It’s incredible to see the progression of credit card rewards over the past few years. Years ago most people were earning one point per dollar spent, while nowadays we’re seeing so many amazing new bonus categories.
The new standard was set a couple of years ago when the Chase Sapphire Reserve® Card was introduced. This was a premium credit card designed for people who don’t usually get premium credit cards. While the card has a $550 annual fee, it offers a $300 annual travel credit, 3x points on dining and travel, a Priority Pass membership, and much more. Chase has said that they’re not sure they’ll ever make money from the card, given how lucrative it is.
However, since then we’ve arguably seen some cards introduced that are so generous one has to wonder how credit card issuers can afford to offer these rewards. For example:
- The Blue Business® Plus Credit Card from American Express (no annual fee (Rates & Fees)) offers 2x Membership Rewards points on the first $50,000 spent every calendar year (1x after that)
- The American Express® Gold Card ($325 annual fee (Rates & Fees)) offers 4x Membership Rewards at restaurants (on up to $50,000 in purchases per calendar year and then 1x) and 4x Membership Rewards points on U.S. supermarket purchases (on up to $25,000 of spend per calendar year and then 1x)
- Changes in 2019 to the Citi Prestige Card, which offers 5x points on dining and air travel
So, while there’s obviously huge competition among issuers to gain market share, is all of this sustainable? Let’s take a closer look.
How credit card issuers make money
Historically credit card issuers make money in three ways, including through:
- Annual fees on cards
- Interest/financing charges, an other fees (including late fees)
- Credit card transaction fees (where they get a percentage of each transaction, which varies depending on the type of card)
The Chase Sapphire Reserve: a prime example
I think it’s most useful to use what Chase has said about the Chase Sapphire Reserve when looking at how the credit card landscape has changed. As premium credit cards are being picked up by more millennials, Chase has found that people are spending a lot more on dining and travel than they expected (after all, that covers a huge number of expenses for urban millennials), and fewer people are financing charges than expected. That combination means that their revenue per cardmember is down, and their expenses are up.
Chase has also indicated that while they expense customer acquisition costs over the first 12 months, it’s typically seven years before they make money on a consumer.
What Chase has done exceptionally well is how they’ve tried to engage with these new enthusiastic cardmembers in more ways. They realize it’s going to be tough to make money on cardmembers directly from their spend if they’re not financing charges and they are earning 3x points in many categories, so they try to engage with them in other ways, including with Sapphire Banking, special mortgage offers, etc.
It’s brilliant of them to try to extend relationships in this way.
How important is market share, really?
Historically the credit card industry has been very profitable, and as of now it still is. That’s because the margins for most credit cards are still huge, because since people aren’t optimizing their credit card spend.
In many ways the investment in premium cards seems less profit-driven and more market-share driven. They’ve in particular been going after affluent urban millennials, even if they’re losing money on them.
It makes me think of Uber. They of course have a huge amount of market share, but they lose money on rides. I do question how they’ll ever get to a point where they’re profitable. Then again, in today’s economy market share seems to often be more important than profitability when it comes to how companies are valued.
Are credit card rewards a race against the clock?
This raises a whole other question. We’re getting to the point where I wonder how much more generous card issuers can be, as they battle for market share.
But arguably the credit card industry on the whole faces a much bigger challenge. Every industry evolves, and the credit card & payment industry is no different.
Originally credit cards were introduced for the ease as well as security with which you can pay. But over time in a battle for market share, they’ve turned into huge rewards programs that consumers are obsessed with.
Many retailers aren’t happy with this, though. For example, Amazon has been on the attack against reward credit cards. Different kinds of cards come with different merchant fees, and major retailers want to unbundle that.
If a card issuer wants to accept any Visa product, then they have to accept all Visa products, including Visa Signature and Visa Infinite. This matters because those cards have higher fees, and they want to be able to opt out of accepting those products.
There are bigger implications here beyond just what type of credit cards can be accepted. We’re seeing mobile payments evolve, so over time I imagine this industry will get more “efficient” as well.
That efficiency may very well come in the form of this going nearly full circle, where we essentially see phones act as secure debit cards. Your fingerprint or face might be required to use your phone as a payment method.
