making purchases of certain amounts at specific retailers using Ally's debit card (for example, $5 back on $50 purchase at Target.com).

Downsides?

The article reviewed some of potential downsides for the consumers. In addition to the privacy issue, there's a risk that you don't receive the expected cash back credit. One downside that the article didn't mention is that it might encourage you to spend more. I could see that as a possibility with the Ally Perks program since it requires a purchase to reach a certain level before you receive the cash back credit (i.e. $50 purchase at Target.com to receive $5 cash back). If you only needed something that cost $30 at Target.com, you may end up buying $20 more for things you didn't really need and for things that you could have cost less at other places. If consumers are careful about how and when they use these offers, they can be good deals.


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Comments
4 Comments.
Comment #1 by Anonymous posted on
Anonymous
In addition to the privacy issue...

Apart from that, how was the play Mrs. Lincoln?

3
Comment #2 by Jim Marous (anonymous) posted on
Jim Marous
The quote in the middle of your post is misleading and is not in the revised version of the CNN Money post. Banks do NOT sell any customer information to retailers or to the partners such as Cardytics. In fact, all customer data is retained within the firewalls of the bank. Merchants determine what type of transaction behavior they want to target and the bank matches the offer to the customer.

2
Comment #3 by Anonymous posted on
Anonymous
I think I'll just use my Target Visa Card and get $1.50 off on that $30 purchase.  (5% discount) 

2
Comment #4 by Jim Marous (anonymous) posted on
Jim Marous
Here is the disclaimer on the CNN Money Post: Editor's Note: After this story was first published, we made two clarifications. First, we adjusted the headline, which initially read, "Banks' billion-dollar idea: Sell your shopping data." And we added additional language to explain how banks are using their customers' data.

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