Erosion of the PerkStreet Model

I know it may not seem like it from the title, but I actually am a fan of PerkStreet (a sponsor on this site).  It is by far the best debit rewards card program out there offering 2% back on all purchase with various rotating rewards in the 5% range.  If debit rewards are your game, this is the card for you.  I also think their marketing and customer service are tremendous.  When readers have shown up in the comments section of my reviews (PerkStreet Review Part 1PerkStreet Review Part 2, and PerkStreet Review Part 3 – Management Speaks), PerkStreet employees actually respond and try to resolve the issues.  So, why this title?  Because of my $5,000.

One of the primary issues I've talked about before is how PerkStreet requires you to have $5,000 sitting in your checking account paying you 0% interest in order for you to get the 2% back on your debit card purchases.  For the time being users of PerkStreet have few other viable options to gain interest on this money that they obviously want to remain liquid (else why put it in a checking account?).  However, at some point Ben Bernanke will stop being PerkStreet's best friend and will stop artificially keeping down interest rates.  When he does that, banks EVENTUALLY will start raising their deposit rates.  Checking accounts will begin actually paying interest again, and the PerkStreet rewards model will begin to look less attractive to consumers who will want to take their $5,000 and start chasing the better rates again.  With less $ in their PerkStreet account, consumers by definition will be forced to spend less (since it's a debit card we're talking about).  Additionally the incentive to spend drops by 50% because with less than $5,000, you only get a 1% reward on your purchases.  This less cumulative spending means fewer purchases which means fewer merchant fees/card swipes for PerkStreet which has to be where they're getting the bulk of their profits (aside from the fees) since PerkStreet doesn't make loans.  I'm not sure how PerkStreet will handle this situation, but they're smart guys, and I'll be curious to see how they respond.

What do you guys think?  Am I missing something here?

Posted in Debit Cards Tagged with: ,
  • Slug – We at PerkStreet love that you aren't afraid to weigh in with tough questions – open dialogue is one of our core values and debate is, well, a daily activity.
    You are correct that rising interest rates increase the opportunity cost of maintaining the minimum balance that earns 2%. Embedded in your analysis, however, is the assumption that the minimum balance amount is constant. The value of a PerkStreet account only erodes if the benefit received (2% x monthly spend) stays constant while the cost (e.g. missed interest = rate x balance) goes up.
    We make money by loaning our deposits to other banks – as interest rates go up, we make more and can lower the minimum balance for 2% while still covering our costs. Many banks take a strip mine approach to their customers, with fees & minimums only going up and using a thin veneer of rewards as cover. By contrast, we think of rewards as a profit share. Yes, we need to make money, but the reason we have and will continue to grow is because we give customers a great deal.
    Keep on perk'n – Jason

    • Jason,

      Thanks so much for your thoughtful response. I was actually assuming you were taking the PerkStreet deposits and simply re-depositing them yourself in interest bearing accounts (clearly, demonstrating I’m not a banker!). I figured this would be fairly nominal compared to merchant and customer fees. I failed to consider that you might be making loans to other banks which would indeed be more lucrative (esp. if they’re in Greece). Nice to understand this piece of your business.

      If it is the case that PerkStreet would need to lower its required minimum balance amount in the face of rising interest rate environment to stay competitive as you seem to imply, then it seems PerkStreet might lose out a bit by having less money to then lend to other banks albeit at a likely higher rate. The question then becomes is the interest rate spread (between the PS rate of 0% and the bank loan rate) going to be large enough to make up the difference. My guess is it probably will be, and that you guys will even be able to start paying a nominal interest rate to your customers which I’m sure will be backed by an incredible marketing campaign. Interest + Rewards!

  • zoomzoom9

    Slug,
    Great point, but the smart financial types out there will realize how much more beneficial Perkstreet is over a savings account.  Let's say you have $5k to choose to leave in your Perkstreet account to get the 2%, or you can invest it in a savings account.  Assuming a rate of 5% for a regular savings account, you could get around $20/month in interest, which is taxable.  However, you only have to spend $1k/month in Perkstreet to earn that $20 in cash back.  Considering most people spend more than $1k in a month, you're actually better off parking the $5k in Perkstreet in order to get the benefits of the cash back.
    Or, you can take the middle road and take the 1% cash back and keep your $5k in a savings account.  Based on this, if you spent $1k/month, you'd get $20 in interest plus $10 in cash back.  It ceases to be beneficial though if you're a heavy spender, as spending $2k/month would get you $20 cash back and $20 interest, which is equivalent to keeping the $5k in Perkstreet and getting 2% cash back on the $2k/month (and more beneficial as the spending increases past this point).
    What do you think?

    • zoomzoom9,

      Thanks for your comments. You’ll get no argument from me on these points though I do worry about the idea of spending to get a % back vs. saving, but that’s another topic. The only clarification I would make is when you refer to the “smart financial types out there” when I think you mean the “smart financial types out there who use debit cards” The smart financial types that I know use credit cards instead of debit cards. As I detailed in part 2 of my review, a rewards credit card approach is always going to beat the debit card.