Rewards Credit Cards Gained A Fanatic Following—Now Banks Are Pulling Back (#GotBitcoin?)
Major perks like airfare and cash back were meant to lead to higher returns. But consumers figured out how to game the system. Rewards Credit Cards Gained A Fanatic Following—Now Banks Are Pulling Back
Blake DiCioccio and her husband, Jason, flew around the world in business class in 2017, from San Francisco to Taipei, Tokyo to Belgrade, and Frankfurt back home. They didn’t pay for it. JPMorgan Chase & Co. did.
The DiCioccios signed up for two Sapphire Reserve cards from the bank several months before their trip, on an offer that scored them hundreds of thousands of points, which they combined with points from their other rewards cards. They use credit cards as much as possible—even for small purchases—and strategize when to use Sapphire Reserve versus their other cards based on the points each offers. Mr. DiCioccio recently signed up for an American Express Platinum card, and the couple is now thinking about canceling one of their Sapphire Reserve cards to avoid the $450 annual fee.
“It’s a game really—like poker,” said Ms. DiCioccio, 34 years old. “Some people come to the table knowing all the strategy and they have the best chance to win.”
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.
After ratcheting up the perks for several years, banks hit peak rewards frenzy about two years ago. 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 Corp. , Citigroup Inc., JPMorgan, U.S. Bancorp and Wells Fargo & Co., according to bank analyst Charles Peabody.
As of the third quarter, JPMorgan’s credit-card holders had accrued $5.8 billion in rewards they had not yet redeemed, up 53% from the end of 2016, according to securities filings.
“For a lot of consumers, a credit card is the first step in a bigger financial relationship, and we’re already seeing success with Sapphire customers doing more business with Chase,” said JPMorgan spokeswoman Mary Jane Rogers.
Compounding the problem for banks: Interchange fees—paid by merchants to banks whenever customers shop with a credit card—are under pressure.
The fees are a primary source of funding for rewards programs, but retailers are trying to lower them. Merchants including Amazon.com Inc., Target Corp. and Home Depot Inc. are pushing through lawsuits for changes that would lead to lower fees, and bank executives worry that such a shake-up could make some of the more generous rewards programs unsustainable. Merchants paid card issuers $43.4 billion in Visa Inc. and Mastercard Inc. credit card interchange fees in 2017, up 68% from 2012, according to the Nilson Report.
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 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.
Risk And Rewards
Banks face increasing costs from reward cards as consumers have figured out how to game the system.
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, according to an analysis by Autonomous Research.
JPMorgan executives debated whether to stop letting cardholders pool together points from multiple cards, according to people familiar with the matter. JPMorgan’s Ms. Rogers said the bank has no current plans to stop cardholders from pooling points.
Citigroup plans to cap the number of times each year its Prestige cardholders who stay at hotels four consecutive nights can get the fourth night free. A Citigroup spokeswoman says the bank is focused on fostering long-term relationships with cardholders.
AmEx has been introducing cards with fewer sign-up bonus points. An AmEx spokeswoman said the company is offering other bonus options, such as statement credits based on restaurant charges.
The banks face rewards enthusiasts who take pride in wringing the most benefits from each card.
For example, many cards offer “tiered rewards,” where only certain purchases qualify for the most generous cash-back terms. That’s no obstacle for customers like Tony Rodriguez, a 34-year-old Ph.D. student in Knoxville, Tenn.
Mr. Rodriguez and his girlfriend, Whitney Forbes, use the AmEx Blue Cash Preferred card for groceries, earning 6% back on up to $6,000 of purchases a year, and for gas, which earns 3%. They use Discover Financial Services ’ “it” card and a Chase Freedom card for purchases that qualify for 5% cash back. Those items change every quarter, so Mr. Rodriguez keeps a list on a slip of paper in his wallet. Everything else goes on their Citi Double Cash card, which gives 1% back on all purchases and 1% back when they pay off the bill.
Mr. Rodriguez, who is studying industrial engineering, began shopping around for cards about 2½ years ago. “Soon, I realized there’s all sorts of free money,” he said.
Big banks pushed into credit cards after the financial crisis to offset a slowdown in their trading and mortgage units. JPMorgan and Citigroup poached top executives from AmEx, which made premium rewards—with a high annual fee—its calling card for decades, and copied the strategy.
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.
Credit Card Report
While credit card openings have leveled off in recent years, consumers are closing cards more often—and banks have pared back on certain rewards.
Merchants also typically pay higher swipe fees on the more generous Visa and Mastercard rewards cards—typically more than 2.1% of a purchase on premium rewards cards, compared with roughly 1.2% to 1.7% on more standard rewards cards.
For the next couple of years, banks competed to come up with increasingly flashy cards. The frenzy reached a peak when JPMorgan introduced Sapphire Reserve in August 2016, offering 100,000 bonus points for consumers who charged $4,000 in the first three months, three points per dollar spent on travel and dining and a $300 credit on travel purchases, among other perks.
JPMorgan’s Ms. Rogers said two years in, the bank had seen record retention levels topping 90% for its Sapphire Reserve customers.
