Debit Card Discounts vs Credit Card Rewards

I heard a legal settlement between retailers and Visa and MasterCard got rid of a credit card network rule that prohibited retailers from surcharging credit card purchases. Although it’s a theoretical possibility, I don’t think we will see surcharges any time soon.

More likely we will see discounts for debit card purchases. Although the lack of a discount and a surcharge are economically the same thing, they are legally different. People also emotionally respond to discounts and surcharges differently.

Grocery stores I shop at had offered for a long time a 5-cent discount for every bag you brought to the store. A very small percentage of shoppers went for the discount. The vast majority basically paid 5 cents for every bag they received from the store. Presumably they were OK with it.

Then the city ordinance changed. The city mandated a 10-cent surcharge for every bag. Now I see most people bring their own bags. If people forgot their bags and they are buying a small number of items, they would carry the items in their arms out to the car instead of paying 10 cents for a bag.

5 cents versus 10 cents doesn’t make that big a difference. Paying extra versus not getting a discount does. In terms of changing people’s behavior, a discount is not nearly as effective as a surcharge. But stores would rather just raise prices and then offer a discount to make people feel better and not complain.

I signed up for a Target REDCard debit card last year. It gives 5% discount for purchases at Target and target.com and also free shipping at target.com with no minimum purchase. The Target debit card is known as a closed-loop decoupled debit card. Closed-loop means the card can be used only at one place (Target). Decoupled means one entity issues the card (Target) while another entity holds the underlying checking account (my credit union).

Target is modeling this after checks. When you use the Target debit card, it’s as if you are giving them a check written against your bank account. They debit your bank account electronically. The bank account is pre-designated. Using the debit card is faster and more convenient than writing a check.

I signed up not because I buy so much at Target to make it worthwhile. I signed up because I wanted to encourage debit card discounts. If the number of cardholders is a KPI for this program, I wanted to add myself as one in the total number.

The Target debit card works beautifully. I get the discount on the spot. Although there is also a Target store credit card that gives the same benefits, I chose debit because there’s no bill to worry about.

I  wish Target would add the card to its mobile app. I can already add a Target gift card to the mobile app. At checkout, the gift card displays as a barcode in the mobile app. The cashier scans it and that’s it. For a card that I don’t use frequently, such as the Target debit card, adding it to a mobile app makes perfect sense. You don’t have to carry the physical card all the time and you would still get the benefit when you need it.

My next wish would be making it open-loop: let other stores join the program and offer discounts. Having a separate card for each store will get unwieldy even on a mobile phone. If one program can unite many stores, all the stores will benefit.

If you can get a discount right away, it doesn’t make sense to pay the full price and then get a portion back through credit card rewards. I think we will see more discounts on debit cards than surcharges on credit cards. One easy way to implement such discount would be to make the grocery store loyalty card discounts contingent on paying with debit or cash. Or airlines award frequent flyer miles only if you pay with debit or its own co-branded card.