Everyone loves rewards but they are not as free as they sound. Cardholders chase them, though the mass market rarely does the math to understand what it takes to earn a point. In the case of a standard rewards card with 1 point per dollar spent, it takes $10,000 in spend to generate $100 in rewards.
Do the math. The average US household income is shy of $60,000. Lob off 25% for taxes and another 30% for shelter, and you are down to less than $30,000. Then assume you have the average number of household credit cards, 3.5, and it is easy to see that it takes much work, and most of a household’s transactions, to get $100 in rewards from a single card.
There are exceptions, certainly. Premium cards have great introductory incentives. Many issuers double and triple rewards for verticals frequented by business travelers. Some cards with high fees return 50,000 or 75,000 in points.
Someone needs to pay for the points. Either the merchant or the consumer with higher interest rate, or perhaps weak credit accounts that do not have reward options.
An alternative to the point-per-spend dollar is merchant-funded rewards (MFR), the topic of today’s read at Bloomberg.
- Bank of America Corp.’s partnership with Cardlytics helped it develop BankAmeriDeals, which gives the bank’s credit and debit card holders cash-back offers at retailers.
- These so-called card-linked offers have become increasingly popular among consumers and could soon capture half of the global digital advertising market, according to a survey by CardLinx.
- “This is a good example of how, based on what we know about our customers, we can personalize the experience,” says Brent Reston, who leads digital sales at Bank of America.
- Cardlytics has recently signed deals with JPMorgan Chase & Co. and Wells Fargo & Co., and the company is expected to generate $150 million a year in revenue this year.
- Since Cardlytics went public in February, its stock has jumped more than 50 percent. good news is many of those are our customers today.”
The logic of MFR makes sense. The MFR vendor scans your transactions and may find that you frequent McDonalds and spend an average of $7.41 per visit. The same vendor might have a relationship with Arbys, who might want to run a campaign to stimulate sales. The MFR vendor could sell their service to Arby’s and when they encounter a McDonalds transaction on a cardholder statement, they could generate either a virtual or physical coupon for $2.00 off.
The beauty of this function from the vendor side is that this can be done for any vertical. If you shop at Macy’s you can be rewarded with a coupon at Target. Use Shell gas? Then you can get 5 cents off at Mobil. The possibilities are endless. The biggest challenge is to build the merchant relationships so that you have persistent and fresh group of offers.
Traditional reward programs will continue for a few years, but as card profitability continues to drop, and noninterest expenses continue to climb, MFR rewards will outsurvive point rewards in years to come.
For the bank, the benefit is even better. Assuming they have the right offer, the rewards program expense can shift to the merchant partner, with a win-win-win for all segments.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