With a new entrant we could see a system that has much lower fees for merchants while possibly offering even better security than credit cards. Clearly credit cards feel threatened by this, which is why they’ve been evolving into the mobile payment space.
Every industry evolves to become more efficient and lower cost (just look at how airline tickets are sold nowadays), and the credit card industry isn’t immune from that.
My take
As consumers there has never been a better time to be using credit cards. I do think we’re nearing “the best of times.”
I imagine the major card issuers are getting to the point where they’re going to be losing money on these premium cards that offer huge spend bonuses. Of course they’ll make money on some and lose money on others — that’s natural in any industry.
It’s not just those of us really maximizing bonus categories that are doing well with these cards, but even your average urban millennial who spends a lot on dining and travel (including transportation) probably comes out ahead, especially as we see fewer premium credit card users financing charges.
I have a hard time imagining things will get much better than they are now. I also think that eventually the industry will see some technology advancements that largely drive down costs to merchants, and in turn, will lead to fewer rewards for us. What I don’t know is what that timeline looks like — will it be in a year, a decade, or further out.
What do you make of the direction that the credit card industry is headed?
The following links will direct you to the rates and fees for mentioned American Express Cards. These include: American Express® Gold Card (Rates & Fees), and The Blue Business® Plus Credit Card from American Express (Rates & Fees).
@Mr G You, dear friend, sound like an entitled, triggered conservative. Shall I instruct you where to go?
@Chuck
You my friend sound like a typical millenial snowflake.
Go to your safe space now.
DCS is ranting and raving again, I think it's time for another "Asian tour" for him
That's it, son, focus on the messenger and not the message. Mental giant, indeed.
No, not Mike. See how many friends you have here in your safe space?
Look in the mirror. All the travel blogging sites are destroying the very thing they covet so much... the credit card signup bonuses and rewards. It's not sustainable when everyone and their cousin has the same card / benefits. Just look at the airport lounge over crowding situation.
@Mike is that you under a new moniker? Sure sound just as stupid and insecure... What a piece of work!
Right, because the comments section is safe only if DCS gets to hurl his insults and express his superiority unchecked by any of the hoi polloi. He's so right, though -- jealousy at his unbelievable prowess in the hobby is certainly the reason why he is disliked so.
However, for such a smart guy, it's odd that he doesn't know what "ignore" means.
Hello, folks, when you thought it was safe again to be in the comments section of OMAAT, another creature crawls out of the woodwork! Buckle up for the ride!
Don't be so hard on yourself.
Sad truly piece of work...
@DCS, I have been here for years. Yes, surely I lack the cranial capacity to keep up with you. It is so rare to spy a true genius like you.... an honest-to-goodness mental giant who sees a clear list of complaints about his repeated, consistent behavior and asks "What are your complaints against me?" Please go seek whatever professional help you need in order to learn how to read for comprehension. Then feel free to...
@DCS, I have been here for years. Yes, surely I lack the cranial capacity to keep up with you. It is so rare to spy a true genius like you.... an honest-to-goodness mental giant who sees a clear list of complaints about his repeated, consistent behavior and asks "What are your complaints against me?" Please go seek whatever professional help you need in order to learn how to read for comprehension. Then feel free to begin offering well-constructed arguments anytime you like. Until then, sure, I will stop punching down.
G'day.
@Chuck -- Go pick on someone your own size. Soon you will be flailing like other morons who started similar "fights" unprovoked. I doubt that your brain can generate sufficient nerve impulses to enable you go toe to toe with well constructed arguments.
So, your complaints about me are what exactly? That I saw the many shortcomings of programs that ended up collapsing when they were being touted as the "best in the business"? That...
@Chuck -- Go pick on someone your own size. Soon you will be flailing like other morons who started similar "fights" unprovoked. I doubt that your brain can generate sufficient nerve impulses to enable you go toe to toe with well constructed arguments.
So, your complaints about me are what exactly? That I saw the many shortcomings of programs that ended up collapsing when they were being touted as the "best in the business"? That I have largely been proven right about Hilton Honors being a highly rewarding program that got little credit? That I play the game with a "full deck" and have been able to afford Big-Time redemptions YEARLY since 2011? Do you know what this seems like to me? You are "green with envy"...maybe just little?