At an investor conference, AmEx called it a “full frontal assault” to its longstanding Platinum card. Despite Sapphire Reserve’s $450 annual fee, customers flocked to it so quickly that JPMorgan ran out of the metal cards and reached its first-year goal for new accounts in two weeks.
Within a few months, JPMorgan had misgivings about the card’s costs. It halved the bonus points to 50,000 and dialed back in-branch promotion of the card.
The Sapphire Reserve card proved great for business for Brian Kelly, who started the rewards website The Points Guy as a hobby in 2010, while working in human resources at Morgan Stanley .
His website helped spawn an ecosystem of rewards fanatics across the internet who swap tips about card deals. The banks covet his favorable reviews of their cards and often turn to the site to promote them. In December, Mr. Kelly hosted a card awards ceremony in New York City, sponsored by JPMorgan, Wells Fargo and others.
JPMorgan had approached Mr. Kelly in spring 2016 to ask how his company would market an upscale card it had in the works. He learned more details about the card, which turned out to be the Sapphire Reserve, a couple of months later while on vacation in Tanzania with his parents. The bank agreed to pay The Points Guy each time readers visiting the website started an application and received the card. The site earned millions of dollars from the card in the months after it was introduced.
Despite misgivings about the rewards programs, banks are still competing for the customers who use them, and chipping away at rewards is risky.
James Fuller of Ellijay, Ga., used to charge about $30,000 a year to his Starwood Hotels & Resorts personal and business credit cards. He and his wife, Allison, used the points to stay for free at hotels in 17 states where they ran half-marathons.
Then Mr. Fuller, a 28-year-old high-school teacher and small-business owner, saw on online forums that the hotel, which was recently acquired by Marriott International Inc., and AmEx might scale back the cards’ rewards. Sure enough, Marriott and AmEx made the cards’ points significantly less valuable last year when redeemed for hotel stays. Mr. Fuller canceled the business card and slashed his spending on his personal card to about $300 a month, from a typical $2,500.
Mr. Fuller now puts most of his purchases on JPMorgan credit cards.
“We feel confident that the majority of our current SPG AmEx card members will get more value out of the card’s new value proposition,” said an AmEx spokeswoman. A Marriott spokesman said the card remains popular and is “a tremendous value proposition.”
Rob Broadhurst, who lives in West Sacramento, Calif., saw on an online forum that JPMorgan planned to end price protection on Sapphire Reserve. In late March he and his wife, Katie Anderson, hurried to buy a new fridge for $1,599. Weeks later, when they found an online ad for the same model for $1,399, they rushed to submit a claim for the $200 difference, and soon got a check in the mail.
JPMorgan removed the card’s price protection feature in August. “It was definitely a bummer,” said Mr. Broadhurst, 34. The couple still use Sapphire Reserve, though, because they redeem the points for travel.
Banks have been lowering sign-up bonuses on premium cards since 2017, the year after JPMorgan introduced Sapphire Reserve. The bonuses averaged 66,000 points in 2016, before dropping to 58,000 in 2017 and 44,000 in the first seven months of 2018, according to consulting firm Simon-Kucher & Partners.
That is in large part because of concerns many card issuers have about “gamers,” who open cards with rich sign-up bonuses and then stop using them once they have tapped out the early rewards. U.S. credit card attrition rates, a measure of how many cards are closed each year, reached 15% in 2017, up from less than 10% the year before, according to Mercator.
The issue was flagged by AmEx’s then-chief Kenneth Chenault in 2017 when he was asked at an investor conference about competition from Sapphire Reserve. Card companies that are “driving the stakes up,” he said, are “also getting people who are gamers.”
In mid-2017, Krishnaswamy Narayanaswamy, who works in data analytics and is 54 years old, and his wife signed up for J.P. Morgan’s Sapphire Preferred, which included a 50,000-point sign-up bonus. Then the couple, based in Vancouver, Wash., wanted to ditch the card to avoid paying an annual fee—but closing the account, which was in his wife’s name, would have hurt her credit score by reducing her so-called available credit. They also didn’t want to open a brand-new account, which could have impacted her credit score in other ways, like lowering her credit limit. So she transferred to another JPMorgan card that has no annual fee, the Chase Freedom, a move that didn’t technically require closing or opening an account.
Banks are still grappling with how to wean consumers off the easy perks. Barclays PLC this past spring introduced a credit card without a sign-up bonus and instead offered up to 25,000 bonus miles each year to consumers who charged at least $25,000 on the card. Rachana Bhatt, a managing director at Barclays’ U.S. credit card division, said in an interview at the time the bank hoped to appeal to long-term customers with a “sustainable” offer.
The Points Guy website, now owned by Red Ventures, gave the card a lukewarm review.
The card failed to take off. By early October the bank stopped taking applications.
The card “represented a disruptive approach in the industry—rewarding customers for ongoing loyalty rather than just one up-front bonus,” said Ms. Bhatt. “We took a smart risk, learned fast and pivoted.”Go back