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)