In short, the soapbox is yours. Knock yourself out. If you begin following from thread to thread or forum or forum, like your predecessors, then we'll have to duke it out with no holds barred.
I will simply ignore you until then.
G'day.
Wait a minute, is there an article on here OMAAT about Sapphire Banking? I totally missed this news!!! WTH!
You hope I disappear? I'm sorry to disappoint. I wish I knew how to quit you, but alas, I do not.
I hope that you stick around, you national treasure, to churn out more of DCS' Greatest Hits, like:
* The Mods Are Oppressing Me
* Hilton Is The Best Program Because I Say So
* My Value System Is The Correct One ("Your Experiences Are Immaterial and Your Opinions Are Uninformed")
...
You hope I disappear? I'm sorry to disappoint. I wish I knew how to quit you, but alas, I do not.
I hope that you stick around, you national treasure, to churn out more of DCS' Greatest Hits, like:
* The Mods Are Oppressing Me
* Hilton Is The Best Program Because I Say So
* My Value System Is The Correct One ("Your Experiences Are Immaterial and Your Opinions Are Uninformed")
* Allow Me to Cite My Own Previous Opinions of How Right I Was As Evidence of How Right I Am Now
* All Who Oppose Me Are Trolls
* Suite Guarantee
* Why Narcissists Name Their Vacations
* Talking Down to Blog Owners While Using Their Spaces for My Validation Efforts
You play the songs we all love to hear. This is why we keep buying tickets. Keep rockin', dude!
The general model is for interchange to pay for rewards+profit and annual fees cover the cost of benefits + more profit. With greater competition, there is no doubt less of the profit. Remember that most cardholders will only have one or two cards on which they put all spending. Without considering the annual fee on the CSR, spend on travel/dining can only be about 20% to break even. For the average consumer, this isn't that...
The general model is for interchange to pay for rewards+profit and annual fees cover the cost of benefits + more profit. With greater competition, there is no doubt less of the profit. Remember that most cardholders will only have one or two cards on which they put all spending. Without considering the annual fee on the CSR, spend on travel/dining can only be about 20% to break even. For the average consumer, this isn't that unreasonable. For the "power user," the af can cover some of this cost. Again, most people aren't visiting lounges multiple times a year, and all benefits are designed with the expectation of breakage (see: Amex).
What I think will change is that there will be more effort to cap benefits that are costly in the tails (e.g., lounge visits). We've already seen this with the revamped citi card's "4th night free" benefit. Amex bonus categories almost always have dollar caps.
PS, I doubt citi budgets $.015 per point given their xfer partners and the lower travel portal rate.
Interesting post. I really like your business analysis articles on the industries relevant to points and miles. Your points on the sustainability of the current credit card market, brought to mind a Fortune magazine article I was reading earlier this week. It was talking about how Intercontinental Exchange (owners of NYSE and other exchanges) is trying to setup a Bitcoin exchange. The piece touched on how the ICE executives felt that a stable, credible Bitcoin...
Interesting post. I really like your business analysis articles on the industries relevant to points and miles. Your points on the sustainability of the current credit card market, brought to mind a Fortune magazine article I was reading earlier this week. It was talking about how Intercontinental Exchange (owners of NYSE and other exchanges) is trying to setup a Bitcoin exchange. The piece touched on how the ICE executives felt that a stable, credible Bitcoin marketplace could offer a low-cost replacement for credits as we know them. Lots of interesting disruption potentially coming to this space!
Fortune article: The NYSE's Owner Wants to Bring Bitcoin to Your 401(k). Are Crypto Credit Cards Next? (http://fortune.com/longform/nyse-owner-bitcoin-exchange-startup/)
@jjp: "I still know people who see what I do with miles and points, then get one credit card and want to take a family somewhere (Hawaii, usually). What happens to those points when reality sets in, I don’t know."
I'm often asked how I manage to take my family on business or first class overseas vacations. Typically, as soon as I start explaining my strategy, my interlocutor's eyes begin to glaze over. It's not...
@jjp: "I still know people who see what I do with miles and points, then get one credit card and want to take a family somewhere (Hawaii, usually). What happens to those points when reality sets in, I don’t know."
