Pressure on interchange fees has prompted credit card issuers to seek new ways to structure and fund rewards programs. Card-linked offers (CLO) are emerging as one solution, allowing issuers to drive loyalty without relying solely on interchange-funded points and miles.
American Express, Chase, Citi, Capital One, and Bank of America are increasingly incorporating CLOs to boost engagement, strengthen customer relationships, and generate additional noninterest revenue.
Card-Linked Offers: Keep Rewarding Consumers, but Shift the Narrative, a report from Javelin Strategy & Research, examines how and why card companies are embracing this strategy. As more jurisdictions threaten the interchange fees that have long supported rewards programs, issuers need to prepare for a potential decline in that revenue. Brian Riley, Director of Credit at Javelin, cautions, “It’s important for issuers to be thinking: What is my strategy if and when that ever happens?”
The Threat to Interchange Fees
The precedent was set in 2010, when the Dodd-Frank Act capped interchange fees on debit card transactions, disrupting a key source of funding for rewards programs. Many debit cards subsequently lost their rewards. Today, U.S. issuers continue to face pressure from merchants and regulators to lower interchange fees, with proposals in several jurisdictions seeking to eliminate fees on transactions involving taxes and tips. Issuers need to prepare for the possibility of further reductions in this revenue.
“When that action happens, it will happen quickly,” said Riley. “They won’t say it’s a wind down due the next five years, it will be ‘They’re out.’ What we saw with companies like Chase, when debit cards rewards went out, the day after that announcement, reward programs were taken down.”
How realistic is the prospect of interchange fees disappearing—or at least shrinking significantly? The Credit Card Competition Act, which would encourage competition among payment networks and potentially lower interchange fees, has circulated in Congress for several years but has yet to gain much traction.
Merchants, however, continue to push for lower credit card interchange rates, which approach 2% in the U.S., compared with roughly 0.3% in Europe. European issuers have responded to lower interchange revenue in part by charging higher annual card fees and offering different interest rate tiers.
“The U.S. stands out as having very high rates,” said Riley. “You have other jurisdictions like Europe cutting fees this aggressively, and Australia doing it aggressively. You have merchants here now pushing the Card Competition Act for yet a third time. Sooner or later, it’s going to hit the right arena and there’ll be some kind of action on it.”
Inside the Card-Linked Offer
As premium cards gain popularity, issuers are looking for new ways to justify annual fees that can run the hundreds of dollars.
Traditional rewards programs typically award points based on spending. A cardholder, for example, might earn 100,000 points for using a particular card and then choose from a set of redemption options designed for that card’s customer base.
CLOs work differently. Rather than rewarding spending alone, they offer discounts or other incentives tied to specific merchants and, in some cases, individual products.
Issuers may make CLOs available across multiple card products while tailoring the offers to different customer segments. Chase Freedom, for instance, offers discounts ranging from 10% off a cheeseburger at Johnny Rockets to $8 off an AARP membership. Cardholders can often stack these offers with their regular rewards, earning points on a Chase Visa purchase while also receiving the discount.
Targeting the Offers
One challenge with CLOs is relevance. Issuers may present dozens of offers, but only a handful are likely to appeal to any given cardholder. Artificial intelligence could help narrow the gap between the offers available and what customers actually want.
Chase could use AI to analyze its merchant portfolio and identify fine dining restaurants in a particular ZIP code. Instead of presenting cardholders with a long, generic list, issuers could use such tools to surface offers based on location and individual preferences.
Bank of America might present a shopper with 100 options, but if only two or three are relevant, the customers may be reluctant to sift through the list. Over time, will could help issuers target these offers more efficiently, matching dining deals to one customer and outdoor adventure activities to another.
“When I look at the American Express offers once a month, maybe there’s one that could be Sherwin Williams paints that will save me $10 when I spend $50,” said Riley. “And that would be targeted to me, but things like restaurants in New York wouldn’t necessarily do it for me.”
“If I’m going to make a purchase at Home Depot, I’m typically going to Capital One Shopping first to see what Lowe’s has, and whether can I defray the cost,” he said. “That’s where AI has a role in being able to do better targeting.”
Key Takeaways
Interchange fees remain a potential vulnerability for rewards programs, making it important for issuers to develop alternatives before revenue declines. If fees are reduced and issuers want to preserve rewards, they may need to adjust account pricing or other program terms. Building CLOs into existing rewards strategies could provide a useful complement—and a fallback if interchange revenue comes under further pressure.
CLOs also create an opportunity for local businesses, since many offers encourage cardholders to shop and spend in their own communities. But maintaining relationships with merchants across hundreds of local markets can be challenging for large national issuers.
That creates an opening for regional and community banks, which may be better positioned to leverage their local relationships. For larger issuers, the challenge will be delivering on promises to support local businesses at scale.
“Smaller banks are able to go into those markets locally,” said Riley. “That could give them a good home court advantage.”
