SoFi Smart Card Pits Debit Rewards Against Credit Cards

The exclusive new SoFi Smart Card supports spending, savings, and rewards. In addition, this debit card helps users build credit. The card is a pipeline into the owner’s checking and savings accounts. Members earn rewards even though this is a debit card — no credit line needed. Non-SoFi members will have to wait to get one.

Debit reward products are increasingly popular. These cards can offer better rewards because debit transactions are less costly. The secret is that debit cards have lower interchange fees. This leaves more money available for rewards and services. The savings also protect margins.

There was a time when consumers had to turn to credit cards to earn spending rewards. Debit cards have blurred that line. Fintechs now use rewards and perks to hawk debit products. In other words, no revolving credit needed.

That rewards angle is important for card issuers. It helps them decide how to compete for loyalty. Credit card issuers have prospered by offering rewards, but now see a new class of competition from the debit side. Indeed, some fintechs offer airline-type perks with their debit cards.

Younger users are listening. They like rewards but not credit commitments. CardRates recently covered the rise of airline rewards debit cards. These products appeal to younger and fee-hating consumers.

The Smart Card fits right in. Users get rewards and financial tools within one account. That may change how prime consumers think about value when they spend, save, and collect rewards.

SoFi puts it this way: “With 5% cash back rewards on grocery store and grocery store delivery purchases using the SoFi Smart Card, members could save over $600 annually based on typical monthly grocery spending.”

Consumers are catching on to the debit rewards gambit. These worthies want to avoid fees and enjoy efficient products. Fintechs are smart. They see the potential to promote debit rewards as an alternative to traditional credit.

The debit reward programs are a laboratory for testing new designs for consumers who want to avoid interest charges. Many of these same consumers want simplicity and predictability. Account-based perks fulfill these needs. The Smart Card follows that strategy by linking rewards to balances and activity inside the SoFi ecosystem.

So now debit has become a more important solution than just basic banking. Fintechs are free to formulate novel reward structures that attract younger consumers. These are the customers who prefer steady and easy-to-understand benefits.

SoFi Plus members can get the new Smart Card. The company knows it’s a savvy way to construct a payment system that operates on a closed loop.

The competition for entry-level card users is intense. After all, landing a newbie is one of the best ways to build brand loyalty. Many of these customers begin with debit cards and then “graduate” to credit products. A hybrid product like the Smart Card may delay that move. SoFi aims to keep members within one account for spending and saving.

Perceived value may come down to a rewards bidding war. Credit cards are saddled with those pesky interchange fees that restrict their flexibility (or increase cardmember costs). Now credit card issuers have to think hard about the best ways to stave off the debit card pressure.

The ingenious part of the Smart Card offering is that customers can build credit using their own deposits. They can build credit without debt or interest charges. Issuers will have to pay more attention to planning their entry-level products.

The Smart Card also promotes a holistic approach. Customers can centralize their banking, spending, and credit-building functions in one place. Issuers may have to rethink how they design their portfolio and engage new customers. 

SoFi is whittling down the distinction between debit and credit. Credit issuers may respond by offering broader perks over a wider range of bundled accounts.

The Smart Card intensifies the competition between credit and debit. The card provides a single account to SoFi members that blends rewards, savings, and credit building. Credit card issuers cannot ignore this trend. They will have to find new ways to attract and hold customers — especially younger ones.