In an unsteady economy, credit card issuers are attracting the most profitable customers by offering lucrative introductory benefits. These come at a significant cost to issuers, but in a world where high-end credit cards come with annual fees in the hundreds of dollars, users have come to expect immediate rewards in return.
In a new report, Credit Card Acquisitions: An Intro to Introductory Offers, Brian Riley, Director of Credit at Javelin Strategy & Research, explains why these offers are so critical to card issuers. One factor that helps make them work: a key accounting technique that amortizes the incentive cost over the anticipated card’s lifetime.
Constructing the Offer
From 2016 to 2025, the number of credit cards in use in the United States rose by nearly 50% while the adult population grew by just 10%. Clearly, issuers are doing something right in enticing customers to sign up for cards. But those decisions carry a cost. Introductory rewards represent a significant investment in the accounts, typically ranging from $200 to $500. For high-ticket cards such as American Express Platinum, Chase Sapphire, or Citi Prestige, the cost will be closer to $1,000.
“When you’re constructing the offer, there are ways to enhance it,” Riley said. “You see the premium cards really standing out now with a lot of benefits, such as the customer having to spend $3000 in 90 days to get $1,200. The reason for that is to get the card activated early in the situation.”
For issuers, the challenge is to devise an introductory offer attractive enough to generate customers but conservative enough not to strain the card revenue model. These introductory offers are typically conditional, requiring the customer to meet a purchasing threshold to earn the reward.
That’s a necessary step, because it’s the way to quickly put a new account into positive territory. A new account generally costs between $175 and $250 to book, so if the customer is making only modest purchases, the account will not land on the positive side of the revenue curve for up to three years.
Creative Accounting
Programs like these require a sizable outlay of funds at the onset. One of the methods issuers have found for managing these costs takes advantage of an FAS accounting rule that lets them amortize the expense over seven years, or 84 months. Rather than taking an upfront hit of something like $1,000, they are able to take it out at $12 a month.
JPMorgan Chase CEO Jamie Dimon clearly understands this dynamic. “One of the fictions here is that the marketing cost gets booked over 12 months,” Dimon said earlier this year on CNBC’s “Squawk Box.” “The benefit of the card gets booked over seven years. The card was so successful that it cost us $200 million, but we expect a good return on it. I wish it were a $400 million loss.”
This technique helps card issuers cover the costs of their introductory offers while expanding their pool of cardholders, but not every bank takes advantage of it. Some banks instead employ asset-based securitization, whereby they use their current funds to fund their credit cards, then take those into capital markets and sell the portfolios.
Getting the Customer’s Attention
Consumers who earn a 100,000-point reward when the card is activated but start revolving on the card are going to quickly diminish their rewards, especially if they are paying the average interest rate of 23%. People get the card for the points, but they need to keep an eye on the long haul and the full numbers involved. Riley reinforced the idea that consumers need to always use the card with their own interests in mind.
“The top brands are pretty aggressive in using introductory offers, for a couple of reasons,” Riley said. “There’s often an issue where people get a credit card, but never trigger it or take a long time to do it, while the issuer wants it to be just a natural thing for people to use.
“But there are opportunities to grow by making their offer more attractive. They have to educate consumers when they do it because consumers go in and ask, ‘How many points will I get for this relationship?’ They really need to understand the full scope of what’s in that offer. And it’s not just rewards. It’s the incentive to get more payments up front for using the card.”
Javelin’s research shows that 40% to 60% of people will carry a balance from month to month. Although issuers make a lot of money on such users, this doesn’t mean they should necessarily fill their portfolio with people who don’t pay their balance every month. Although the interest can be lucrative, issuers need to remain sensitive to this in the context of the initial reward.
To Fee or Not to Fee
When assessing credit cards, Javelin breaks them into two worlds: cards without fees and cards with fees. Issuers need to convince people that the fee will be a worthwhile investment for them. Consumers need to choose cards with the same calculus in mind.
“On my Amex card, for instance, I can get the same card with 3% back on groceries if I don’t pay a fee,” Riley said. “If I do pay a fee, I get 6%. When you start doing the math, it will equate to a benefit there.
“Same thing goes with premium reward cards: The 100,000 points you get from Chase for signing up are built into its whole fee structure. The account has to become a profit center. I need to be able to make money on that particular card I’m lending to that particular person to make the whole proposition work.”