I'm often asked how I manage to take my family on business or first class overseas vacations. Typically, as soon as I start explaining my strategy, my interlocutor's eyes begin to glaze over. It's not so much that people have unrealistic expectations. It's that this topic is incredibly boring to them.
Which is perfectly fine. Some of these people can spend hours talking about the minutia of football, baseball or basketball. My eyes glaze over before the first sentence is finished.
The difference, of course, is that one of these pursuits ends up with by butt in a first class seat. The other doesn't.
I'm no expert on this but once the credit cycles starts to really head south with rising interest rates and that jazz, I imagine households will be stretched a bit. Credit becomes more expensive. Consumers might spend less but they'll be paying more for loans and credit broadly speaking. And if real wages don't pick up, they might start paying interest on those credit card bills they used to payoff every month. Note: real wage...
I'm no expert on this but once the credit cycles starts to really head south with rising interest rates and that jazz, I imagine households will be stretched a bit. Credit becomes more expensive. Consumers might spend less but they'll be paying more for loans and credit broadly speaking. And if real wages don't pick up, they might start paying interest on those credit card bills they used to payoff every month. Note: real wage growth especially for lower income people has been basically zero for decades. A dollar today for them has the same purchasing power as it did in like 1975.
Anyway, I'm sure credit card companies know all this and their fight for marketshare will payoff once people start paying that lovely 19% interest rate on their cards.
Most people don’t rotate their cards to maximize every single purchase. I know I’m in that camp.
People don’t have jobs as flexible as Lucky so they can’t get the most bang for their points. Regular folks have limited vacation days and sometimes in order to spend most time at the final destination, people just redeem tickets on Chase.com for 1.5 cent/ point and call it a day. Having 50 connections from point A...
Most people don’t rotate their cards to maximize every single purchase. I know I’m in that camp.
People don’t have jobs as flexible as Lucky so they can’t get the most bang for their points. Regular folks have limited vacation days and sometimes in order to spend most time at the final destination, people just redeem tickets on Chase.com for 1.5 cent/ point and call it a day. Having 50 connections from point A to point B just to get the saver award and spend 50 hours flying in the air isn’t most people’s cup of tea.
People who can maximize credit card points is a small subset of the population.
Pattaya's "WaLking Street"...
Lucky, the sky is not falling. Keep the faith.
@Tim sez, astutely: "Having said that, with these new more attractive cards, if anything, it’ll keep Chase from watering down the CSR. That is a very good thing."
I agree wholeheartedly. Chase is not likely to up the ante, but they will keep the CSR where it is to remain competitive, which it will be, especially with the card's broad definitions of "travel" and "dining."
@Debit - You mean Pattaya's "Waking Street", the likes of...
@Tim sez, astutely: "Having said that, with these new more attractive cards, if anything, it’ll keep Chase from watering down the CSR. That is a very good thing."
I agree wholeheartedly. Chase is not likely to up the ante, but they will keep the CSR where it is to remain competitive, which it will be, especially with the card's broad definitions of "travel" and "dining."
@Debit - You mean Pattaya's "Waking Street", the likes of which one finds all over Thailand. Yes, I was there on New Year's eve, and will be there again this year. The place is always packed for the festivities...
@Chuck, if by "predictable" you mean "hitting back hard" at trolls like you, then you got at least that one right. A good thing most appear to have disappeared after the demise of their programs, and I can only hope that you too will, sooner than later...
G'day.
DCS,
Do you go that strip but the breach on pattaya that has all the strip clubs run by the Russian mafia?
I think your old ass will really enjoy going there. Just go!
> the industry will see some technology advancements that largely drive down costs to merchants
Agree, but the issue is not technology, it's commercial terms driven by lack of competition
> fewer rewards for us
Not true. Paying 3% less for every single item we buy is the best reward we could ever get. Worth more than any of these travel award would ever amount to.
@DCS I read your original post and actually agree with your points. You had me until the whole trademarked Asian escapade thing. And about having your post held back.
I’m a big CSR fan and agree you don’t want to be spread too thin. Having said that, with these new more attractive cards, if anything, it’ll keep Chase from watering down the CSR. That is a very good thing.
Having said all...
@DCS I read your original post and actually agree with your points. You had me until the whole trademarked Asian escapade thing. And about having your post held back.
