As card profits continue to tumble expect card issuers to take a more conservative view on rewards. Earn them, use them, as soon as you can before the tides turn.
Today’s WSJ covers the topic in detail.
- The ultra-premium rewards of the kind that JPMorgan has championed have turned into financial albatrosses. Big banks calculated that giant rewards would make consumers spend more, earning the banks more interest and boosting their returns. They calculated wrong.
- Consumers have figured out how to game the system, spending just enough to earn generous sign-up bonuses—then abandoning the cards in a drawer. Others pay their bills in full and avoid interest charges and late fees.
- Now banks face increasing costs associated with the cards. Rewards costs grew an average of 15% in the third quarter of 2018 from a year earlier at Bank of America , Citigroup Inc., JPMorgan, U.S. Bancorp and Wells Fargo & Co., according to bank analyst Charles Peabody.
Mercator Advisory Group watches credit card rewards like a hawk. We often question the business model.
- Mercator Advisory Group, a payments consulting firm, predicts that credit cards will deliver a return on assets in 2019 of 3% to 14 large banks highly concentrated in the card business, down from nearly 5% in 2014.
- JPMorgan, Citigroup and other large banks, including American Express , are discussing how to cut back or rejigger some of their cards’ rewards, according to people familiar with the matter. The banks don’t plan to end rewards, but want to shift them in ways that encourage more card usage and scale back upfront bonuses, the people said.
- Getting the calculation right—without alienating customers—is crucial. Credit cards account for an average of about 14% of revenue at Citigroup, Bank of America, JPMorgan Chase and Wells Fargo…
- Rewards competition began to heat up in 2013 when Discover launched the it card. A year later Citigroup created the Double Cash card, which also offered hefty rewards at no annual fee. Many banks view the rewards as a way to reach younger consumers and turn them into bigger clients by selling them other products, including wealth management services, as they graduate to bigger jobs and paychecks.
So with your Credit Policy hat on, look at your revenue dynamics; if you are a consumer, get ‘em while you can!
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
