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04/20/2012

Can you earn money spending yours?

In a context of record low level of interest rate, cash back products and banking bonuses offer customers additional revenue for the use of their account.

The cash back products are developing in Belgium.

Belgians are known to be saving a lot of money. With a saving rate of 17.2% of their disposable income and €222 billion (Q3 2011) lying on savings account, banks are competing to attract this cheap source of financing. This is especially true for smaller banks, which have to be imaginative in order to compete with the 4 biggest institutions of the country (BNP Paribas Fortis, Belfius, ING, KBC).

This situation led to the apparition of several products that financially reward customers for using their account, e.i. spending their money. Two different rewarding products can be found on the Belgian market: bank accounts and credit cards. While current account offering banking bonuses (financial reward given to the customer) have been offered to customers for several years, the cash back credit card is a new product on the Belgian market. Even though both products reward the transactions executed by the customers, the banking strategy behind is different.

Banking bonuses

The rewarding products appeared on the Belgian market in January 2008 with an offer from Keytrade Bank (part of Credit Agricole Group). It offered its customer a banking bonus of 5 eurocents per operation. This has since been renewed every year. The current offer credits Keytrade Bank's customers 5 cents per operation on their current account. These operations include cash withdrawal, payments through debit card, credit transfer and direct debit. It excludes international credit transfers, credit card payments, permanent orders and ‘proton' operations. The total amount due to the customer is credited on the following month. There is no maximum amount of banking bonuses for this promotion; the current account is bearing an interest of 1% and the account is free of charge.

Besides the banking bonus offered on its current account, Keytrade Bank also carries out a campaign to attract new customers every year. During the campaign, every existing customer who supports the accounts opening of a new one is rewarded with €30 in cash. The new customer also receives a €30 bonus once the accounts are opened.

Other banks also developed banking bonuses offers for the use of their current account or for account opening. Among them, Axa Bank (since 2009) and Citibank (since 2011) currently offer banking bonuses for the use of a current account within their institution.


Overview of main offers for bonuses on the use of banking accounts

Cash Back credit cards

Cash Back credit cards operate as any other credit card. The customer receives the card from its bank and uses it to pay its purchases. The merchant pays a defined fee to its bank to be able to receive payments by credit cards. Part of this fee goes to the card association which connects the different banks (Visa and MasterCard being the two leaders) and another part goes to the consumer's bank (or issuing bank). The latest part is called interchange fee.

Cash Back credit cards are not a new product since they have been used since the 1970s in the USA. Nevertheless, they had never appeared in Belgium before 2011 and the Citibank offer. Three different cards are offered to customers: two MasterCard and one Visa with different advantages.

One reward concept, two banking strategies

Obviously, the reward concept of banking bonuses and cash back credit cards is the same: reward the customer for the use of a specific banking product. Nevertheless, the strategies behind both products are quite different.

In a country where basis interest rates lower than 1% are observed on savings account, banking bonuses offer an interesting additional reward for the customer. Thanks to this argument, banks hope to attract new customers and retain existing ones, thereby increasing their clientele and the deposits. These deposits are, of course, essential for the functioning of the bank. Their importance will increase with the entry into force of the Basel III agreement in the coming years. Indeed, the Net Stable Funding Ratio of the regulation gives a particular importance to deposits from the retail activity. Banking bonuses are thereby a way to earn customer's loyalty and insure the bank's compliance with the regulation. Indeed, if payments are regularly carried out through an account, there will be regular money inflow to this very account. Banks can hope there will also be deposit on a savings account within the same bank, once the current account is used on a regular basis. This is especially true considering the saving propensity of Belgians and their reputation of loyalty towards their main bank, confirmed by the rather small use of the interbank mobility (only 58 195 demands in 2011, while there more than 16.6 million current accounts in the country).

While banking bonuses are set up to attract and retain customers, cash back credit cards pursue other goals. Thanks to the discount they provide on the purchase of the customer, these credit cards can be seen as a good way to spend less while keeping the same life style. Nevertheless, these credit cards are not directly offered to attract new customers for the bank itself since that none of the Belgian cash back cards must be linked to a current account within a specific bank. The customer receives his credit card bill every month and settles it using the account (and the bank) of his choice.

The cash back credit cards bring revenue for the issuing bank through the interchange fee received from the acquiring bank and the fee paid directly by the customer for the issuance and the use of the card. It also generates revenues through the interest payments on the revolving credit associated with the credit card. These credit cards are thereby a mean of growth and diversification of the revenues of the bank.

These cards can also be seen as a way to face an evolving environment in the means of payment. Indeed, the SEPA Cards Framework will induce changes on the cards market and new pan-European players will try to capture market share in the market. In this context of changes and upcoming challenges in the payments industry, the cash back program can be seen here as a mean to diversify revenues from payments for banks and to earn the loyalty of the customer for the card networks towards the potential newcomers on the European market.

A new tendency in Belgium?

Nowadays, cash back and banking bonuses products are far from being the norm in the Belgian retail banking products landscape. Nevertheless, low interest rates, Basel III regulation and challenging environment in the means of payment market will increase the possibility of a harder competition between banks in Belgium. It would then not be surprising to see these rewarding products become more the rule than the exception.

Sia Partners


BNB: Bulletin statistique trimestriel : 2011-IV.

Febelfin: Chiffres du secteur financier

Sia Partners: The market for bank cards in Europe by horizon 2018: What market share for new entrants?

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