Engaged Consumers Drive $330 Million In Additional Rewards Redemptions For Chase

Filed Under: Chase, Credit Cards
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JP Morgan Chase revealed their second quarter earnings today, where they reported a record $8.32 billion profit. However, there was one cost they incurred that was significantly higher than expected. Specifically, Chase credit card users redeemed Ultimate Rewards points faster than anticipated, to the tune of about $330 million.

As explained by Chase’s CFO, Marianne Lake, “This is maybe larger than we have seen over the course of the last several years. We do pretty regularly review our rewards liability in light of evolving consumer behavior.” This might sound like a negative, though it’s explained that this comes from the success of the Chase Sapphire Preferred® Card and Chase Sapphire Reserve® Card, and it’s a good thing because it shows how engaged users are.

An increase in cardmembers has led to strong loan growth, and record retention rates, so while the Sapphire Reserve initially had a big welcome bonus, users are holding onto the card and engaging with Chase in more ways, which is great news for Chase.

As Lake describes it, “engaged customers bring us more spend, they bring us more of their share of wallet.”

So what’s causing this sudden increase in credit card reward redemptions? My guess is that there are two factors in play, and they largely center around the popular Chase Sapphire Reserve® Card. The card offers triple points on dining and travel, and you can also redeem points for 1.5 cents each towards a travel purchase, which makes for an easy and rewarding points structure.

This is leading to increased rewards costs for Chase in major ways:

  • A higher percentage of spend is on dining and travel than Chase was expecting, and those categories offer rich rewards; I guess this shouldn’t be too surprising given how popular the card has been with urban millennials, who as a group spend more on those categories than just about anyone else
  • Historically I assume people would be more likely to hoard points given the challenges associated with redeeming them, but with the Sapphire Reserve allowing you to redeem points for 1.5 cents each towards the cost of a travel purchase, people are probably earning and burning their points, since you can use your points at that rate towards virtually any travel purchase

It has been fascinating to see Chase’s dominance in the rewards cards space. In many ways Chase has been so successful that it’s been problematic. The Sapphire Reserve is so rewarding for cardmembers that Chase isn’t sure they’ll ever make money on the card, though on the plus side I imagine the high retention rates and increased engagement with cardmembers is a net positive for them.

Are you surprised to see such an increase in Ultimate Rewards redemptions? 

(Tip of the hat to @HH_Cash)

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  1. It’s so silly that Chase “blamed” its customers for a “loss.” What a ridiculous story.

  2. Thank you federal reserve. An economy for the rich, by the rich. The workers are just around to keep the lives of the rich comfortable.

  3. 1. Summer travel season so more people are redeeming points for travel. Even though this is year 3 for this card I would assume some people have been saving for the big trip and are now redeeming points.
    2. On the flip side reward devaluations over the past 3 years have occurred swiftly and impacted nearly every legacy carrier. Actions like this pushes consumers to using points versus saving points.
    3. More consumers are using credit cards for all transactions, so more points are being accumulated. People who used debit cards have switched to credit cards for more security protection and coverage. Competition in this arena is good for consumers.

  4. @Jeff There was no loss and no one blamed any customers. At least pretend to skim the article next time.

  5. I’m confused. They book a liability for the points when they issue the points. Giving out more points is a different thing from redeeming the points.

  6. @ beachfan — There’s a liability when they issue points, but presumably until points are redeemed, the liability they associate with that is less than 1.5 cents per point. With more people having the Reserve, not only are people redeeming each point for more value, but there are more points with which that’s happening.

  7. Lucky,

    @beachfan is right here from an accounting perspective. The issue JPM flagged today has nothing to do with points being redeemed faster or the credit card being used at more places that have 3x. The $330M adjustment is to points already earned but sitting in folks UR award balances. The liability should reflect what the company is expected to have to pay out in the future. The company most likely has some control where they do an analysis each reporting period and realized that on average people were being more “engaged” in their redemptions and were redeeming the points for more lucrative items (they didn’t specify if those are miles or cash or what). The issue here is the company already has this big liability on the books for when they originally issued the points, using the original lower estimate of how much it was going to cost them, now they have to go back and multiply all the outstanding points by the incremental value of the updated average redemption cost.

  8. I think the reason they are not sure about making money is down to the overly generous 100k launch offer. That is a sunk cost and I bet they regret being so generous now. Day to day I am not sure it is much more of a money loser than CSP or some rival cards.

  9. I guess I’m not buying the assumption that the Reserve’s 3X/1 category spend structure played any significant or even moderate role in the uptick in 2Q redemption costs. It simply appears to me that the already earned welcome bonuses came home to roost in the form of concentrated redemption. The timing makes sense given that we’re at the height of summer activities and travel. I suspect the generous welcome will continue but Chase will increase the number of warning shots across the bow (periodic reviews) to keep “engaged” cardmembers in check.

  10. Points liability is nothing more than a journal entry but the alleged $330M loss appeared on their earnings statement and would be due to actual points redemption. Just thinking it through…am I misunderstanding this?

  11. @AdamH – I think Lucky and you are saying the same thing, and you are both correct.

    @Tom – You are forgetting something very important. Chase sets the rule and they can devalue at any given moment. If they are handing out too many UR, they give out less. If you are redeeming too expensive items, they reduce the value UR. If UR is still sitting then it can be 0 or 1.5 depending on Chase not you. So sunk cost yes. Regret, I would say no. Will Chase make money??? The cost is pretty much clear but the most important keyword that we can only take a guess is the lifetime value of customer.

