Cashback Rewards Programs Come of Age

There was a time not too long ago when banks gave out toasters to attract customers, retailers rewarded shoppers with redeemable stamps, and credit card companies gave out, well…new credit cards. Then in 1986 came the national debut of the Discover card, which pioneered cash-back rewards and set in motion a whole industry’s worth of incentive programs.

Cashback refers to financial transactions related to credit and debit cards that refund the cardholder with a percentage of the amount spent on qualifying purchases.

The cashback trend that Discover kicked-off decades ago has progressively given way to others, most recently shopping companions and reward programs such as Capital One Shopping and Paypal’s Honey. These services provide various ways to save while shopping online, including finding coupons and offering cashback rewards at participating online retailers.

The newer wave of shopping rewards programs has a distinct advantage over the original cashback offering which was traditionally funded directly out of interchange and thus eats into issuers’ margins. 

On the other hand, the cashback rewards delivered via shopping companions are funded by merchants’ performance marketing budgets, which are distinct from interchange and therefore provide issuers the ability to deliver rewards to cardholders which don’t reduce margin and instead generate new revenue streams.

The First Wave: Rewards from Interchange

The Discover card introduced itself to consumers in a national ad campaign during Super Bowl XX in 1986. Discover differentiated itself from the competitors by offering cardholders a percentage of every transaction back into the consumer’s account. However, what started as a differentiator has now become table stakes for issuers.

Today, nearly every issuer has a card in their portfolio offering incentives that work by giving away interchange to reward the user. Cards offer varying cashback levels, depending on the type of purchase or transaction level. For example, a cardholder might earn 3% back on gas purchases, 2% on groceries, and 1% on all other purchases (thus, giving away the lion’s share of interchange).

Today: The Next Generation of Rewards

Consumers, especially in this time of rising prices, favor earning cashback from their purchases to make their money stretch further. Interchange-funded rewards on purchases are great for the consumer, but cut into fee revenue for card issuers and financial institutions.

However, the new wave of cashback and shopping rewards not only expands user benefits but opens up an opportunity for financial institutions. These merchant-funded rewards programs, enabled by the existing infrastructure behind performance marketing affiliate programs, have become incredibly popular in the last few years. Examples include PayPal's Honey, Capital One Shopping, and Acorns Earn.

These programs offer cashback rewards, online coupons, and other shopping benefits, all of which tap into merchants’ performance marketing budgets without touching interchange. In this model, the commissions from e-commerce purchases come out of the online retailers' performance marketing budgets in the form of affiliate commissions (and not from interchange), so the revenue generated from a cashback loyalty program is almost totally incremental to the financial institution.

How To Tap Into the Power of Shopping Rewards Programs

There are several ways for FIs to skin this cat. In Paypal’s case, they chose to acquire Honey in order to offer shopping rewards to users. Capital One chose a hybrid approach, with a series of acquisitions which they then wove together and in turn built upon further to launch Capital One Shopping. 

In addition, companies can choose to partner with a shopping rewards platform to go to market quickly. Acorns is a good example of an FI which taps Wildfire’s enterprise cashback rewards platform to launch a white label rewards extension that helps customers meet their investment goals, branded as Acorns Earn. 

Wildfire also works with numerous FIs to power their shopping rewards programs, including traditional banks, challenger banks, fintechs and others. The company’s global platform is available in over 50 countries and provides benefits to online shoppers across all devices (desktop [Chrome & Safari], iOS, and Android).

It’s No Longer a Race to the Bottom for Interchange Rewards

With the latest wave of cashback rewards programs, financial institutions can reward customers without dipping into their interchange and keep a portion of the transaction for themselves. So, in addition to rewarding users, e-commerce cashback rewards incentives generate a new source of income rather than creating additional costs or cutting into interchange margins. 

And, even better, there’s no need to give away any more toasters.