I’m a big CSR fan and agree you don’t want to be spread too thin. Having said that, with these new more attractive cards, if anything, it’ll keep Chase from watering down the CSR. That is a very good thing.
Having said all this, I do think the dilution and devaluations are making it harder to get as good a bang for the buck; hence, more points offered per $ spent.
I still know people who see what I do with miles and points, then get one credit card and want to take a family somewhere (Hawaii, usually). What happens to those points when reality sets in, I don't know. Maybe they buy gift cards. They don't/won't stick with it long enough to actually make it work out.
@DCS, how fantastically predictable. At least no one will ever accuse you of being inconsistent.
G'day.
@Chuck, @dave, @ Mattt - It's full moon and the "natives" are agitating.
@Chuck - To go after someone who has never addressed and you no nothing about with gratuitous insults is a clear sign of someone with issues that only shrinks can help you address. I can recommend a few good ones.
@dave - I have been all over SE Asia (Phuket, Bali, Koh Samui, etc). Have you? BTW, I am returning to Pattaya...
@Chuck, @dave, @ Mattt - It's full moon and the "natives" are agitating.
@Chuck - To go after someone who has never addressed and you no nothing about with gratuitous insults is a clear sign of someone with issues that only shrinks can help you address. I can recommend a few good ones.
@dave - I have been all over SE Asia (Phuket, Bali, Koh Samui, etc). Have you? BTW, I am returning to Pattaya Beach for New Year; will send you a postcard.
There is probably a good reason why my posts got delayed, but 'delusion' ain't one of them because even YOU would know when a comment does not post when it should.
@Mattt - Sore for losing the last argument, I see. Well, you'll just lose another if you do not do yourself a favor and get lost.
Now, does anyone of you care to say something intelligent about the topic of the thread?
US credit card sign up bonuses and ongoing earnings rates are massively higher than most (any?!) other place - will be really interesting to see how sustainable it is in the longer term, especially if retailers are starting to take issue with paying interchange fees many multiples higher. Of course the points inflation from generous credit cards then can have knock-on consequences for schemes - see the recent examples of BA and LH increasing fees...
US credit card sign up bonuses and ongoing earnings rates are massively higher than most (any?!) other place - will be really interesting to see how sustainable it is in the longer term, especially if retailers are starting to take issue with paying interchange fees many multiples higher. Of course the points inflation from generous credit cards then can have knock-on consequences for schemes - see the recent examples of BA and LH increasing fees for ex-US departures. Don't get me wrong, I'd love to have the sort of earnings rates you folks have available to me (and clearly make the most of it!) but will be interesting to see if it's sustainable or not.
@DCS dude stfu nobody cares enough about you to moderate a comment... go play with your little hilton
"...my 2018 Year-end Asian Escapade ™..." DCS is a Gomer. Keep in mind a chunk of his last "Year-end Asian Escapade ™" was spent in Pattaya. Of all the places in SE Asia, Pattaya for crying out loud!
"This can’t be a coincidence....Is the site now screening comments to try to muzzle dissenting voices by not releasing from “moderation” comments that do not toe the line?" Wow, totally delusional!
The merchant fees are bound to go up and all of us will be paying more for goods and services because of the card merchant feees. I pity the poor folks who pay cash - they are the ones paying full freight for the rest of us.
Sort of off-topic, but if you are added as an AU to an Amex Plat, are you then ineligible for a sign-up bonus in the future? Never had Amex before.
@DCS, everyone who has been here more than once knows your rich of history of self-promotion and your lambasting of the opinions of the very people whose blogs you, for some emotional reason, are unable to leave. P.S. I hope that you enjoyed your Vacation®.
Look at any credit card ABS report and you will see how exactly they make money.
The payment rate is a key metric. It says that percentage of the total balance is paid every month, on average. One would think it's close to 100%. In reality, it's about 50%! Here is the money.
@Chuck says, almost certainly with a straight face, considering the total lack of self-awareness: "Maybe the degree to which comments appear to be held is based on the degree to which the poster is likely to be nothing more than a rabblerousing know-it-all who is jealous of those with travel blogs. Or a Hilton employee."
Read the content of my comment that was held in moderation, and then consider the content of yours, and tell...