    @House – You are correct in some ways, but it really is Chase’s ‘secret’ calculation of points value here. Having more people earning at 3x and redeeming more at 1.5 (rather than 1) will affect, and so does uptick in redeeming (might not be because of summer, but say avg days of points sitting idle changes). Engage IMHO means increase in % of UR redeemed/Total UR for the bank.

    The 330M adjustment means that “in Q2” Chase decides that their cost per points went up and recalculating the total liability using the “new” cost went up by 330M. WHY they did it “in Q2” is likely more financial/strategic decision than when the cost of UR actually went up (it’s accounting after all). But it definitely (according to the earnings call) is NOT from actual redemption.

  12. Liability is when the points are issued. The expense is taken at the same time.

    If the redemption is for more than the value assigned to points you will see an additional expense. If it’s for less you will see a gain in the income statement. Redemption affects cashflow the most compared to anything else.

    If took a hit on the income statement then they were undervaluing liability.

    How do you think Antarctica came out of the great recession? The FASB suspended mark to market rule and the banks all became profitable overnight. Capitalists are stealing MOFOs.

  13. Liability is when the points are issued. The expense is taken at the same time.

    If the redemption is for more than the value assigned to points you will see an additional expense. If it’s for less you will see a gain in the income statement. Redemption affects cashflow the most compared to anything else.

    If took a hit on the income statement then they were undervaluing liability.

    How do you think america came out of the great recession? The FASB suspended mark to market rule and the banks all became profitable overnight. Capitalists are stealing MOFOs.

  14. I just read portions of the transcript of Chase’s Q2 earning call, and here’s the bit on the $330M points liability:

    “And, card merchant services and auto revenue was up 6%, driven by lower card acquisition costs, higher card NII on margin expansion as well as loan growth, as well as higher auto lease volumes. This was largely offset by a lower net interchange driven by a Rewards liability adjustment of about $330 million, reflecting strong customer engagement across our Ultimate Rewards offerings. As a result, the card revenue rate was 10.4% for the quarter, but our full-year guidance of approximately 11.25% holds.”

    I am not sure that the interpretation offered here for the $330M points liability is quite correct. Contrary to the belief in travel blogosphere, loyalty programs DO want their points to be redeemed as fast as possible and not hoarded, because the points liability is incurred when the points are awarded. The awarded points are considered a financial “liability” against the company’s bottom line because the cash equivalent of the points awarded as part of a sale or transaction (e.g., the cash equivalent of bonus points awarded after spending the minimum required) cannot be claimed as revenue until the points awarded have be been redeemed, are forfeited or are simply claimed, based on a statistical model, to have fallen through the cracks with no likelihood to ever be redeemed. Therefore, loyalty programs do want you to redeem your points as fast as possible so that they can claim as revenue any cash associated with a transaction in which points are awarded.

    A concrete example: Chase collected a required minimum spend of $4000 on the CSR and awarded 100,000 UR points in exchange as a signup bonus. Assuming each UR point is worth 1cent, the cash value 100,000 UR points would be $1,000. Therefore, Chase won’t be able to claim as revenue $1,000 of the $4,000 minimum spend it collected for the CSR until the 100,000 UR points awarded in exchange are redeemed. Therefore, Chase does want you to redeem the 100K UR points as soon as possible. It is why all loyalty program provide so many ways for you to redeem your points, or why they have an expiration date for their points if there is no activity. It is also why loyalty programs MUST devalue their points. Devaluing points is the quickest and foolproof way to decrease a company’s reward points liability to keep it from getting out of hand. Periodic devaluations are, therefore, here to stay…

    So, a points liability of $330M is simply the cash equivalent of points that Chase has already awarded but cannot YET claim as revenue a portion of the associated cash sales, because the points have not yet been redeemed or are not yet considered nonredeemable. It is not a good or bad thing per se. It’s just an accounting feature that is required of any company that runs a loyalty program. Overall, Chase’s “card revenue rate was 10.4% for the quarter.”

    It would be a good thing if UR points were being redeemed at a brisker pace, because rather than $330M, the liability would be lower… and that would be a good thing.

  15. Don’t worry. If Chase hits a rough patch the first thing they will do is gut the CSR benefits. Savvy consumers will switch to another card. I figure the majority of consumers though will just keep on using the CSR out of habit and there will be minimal consequences for Chase.

  16. “a Rewards liability adjustment of about $330 million” means that Chase subtracted from their bottom line about $330M because — and here’s the kicker — they’d awarded about 33,000,000,000 Ultimate Rewards points that had not yet been redeemed.

    Yup, 33 billion UR points awarded would definitely reflect “strong customer engagement across our Ultimate Rewards offerings.” It sounds to me like Chase is pleased rather than distressed by that…

  17. I get much more value out of my Chase Trio than I ever did with any Amex card I have had. Amex makes zero sense for me. If I was still a platinum flyer MAYBE but those days are far behind me.

  18. “JP Morgan Chase revealed their second quarter earnings today, where they reported a record $8.32 billion profit.”

    I think it’s important to return to this sentence regularly. The profit doesn’t happen in a vacuum and could indeed be partly due to increased customer engagement with Chase. I could imagine the company being especially greedy and chipping away at Sapphire benefits to see how much they can get away with. But if I were them, I’d leave well enough alone.

    Record profits after all.

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