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Credit Card Reward Chasers: Victim of its Success or is this Hogwash?

By Brian Riley
August 28, 2018
in Analysts Coverage
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Colored credit cards, debit card overdraft

Colored credit cards

Has the Sapphire card become too successful for its own good as this article proposes?

  • Since the credit-card rewards arms race ramped up a couple of years ago following the Chase Sapphire Reserve launch, credit-card enthusiasts who make a hobby of accumulating points for free travel and other perks have swelled in numbers.

  • Like card sharks in a casino, these customers tend to be very savvy, know all the rules and angles, and can eat away at a bank’s credit-card profits.

  • Chase has gained widespread attention for its lavish rewards program, but profitability in its card division has fallen as it spends billions on rising rewards costs.

  • The shutdown cases are anecdotal, but they suggest that Chase may be taking a harder line with credit-card gamers who open too many accounts.

There is no doubt about the success.  Mercator covered the product in July 2017 and opined that the super premium travel reward cards are not sustainable.  A year later, in this June, we updated the rewards market and noted some of the changes issuers made to downgrade reward programs.  The biggest challenge is not in rewards, it is that profitability is floundering.  You can see the stress on the credit card Return on Assets in this document.

However, for now, let’s stick with the premise of this article.

  • Chase quickly amassed hordes of excited customers, despite forgoing traditional marketing and relying on word of mouth. It eclipsed its one-year sales target in the first two weeks, despite a hefty $450 annual fee. It temporarily ran out of the card’s signature metal core.

  • The viral reaction to the Sapphire Reserve’s launch caught the attention of rival card companies competing for a slice of the industry’s $183 billion in fees and interest. Copycat efforts were launched over the following year to keep pace with Chase’s juggernaut, taking to new heights an already expensive and years-long battle to attract credit-card customers by hurling juicy rewards perks at them.

  • Chase, thanks to the Reserve as well as a number of other new cards it’s launched in the past year, has succeeded in luring millions of new customers. Yet the rewards arms race and the new clientele the bank has attracted have taken a toll. JPMorgan’s card income has fallen by 25% in the past two years amid soaring rewards expenses.

Too much of a good thing?  Honestly, I am a big Chase fan and believe in the comments made in the second bullet that follows below.

  • Chase declined to comment specifically on the shutdown incidents cited by customers, or whether it had targeted certain types of behavior to rootout, but said the company gears its products toward long-term customers.

  • “We want to build lifelong relationships with our customers. We know our engaged, long-term customers are more satisfied and we design our products with this in mind,” a company spokeswoman said in a statement.

  • According to Chase’s rewards program user agreement, cardholders can lose points or immediately have their points revoked if Chase closes the account because it suspects misuse of the rewards program “by repeatedly opening or otherwise maintaining credit-card accounts for the purpose of generating” It doesn’t lay out the criteria for determining such misuse.

But, rewards are not free.  $22.6 billion is a lot of dinero.

  • A study by personal-finance website Magnify Money estimated that rewards spending jumped from $10.6 billion in 2010 to $22.6 billion in 2016 among the six largest credit-card issuers: American Express, Bank of America, Capital One, Chase, Citigroup, Bank of America, and Discover.

  • For Chase, profitability from its card business has fallen as rewards spending has climbed.

  • Card income dropped 25% in the past two years, from $5.9 billion in 2015 to $4.4 billion in 2017, while spending by Chase’s credit-card customers increased 26%, from $496 billion to $622 billion.

  • And credit card net charge-offs— delinquent debts the company deems unlikely to be collected — at Chase increased from $3.1 billion to $4.1 billion between 2015 and 2017, a 32% uptick.

So for now, get rewards while you can.  We think you’ll see some across the board changes pretty soon.\

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

 

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