You can’t argue that credit card rewards stimulate spending after almost 35 years since Citi’s American Airlines AAdvantage test, but they come at a price. Some will argue that the best programs come with higher fees. Others argue that they are a losing proposition for credit card revolvers, but at least for now, they are a strong feature in the U.S. Market. There are some signs of weakening as credit card issuers search for net income opportunities.
Consider the article in the WSJ which claims American Express May Become Less Rewarding.
- American Express AXP +0.51% has successfully weathered the great credit cards reward war. Now rapid lending growth sets it up for future risks.
- In recent years, stepped-up competition in the premium card space, especially from major banks such as JPMorgan Chase and Citigroup, had raised concerns that Amex’s rewards to cardholders were insufficiently generous. Amex has proven these concerns to be overdone. Evidently the company’s strong brand, its reputation for customer service and some unique offerings like its chain of airport lounges can make up for a lower rate of rewards or cash-back payouts.
The report cites estimates by Credit Suisse that indicate Amex rewards paid back 1.1% of customer spending in rewards. Chase and Citi spent 1.9%. Discover was at 1.3% and Capital One at 1.2%
But, when it comes to return on reward dollar spent, Amex looks very strong, says the WSJ.
- Buoyed by this performance, Amex shares are up 17% over the past year, compared with a mere 2% rise in the S&P 500.
- The intensified competition does highlight Amex’s dependence on transaction fees, though—especially on its charge cards that don’t typically carry balances from month to month.
- Big banks can afford to give away more per transaction on credit cards because they make it back on interest or even use the rewards to tie customers into broader banking relationships.
- At its annual investor day on Wednesday, Amex’s chief financial officer stressed that fees still will account for at least three-quarters of revenue over the next 10 years, compared with 81% in 2018.
In a separate article at Tearsheet, Citi’s head of customer engagement and innovation says rewards are worth it, particularly when online redemption is available.
- With all the choices consumers have to shop today, rewards programs are real differentiators. Turns out that 89 percent of consumers are more loyal to the stores or businesses where they are a rewards member. But just offering a rewards program is table stakes now — it has to be easy to access and easy to redeem.
- Loyalty programs are incredibly important to consumers when they make purchase decisions. We recently did a study of 1000 consumers and 89 percent said that they are more loyal to the stores and businesses where they are a rewards member.
- When you think of a payments organization, we want to give our customers a reason to use our card for every single purchase they make. Rewarding them with points that they can redeem for exactly what they want is a big driver of that engagement.
Digital engagement works.
- We leverage an omnichannel approach to our marketing. We want to speak to our customers in the way they want to be spoken to and where they are anyway. We look at purchase behavior and previous response to marketing to determine the best offer to show them and where to show it.
Rewards are one reason the PLCC market has been so strong, also. Today, Comenity announced a nice win with Sephora
- For this highly anticipated launch, Sephora partnered with Alliance Data (NYSE: ADS) to bring its first credit cards to market. “We are excited to be working with two stalwarts in the industry with Alliance Data and Visa, to offer a premium product that exemplifies the Sephora ethos,” added Zaretsky.
Rewards are not cheap and with the U.S. interchange where it is, good programs can be funded. But keep an eye on the longevity of product enhancements which continue to whittle away. This article talks about American Express’ plan to discontinue its free Boingo WiFI service on their Platinum Card, a nice perk.
Perks, here to day, gone tomorrow. Enjoy the credit card reward points while you can.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
