If you have been a customer of PerkStreet, you joined to take advantage of the company’s debit card rewards program, and had accrued rewards as of August 12, you just got screwed, to put it bluntly. PerkStreet is closing, the company canceled their rewards program, and the company will not be paying out any accumulated “Perks” or cash back.
PerkStreet failed to get the funding it needed to continue operations, so the company is no longer accepting applications and no longer offering rewards even if they have been accrued. Some existing customers must spend down their balances or transfer any remaining money out of their PerkStreet accounts. Since PerkStreet worked with real banks for holding deposits, those balances are insured by the FDIC.
Accumulated cash back rewards, however, are not ensured by the FDIC, and according to PerkStreet’s terms which every customer must agree to, PerkStreet can change the rewards program or revoke rewards at any time. All types of rewards programs, whether operated by banks or by airlines, operate the same way: rewards are not customers’ assets, even if they’re listed on a statement. They don’t exist except in a database, and they have no actual value, until they are redeemed.
The business model chosen by PerkStreet was unsustainable, but it was a good deal for everyone who signed up a few years ago. PerkStreet’s debit card program was one of the only ways to earn 5 percent cash back on some purchases. This was an enticing offer, and through a powerful advertising campaign that included paying bloggers to solicit new applicants, PerkStreet climbed in popularity online.
The deal that PerkStreet offered during most of its tenure was 2 percent cash back on all purchases for customers whose deposit balance was $5,000 or more and 1 percent cash back for all other customers. PerkStreet later changed the deal to provide the higher cash back for online purchases only.
Some analysts claim that debit card swipe fee regulation played a role in PerkStreet’s demise. When a business offers a free debit card product and provides customers with free rewards just for doing business with them, it must have some other method of profit to pay for those expenses. If swipe fees, the fees debit card companies charge merchants for accepting each transaction, can’t cover those expenses, there must be another source of revenue.
Because PerkStreet’s business model relied on swipe fees for the totality of its revenue, the company was in trouble from the start. Banks and credit card issuers that traditionally offer rewards programs have many other avenues for generating profit, all which help provide the funding for offering rewards which attract new customers and look good in marketing materials. PerkStreet had no other type of revenue by design.
Without a diversified revenue stream any disruption would cause a problem. You can’t blame the government for a company’s bad business model, especially when legislation and regulations don’t appear suddenly. The financial industry has more than enough time to prepare for consumer-oriented legislation.
What does PerkStreet’s closing mean for PerkStreet customers?
If your debit card number begins with the digits 5519, Bancorp Bank was PerkStreet’s partner for your account. Because PerkStreet isn’t a bank, it must partner with a bank to hold deposit accounts with FDIC insurance. Your account is now a Bancorp Bank account and will begin earning interest. All cash back balances in your account as of August 12, 2013 will be eliminated. If you were waiting to withdraw your cash back, you’re out of luck.
For other customers, those whose card numbers begin with 5507, your account is held with Provident Bank. Provident Bank will add your cash back balance as of August 12 to your account on August 15. Provident will not, however, be keeping customers’ accounts open like Bancorp Bank. You’ll need to request a check for your balance, spend down the account, or transfer your money elsewhere by September 26, the date PerkStreet will officially be closing its doors and terminating any employees who haven’t been terminated between now and that future date.
What does PerkStreet’s closing mean for the financial industry?
PerkStreet is not a big company in the financial industry. The world’s economy will continue without much notice. PerkStreet was, however, a leader in a movement away from traditional banks. There are many companies today that provide a layer between customers and their deposits. This intermediate layer has several purposes.
- To provide a different kind of user experience that is more customer-friendly than traditional banks.
- To change appearances so those who are not interested in working directly with large financial institutions can associate with an “outsider” company.
- To offer different money management features that traditional banks aren’t interested in offering.
Another example of an “outsider” financial company is SmartyPig. I’ve written about SmartyPig a few times on Consumerism Commentary, and I’ve used the tool myself to track my savings for a future purchase. SmartyPig, however, like other “outsider” financial companies, is just a layer that sits between me and my money held at a traditional bank.
PerkStreet’s closing is a reminder to these companies that they need to provide value to customers and generate revenue from more than one source. This closing might serve as a wake-up call to other non-banking financial institutions to change their business models if they’re relying solely on swipe fees for revenue. Those companies that rely on swipe fees might also find themselves out of business over the next few years as even tougher regulations take hold.
Disruption needs to have depth. I think it’s great that entrepreneurs are looking into methods of reforming the financial industry. Outsiders disrupting an existing industry fosters innovation that benefits everyone. But the diruptors we’ve seen so far, like PerkStreet, need to mature. They need to find profitable business models while still maintaining their outsider status. These companies need to offer services consumers will buy.
What does PerkStreet’s closing mean for consumers in general?
There’s a risk to every reward. If a company is offering free money, as PerkStreet was with its rewards program, you can be sure there’s a catch. As with all rewards programs, there’s a risk that the company will change its program or eliminate rewards you’ve supposedly “accumulated” at any time. You agree to those terms when you enroll in the program. Frequent flyer programs, credit card rewards, debit card rewards, and hotel stay rewards all operate the same way. Most programs are not in danger because the companies that offer those rewards are profitable and, overall, are not in danger of going out of business.
But when you have a company that offers no other service than a rewards program, you have to look at whether the company has a sustainable business model. It’s easy enough to say this after the fact when a company goes out of business, but this is as good a time as any to look around at the other rewards you might be chasing and making sure that you’re following common sense.
New companies will try to attract new customers with generous rewards programs. In the retail industry, this is a loss-leader. Get customers in the door, then they’ll spend money on other profitable products. PerkStreet had no other profitable products to sell to recover the losses from the sales pitch. Are there any other financial companies that operate that way? Perhaps some other “middle layer” financial companies as described above.
- Evaluate the companies you work with for long-term sustainability.
- Accept that companies don’t give away anything of value for free.
- If you take advantage of a rewards program, cash out at every opportunity available.
- Expect companies to use whatever legal means necessary to strengthen their position when threatened.
- Realize that that an account agreement is lopsided; large corporations have much more power in negotiations than an individual.
If you are looking for the best debit cards rewards programs, you may not find a good choice over the next few years. Many have already eliminated or reduced their rewards offerings, and PerkStreet’s closing may be a signal that there is more trouble to come.
Are you affected by PerkStreet’s closing? What do you plan to do? Are you chasing another debit card rewards program? Which company do you think will be next?
Photo: Flickr/Steve Snodgrass