Earlier this month, the Wall Street Journal reported major banks are looking for ways to make credit card reward and benefit programs less generous. They wrote:
JPMorgan, Citigroup and other large banks, including American Express Co., 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.
I mean, of course? These banks would like to acquire customers more cheaply than they do now, and they would like those customers to generate more revenue. I, meanwhile, would like to be taller. It’s nice to want things; that doesn’t mean you’re going to get them. Don’t worry: These banks have reasons they are stuck giving out large rewards, like it or not.
I spoke with David Gold, who spent years creating and managing reward-card programs at major banks, and who now consults with banks and their corporate partners in issuing credit cards. His advice to cardholders is this: Rich reward cards aren’t going away, but benefits and features that provide “outsize value” and cause customers to become unprofitable may be at risk.
What kinds of benefits and features are those? Roughly, they’re the kinds where a savvy or eager customer can get a lot more value (and impose a lot more cost on the issuing bank) than the average customer. For example, Citibank has twice needed to trim fourth-night-free hotel benefit included with the premium Citi Prestige card because customers found ways to extract so much value from it. For now, this is an unlimited benefit, but beginning in September a cardholder will be able to use it only twice a year, limiting the bank’s cost exposure to any given customer.
Another example is price protection: For years, high-end credit cards offered programs where you could contact the bank if you bought something that later went down in price, and they’d refund you the difference. Monitoring these sorts of price changes was a pain and few cardholders did it. Then, web services like Earny came along to track price changes automatically and make it easier for customers to file price protection claims. Many customers did, the banks took a bath, and they’ve been eliminating the benefit from cards as a result.
A third example is generous lounge-access policies. When Chase launched its premium Sapphire Reserve card in 2016, cardholders received access to the PriorityPass network of airport lounges, and were allowed to bring an unlimited number of guests with them on visits. You read that right: unlimited.
“I know of people bringing 17, and over 30, guests,” says Gary Leff, who writes the View From the Wing blog on travel and credit card rewards programs. That was great for cardholders and their large groups of friends, but not so great for Chase, which had to pay for all those lounge visits. Now Sapphire Reserve cardholders are limited to a more reasonable allotment: two guests.
Setting the need for those adjustments aside, reward cards are still an important business for banks. They attract affluent customers who spend a lot, generating transaction fees to the banks from retailers. The cardholders pay annual fees. And sometimes cardholders don’t pay off their balances every month, even though they expect to, allowing the banks to make money from interest charges. The banks also hope establishing a strong credit relationship will help them make money from the same customers, for example by selling them checking and brokerage products.
The need to attract those customers means a need to keep paying those big sign-up bonuses that the Journal describes banks as complaining about. Otherwise, the customers don’t show up. The Journal reports Barclays tried introducing a card last year with no sign-up bonus at all; instead, they offered a “sustainable” benefit that rewarded customers every year for spending big. You will not believe what happened next: The card found few takers and Barclays stopped offering it.
That said, the very largest opening bonuses may be a thing of the past: Chase has cut its 100,000-point opening bonus for Sapphire Reserve down to 50,000 points. That’s still about $750 of value just for opening a credit card account.
I wrote a few months ago about a longer-range threat to the generosity of credit card rewards: efforts by retailers to reduce what they pay in transaction fees to the credit card issuing banks. A coalition of retailers including Amazon and Target is suing to invalidate credit card network rules that limit retailers’ leverage over fees.
The litigation is unlikely to hit cardholders in the short term. But the nearer-term threat to the great banking credit card boom is not customers or lower fees: It’s Amazon’s own market power and strategic choices. In October, I examined how Costco has been uniquely successful in holding down its credit card acceptance costs:
Costco does not take whatever credit card you want to use; the warehouse club long accepted only American Express, and it switched in 2016 to take only Visa, striking a deal that gives it a steep discount on credit-card processing in exchange for exclusivity. But Costco is a membership club with highly committed customers who pay annual fees. And Costco shoppers are used to trading choice for cost savings: You buy whatever brand of ketchup Costco has, and you use the credit card they tell you to use.
Most retailers can’t copy the Costco strategy because they’d have to worry about losing customers. But maybe Amazon could. Amazon is increasingly reliant on business from its Prime subscribers, who demonstrate commitment to the retailer by paying an annual fee similar to Costco’s membership fee. And Amazon has large convenience and selection advantages that would give shoppers a reason to put up with restrictions on how they can pay.
Another recent Journal story describes how Amazon has gained the upper hand in its relationship with JP Morgan Chase, the bank that has long been the issuer of Amazon’s co-branded credit card. Amazon significantly improved its financial terms with Chase in a recent renegotiation of the deal between the two companies, the Journal says. Amazon is also taking its own steps toward offering payment products.
Amazon’s upper hand with Chase is part of a broader trend in the reward-card business: In negotiations with co-branding partners, the banks have less power than they used to. This is partially because the credit card business has gotten more competitive at the same time the airline and hotel businesses have gotten more consolidated. As more banks pursue business with a smaller number of prominent travel-industry firms, those firms have more power to demand a larger fraction of the profits from the cards they work together to issue, and they have been doing so.
More ominously for JP Morgan and other banks, it is not hard to imagine Amazon going further down the Costco road in the future: restricting customers’ payment options to a set with favorable costs to Amazon, whether because Amazon owns the payment vehicle you’re using, or because it’s cut a favorable deal with a bank to design it. Amazon is one of the few retailers with the clout to credibly threaten to leave the Visa or Mastercard network if they won’t allow it to impose the terms it wants.
In the long run, if Amazon finds a way to do this, that’s likely to rebound as lower credit card rewards to you (and also as lower retail prices at Amazon). But so long as we’re mostly worrying about banks wanting higher profits, I wouldn’t worry too much about what that means for card rewards.
