Banks do not like paying credit card rewards – but they will

Photo: Simon Dawson / Bloomberg via Getty Images

Earlier this month, the the Wall Street newspaper The big banks said they were looking for ways to make rewards programs and credit card benefits less generous. They wrote:

JPMorgan, Citigroup and other major banks, including American Express Co., are discussing how to reduce or redevelop some of the rewards of their cards, according to people familiar with the subject. The banks do not plan to end the rewards, but want to change them to encourage more use of cards and reduce bonuses, said the population.

I mean, of course? These banks would like to acquire customers at a cheaper price than today and would like these customers to generate more revenue. In the meantime, I would like to be bigger. It's good to want things; it does not mean that you will get them. Do not worry: these banks have reasons to be blocked to distribute important rewards, whether they like it or not.

I've talked to David Gold, who has spent years creating and managing loyalty card programs at major banks and now consulting banks and their business partners for credit card issuance. . His advice to cardholders is that rich reward cards do not disappear, but the benefits and features that offer "disproportionate value" and prevent customers from becoming profitable may be compromised.

What are the benefits and features? Roughly speaking, these are the kinds of customers in which a savvy or willing customer can get much more value (and impose much more costs on the issuing bank) than the average customer. For example, Citibank twice had to reduce its free hotel benefit on the fourth night included in the Citi Prestige Premium Card, as its customers found a way to extract valuable value. For now, this is an unlimited benefit, but starting in September, a cardholder will only be able to use it twice a year, which will limit the bank's costs for a given customer.

Another example is price protection: for years, high-end credit cards offered programs in which you could contact the bank if you bought something that went down in price, and they refunded the difference. . Keeping track of these price changes was a difficult task and few cardholders did it. Then, web services like Earny came to automatically track price changes and help customers file price protection requests. Many customers have done so, the banks have taken a bath and they have eliminated the benefits of the cards.

A third example is the generous policies of salon access. When Chase launched its Premium Sapphire Reserve Card in 2016, cardholders had access to the PriorityPbad network of airport lounges and were allowed to bring an unlimited number of guests during their visits. You read correctly: unlimited.

"I know people who have hosted 17 and more than 30 guests," said Gary Leff, editor of the View From The Wing blog about credit card and travel rewards programs. It was great for cardholders and their big groups of friends, but not so great for Chase, who had to pay for all those visits to the show. Now, Sapphire Reserve cardholders are limited to a more reasonable split: two guests.

Setting aside the need for these adjustments aside, loyalty cards remain an important activity for banks. They attract wealthy clients who spend a lot, generating transaction fees for banks from retailers. Cardholders pay annual fees. And sometimes, cardholders do not pay their balance every month, when they do, so banks can earn money through interest. Banks also hope that establishing a strong credit relationship will help them earn money from the same customers, for example by selling them control and brokerage products.

The need to attract these customers means the need to continue paying the big sign up bonuses that the Newspaper describes the banks as complaining. Otherwise, customers do not show up. the Newspaper reports that Barclays tried to present a card last year without any signup bonuses; instead, they offered a "sustainable" benefit that rewarded customers who spent big every year. You will not believe what happened next: the card found a few takers and Barclays stopped offering it.

That said, the biggest opening bonuses can belong to the past: Chase has reduced his opening bonus by 100,000 points for Sapphire Reserve to 50,000 points. It's still about $ 750 just for opening a credit card account.

A few months ago, I wrote about a longer term threat to the generosity of credit card rewards: the efforts of retailers to reduce the amount of their transaction fees to credit card issuing banks. A coalition of retailers, including Amazon and Target, is suing to invalidate the credit card network rules that limit retailers' leverage on fees.

Litigation is unlikely to affect short-term cardholders. But the short-term threat to the big credit card boom lies not in customers, nor in reducing costs: it's Amazon's market power and strategic choices. In October, I examined how Costco managed to contain its credit card acceptance costs:

Costco does not take the credit card you want to use; the club-warehouse has long been accepted as American Express and, in 2016, it has only become Visa, concluding an agreement giving it a significant discount on the processing of credit cards in exchange of exclusivity. But Costco is a membership club with highly engaged customers who pay an annual fee. And Costco shoppers are used to making savings choices: you buy any Costco ketchup brand and you use the credit card that they recommend.

Most retailers can not copy the Costco strategy because they would have to worry about losing customers. But maybe Amazon could. Amazon is increasingly dependent on the customers of its premium subscribers who demonstrate their commitment to the retailer by paying annual fees similar to those of Costco membership. In addition, Amazon offers many benefits in terms of convenience and selection, which gives customers a reason to impose restrictions on the payment method.

Another recent Newspaper This story describes how Amazon has taken over its relationship with JP Morgan Chase, the bank that has long been the issuer of Amazon's co-branded credit card. Amazon has significantly improved its financial conditions with Chase during a recent renegotiation of the agreement between the two companies, the Newspaper said. Amazon is also taking its own steps to offer payment products.

Amazon's advantage with Chase is part of a broader trend in the loyalty card industry: when negotiating with co-branding partners, banks have less power than they had. used to do it. This is partly explained by the fact that the credit card industry has become more competitive, while the activities of airlines and hotels have consolidated. As more and more banks continue to operate with a small number of leading companies in the travel industry, these companies have more power to demand a greater fraction of the profits of the companies. cards that they work together to issue, and this, for a long time.

Even more worrying for JP Morgan and the other banks, it's not hard to imagine going further in Costco's path: limiting customers' payment options to a set of cost advantages for Amazon, whether because of the payment vehicle you own or not. using, or because he has reached a favorable agreement with a bank to design it. Amazon is one of the few retailers to have the power to credibly threaten to leave the Visa or Mastercard network if they do not let it impose the conditions it wants.

In the long run, if Amazon finds a way to do this, it is likely that the product will come back in the form of lower rewards for credit cards (and also lower Amazon retail prices). But as long as we are concerned that banks want higher profits, I do not want to worry too much about what it means for card rewards.