Competition among major credit card issuers continues to intensify as generous rewards programs drive customer acquisition, spending, and loyalty — but they are also creating mounting costs for banks. Recent earnings results from JPMorgan Chase highlight how increased rewards redemption activity can materially impact profitability, even during periods of record earnings. As consumers become more strategic about maximizing points, cashback, and travel perks, banks are being forced to carefully balance growth, customer engagement, and the rising expense of maintaining premium rewards programs.
It is not the first time that under-accrued reward expenses impacted an otherwise strong earnings report. In prior quarters, Citi and Amex had similar experiences recently as consumers become strategic about credit card rewards. CNBC talks about Chase’s record $8.32 billion profit, though an unexpected $330 million charge due to credit card reward redemption stands out as a business issue.
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Buried in an otherwise positive second-quarter earnings report Friday, in which the bank announced a record $8.32 billion profit, was the admission that credit-card customers were redeeming points faster than anticipated, resulting in a $330 million charge.
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Savvy credit-card users have forced JP. Morgan Chase to pony up more in rewards payments than the bank originally projected.
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The initial run of that card sapped quarterly profit by as much as $300 million, the bank said in December 2016.
This can be dismissed as a “good problem” since more usage generates more rewards but the swing still exceeded more than a quarter of a billion dollars. One would expect accruals to align as quickly as purchases.
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Credit-card issuers scrambling to sign coveted high-spenders have sparked a rewards war in recent years. J.P. Morgan ratcheted up the competition in 2016 with its Sapphire Reserve card, which came with lavish perks including a 100,000-point signing bonus and triple rewards for travel and dining.
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The initial run of that card sapped quarterly profit by as much as $300 million, the bank said in December 2016.
For now, Chase should certainly relish record profits, generating more than two billion dollars a month.