@Chuck says, almost certainly with a straight face, considering the total lack of self-awareness: "Maybe the degree to which comments appear to be held is based on the degree to which the poster is likely to be nothing more than a rabblerousing know-it-all who is jealous of those with travel blogs. Or a Hilton employee."
Read the content of my comment that was held in moderation, and then consider the content of yours, and tell us why yours should be allowed to see the light of day. "jealous of those with travel blogs", "Hilton employee", "rabblerousing know-it all"...that's known as nonsense, so maybe that is why it should not be moderated; it is so content-free, it threatens no one.
G'day.
Chase could make a reasonably healthy counter to Citi in one simple move:
Make their definition of "3x on Travel" also apply to Gasoline purchases.
(Yes, I know that I can buy gift cards at Staples with my Ink and get 5x, but the only gas cards they ever have are Shell, and more often than not they only have them in denominations of $25. Kind of a pain in the ass.)
The key for this kind of sustainability is to limit sign-ups to people with actual spend throughput - in this respect the CSR rollout was a collossal failure.
The median household (ALL ages) in the US earns 62,000 a year - before taxes and any other monthly debt payments. Where are the huge numbers of people absorbing these premium cards? Do banks/investors actually expect a ROI beyond their initial up front expenditure?
I don't think it's as dire as you fear. I mean, it may be slightly unsustainable. But it can (I am not saying it definitely will) remain very lucrative for a long time.
Look, there are a few assumptions that are probably false:
1. Card churners must be everywhere.
2. You have a strategy to maximize your points.
3. You will maximize your points.
First, most people probably dump a card a...
I don't think it's as dire as you fear. I mean, it may be slightly unsustainable. But it can (I am not saying it definitely will) remain very lucrative for a long time.
Look, there are a few assumptions that are probably false:
1. Card churners must be everywhere.
2. You have a strategy to maximize your points.
3. You will maximize your points.
First, most people probably dump a card a year, if that. Most families won't even approach 5/24. Those who do (and those who frequent these blogs) are a small minority. So, most people probably get a good card and stay there for a long while, like 2-5 years. It should be reminded that CSR has retention of 90%!
Second, most people probably don't maximize their point earning potential. When my sister visited, she used a Chase Freedom (the rotating one) for EVERYTHING, including restaurants. I mean, I was shocked! Doesn't she know of Freedom Unlimited (at least)? Does she check the rotating categories? She is not the least financially educated person I know (she does budgeting and generally keeps a tight leash on her money, so she probably knows her stuffs). And yet.
Finally, if you don't use your points effectively, you generally get only 1cpp. I love Chase Sapphire (both versions) for this: it's pretty much brain-free to get extra value out of points. However, for most (and especially true for Amex), ~1cpp is where things stay.
In a way, credit cards are like coupons. If you invest efforts and play the game, you get quite a bit of values out of it. If you only want to "build your credit", you still have very decent value (ability to dispute charges, report lost cards, and see all spending in 1 place are all worth it), but you won't bankrupt the bank. And I suspect majority of people do that. They get good value, nevertheless, but they don't harvest every bit of values. This allows people who are willing to invest the time and effort to get exceptional return for their effort.
A side note: 3. is especially precious, and the linchpin for the whole system. It's basically a way to harvest excess in the system: airlines and hotels have some extra capacity, while you (consumers) have time and flexibility. In a convoluted way, you are getting a deep discount for the extra capacity of the vendors through credit card vendors. When you look at it that way, then maybe it's not so outrageous, after all. Maybe this can work :-).
What about the Discover card?
Maybe the degree to which comments appear to be held is based on the degree to which the poster is likely to be nothing more than a rabblerousing know-it-all who is jealous of those with travel blogs. Or a Hilton employee.
https://www.flyertalk.com/forum/30171211-post216.html
Quote:
* When the reports were written, the analysts believed the rewards cards were sustainable. And the enhanced benefits were here to stay. (Clearly there have been some changes in reality since then with AXP sweetening theirs and C/JPM tightening up)
* They believed the swipe economics were good for the issuers, before balances were even considered. This is in the flagship card segment
* Cash back cards were touched on....
