From a bank's perspective, debit cards and credit cards are completely different animals. In some banks they may not even be part of the same management structure. The bottom line is that there is significantly more revenue opportunity with credit cards. Here's how it work:
Credit cards offer rewards, points, miles or cash back as a way to encourage new applications (lower the bank's cost to acquire a new account), improve activation and ensure continued use of the card. Credit card accounts generate significant profit from finance charges (most of the net revenue), interchange (the fees paid by merchants for retail transactions) and customer fees such as annual fees, late payment fees and service fees. Credit card accounts can also generate meaningful profit from cross-selling products such as credit protection and identify theft protection services. A typical credit card rewards program offers customers 1 point for every $1 of retail spend (1% of retail purchases). The net cost to the bank for redemption is less than that due to several issues we will cover later. The bank's redemption cost is less than the revenue they receive from interchange and is a relatively small percentage of total revenue. Even with the necessary cost to maintain a state of the art rewards infrastructure and a robust communication program, 1% reward programs work for credit card issuers because banks use rewards to attract more accounts, find better accounts (those with lower risk), improve usage of accounts, and improve account retention.
Debit cards come from the other side of the aisle. Debit cards provide deposit programs with a lower-cost transaction vehicle than traditional paper checks. The revenue stream includes interchange for transactions in which the consumer provides a "signature." That revenue disappears when the customer uses a PIN pad at the point of sale. Fee revenue is more limited than with credit cards although a growing source of revenue is overdraft protection which allows the debit card to functions, alas, more like a credit card.
With much less revenue to work with, debit issuers are unable to afford lofty rewards programs. The result is that bank-funded debit rewards programs offer 1 point for every $4 of retail spend (.25%). Some banks attempt to reduce the appearance of a weaker program by implementing redemption fees, inflated redemption "costs" and/or limiting points to only signature transactions. Most consumers don't know or care about the nuance between signature and PIN transactions so only a few banks have successfully encouraged users to avoid PINs.
The best deal for an active, but disciplined and careful (more on that later), card user is to put every retail transaction on a credit card with a reward program with no annual fee and pay off the balance in full at the end of the month. You'll receive the best rewards, you'll get interest-free float between the transaction and the payment date and you don't let a merchant touch your core checking account.
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