Sky-High Rewards and the Race to the Top: Can the Good Times Last?

Sky-High Rewards and the Race to the Top: Can the Good Times Last?

Sky-High Rewards and the Race to the Top: Can the Good Times Last?

Charles Keenan

Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people's living rooms thanks to the relaxation of surcharging rules.

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For consumers, it's a golden age for credit card rewards. Big bonuses for opening accounts abound. Cards without annual fees are everywhere. And it's not uncommon to reap two, three and sometimes five points for every dollar spent.

But can the good times last? For now, yes. Long term...maybe not. The largest issuers are content to spend significantly to acquire new customers, and they have the pockets to do it. But for the rest of financial institutions, prudence in program design might make more sense.

Sky-high rewards

Things really amped up in 2016 when JPMorgan Chase offered an extraordinary 100,000-point sign-up bonus for its Sapphire Reserve card, with no annual fee for the first year and $450 per year thereafter. It sent shockwaves through the industry. It also helped Chase take market share and boost overall purchase volume by 13.8 percent in 2017 to $670 billion, according to figures by the Nilson Report, an industry newsletter.

While Chase has scaled back the offer to 50,000 points, that amount still represents a $500 liability once customers fulfill a spending requirement of $4,000 in the first three months. In the frenzy of points giveaways, other competitors have matched Chase's strategy.

Capital One's Venture Rewards card offers 50,000 points once a user spends $3,000 on purchases within three months of an account opening. American Express offers a Platinum Delta Skymiles card with a 70,000-point bonus.

A Golden Age For Credit Card Rewards - 68% of consumers ranked rewards as the most attractive feature. -TSYS' 2017 U.S. Consumer Payment Study

On the premium end, geared toward high incomes and high net-worth consumers, the cards typically carry lots of other perks, including a few hundred dollars in travel credits, generous reward multiples and airport lounge access. In theory, high annual interchange fees help offset program expenses.

Nevertheless, it's an expensive arms race of sorts that's being played out especially by the top issuers. "Economically, there is a battle going on," says Rod Boyer, group executive of loyalty at TSYS.

Deep pockets, bigger problems

While issuers have deep pockets, there's one big problem spending can't fix: consumer capriciousness. Annual attrition rates are historically expected at 15 percent, allowing issuers to amortize acquisition costs over a roughly seven-year period during the average life cycle of the customer.

Yet attrition rates could be much higher for some programs, especially those with a steep annual fee that kicks in after the first year. For example, Chase's Sapphire Reserve charges $450 in year two, so there's risk in a customer bolting for another card near the anniversary date.

"It becomes a 'Why?' proposition, as opposed to year one, when it was a no-brainer," says Brian Riley, director of Mercator Advisory Group's Credit Advisory Service. "It just really proves you can’t buy loyalty," he says.

Sixty-eight percent of consumers ranked rewards as the most attractive feature of their credit cards, according to TSYS' 2017 U.S. Consumer Payment study. But if those rewards are perceived to have dried up or diminished in significance, it's presumable that consumers could move on to the next hot card.

Another threat to card profitability coming down the road includes potential interchange reductions. U.S. issuers, which typically charge 2 percent, are living on borrowed time, Riley predicts. Europe, for example, lowered interchange to 30 basis points, well below the United States. That difference won't hold up over time, he says.

"If you are building a [loyalty program] that's intended to be funded through interchange, then you better start looking over your shoulder, because sooner or later, that wall is going to fall," Riley says.

Issuers need to consider a number of tactics to build long-lasting rewards programs, such as:

  1. Build a sustainable offer: "It's important to have a well-constructed offer," Riley says. "You really can't give away the bank at the end of the day. You have to be practical. How do you protect that long-term relationship?"

  2. Cross-sell: "It's crucial to think about how your issuing base is being leveraged across your broader bank's core product base," Boyer says. "You have to think about it more holistically than just 'How rich is your earn?'"

  3. Emphasize consistency: "Make sure you are consistent, cohesive and seamless across channels," Boyer says. "Make it as simple as possible and friction free for digital." Ease of access from other accounts with the institution is also important.

  4. Engage customers: Issuers are now using technology to increase the amount of communication between cardholders and banks. It could be as simple as letting customers know their accounts are being watched for fraud, with alert options via email and text. "Continue to offer not so much incentives, but opportunities," says Kevin Morrison, a senior analyst at Aite Group. "Cardholders want to see effectiveness in their communication."

  5. Integrate instant rewards: Providing instant rewards at the point of sale will also help retention, Boyer notes. Instant rewards are still in their infancy, but will likely become more commonplace over the next few years. "Go to where they are interacting — how they want and when they want," he says. "Sustainability involves freeing up points for the customer."

Consumers' ever-changing preferences are a fact of life, but it is possible to have staying power in rewards with the right tactics.

The statements and opinions of the writer do not necessarily reflect those of TSYS.

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Charles Keenan

Charles Keenan has written about payments since joining the American Banker as a staff reporter in 1997, a time when automated teller machines were appearing just about everywhere but people’s living rooms thanks to the relaxation of surcharging rules.

His work at the American Banker included writing about credit and debit cards, merchant processing, and bank stocks. He later freelanced for the Banker and industry publications such as Banking Strategies, Bank Director, Community Banker, and U.S. Banker. He also writes about investing, insurance and health care, and is based in Los Angeles.

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