https://www.flyertalk.com/forum/30171211-post216.html
Quote:
* When the reports were written, the analysts believed the rewards cards were sustainable. And the enhanced benefits were here to stay. (Clearly there have been some changes in reality since then with AXP sweetening theirs and C/JPM tightening up)
* They believed the swipe economics were good for the issuers, before balances were even considered. This is in the flagship card segment
* Cash back cards were touched on. Typical spend is 10k per year. They used typical BLS consumer spending breakdown to figure out values for holding cards. About 40% of these holders run balances, averaging $4k. Most cash back cards have modeled ROE's in the 17%-21% range, which is reliant not just on the business economics, but the bank capital that must be set aside the support all that. For some perspective on current chargeoffs about 3% of loans on branded cards get charged off at Citi, and 5% for their white labeled store cards.
* The big banks have lower return expectations for these ventures than the pure play card co's like Amex or Discover. The analysts believe Plat runs mid 20's ROEs, versus teen ROE's for CSR/Prestige. And because the big banks have so many weak biz lines (ROE wise) for them to get bigger in the cards is still accretive to their overall financials. The report also did point out how the banks have more avenues to squeeze products out of their card customers, versus Amex or Discover, who generally only have a single profit channel with their card holders, i.e. the card.
* For the top tier reward cards, apparently all the mischief for Amex started when the big banks hired away their talent, and then made lounge access proprietary to the banks flagship cards. The top tier cards are estimated to have 35k of spend each (for profitability modeling purposes) but Plats spend much more typically.
* Leakage rates for Plat card - analysts estimate 25% of airfare and UBER credits are lost.
* Net Profit after Tax per card for the Issuer is estimated at $137 Plat, $93 CSR, $123 Prestige. There are lots of complex assumptions in their spreadsheets which I will avoid.
* For the Prestige 4NF benefit, the analysts model it as a straight $200/yr benny but admit its a complex one. They believe that booking through Amex or Citi gets 10-15% commission to inhouse agency, which helps subsidize the 4NF or 5x Plat MR benefit. Clearly Citi has had more insight into true cost, and the scaling back of that, suggests that $200/yr might be understating the cost. But it could also be a benefit that is highly concentrated in who loads up on it. The survey questions leaked earlier suggest that they need to redistribute how much value is being extracted in this ancillary benny.
* Optimizers/Churners - the analysts glibly state that they can inflate costs but are hoped to be only a small subset of users. Clearly Chase, Citi, AXP all have their own internal procedures for hunting those. The analysts believe that spend optimizers can make the cards profitability negative (-$400 to -$900) depending on the card and variables. I suspect most FTers are all in that camp; presumably the cue will be when retention is not offered.
* So what's interesting is that I had not realized how incredibly profitable these products were generically under current bank rules, which explains the golden age of rewards cards we're going through, with seemingly new entrants / offerings from all kinds of oddball banks. Some of this is a function of investment banking and mortgage lending being far more staid now, and less worthy of resources. We all should be thankful to the factions who run balances, rack up late fees, and make silly redemptions.
* I believe this summary is within the bounds of fair use. Please don't PM me for the reports.
Comment finally posted, with all the typos and errors due to posting from a hand-held while in transit...
..."...“pairing”, but which I mean..." = ..."...“pairing”, BY which I mean..."
"If it ain’t brake, don’t fix it!" = "If it ain’t brOke, don’t fix it!'
Etc...
If the rising rewards are unsustainable (or, at least, less profitable) then the only other way to go, to increase market share, is volume...meaning offer cards that earn rewards to those on the lower rungs of the FICO ladder. If AMEX or Chase can't afford to go higher with earning rates on the luxury cards, then offer 1x and 2x points with credit cards aimed at those who probably should go with secured cards instead....
If the rising rewards are unsustainable (or, at least, less profitable) then the only other way to go, to increase market share, is volume...meaning offer cards that earn rewards to those on the lower rungs of the FICO ladder. If AMEX or Chase can't afford to go higher with earning rates on the luxury cards, then offer 1x and 2x points with credit cards aimed at those who probably should go with secured cards instead. NO ONE will be able to resist this. Not with the number of websites and travel articles dedicated to "traveling in style for free!".
How much different are Visa Infinite merchant fees compared to regular Visa fees?
Now, that one comment just posted immediately, so maybe it's the size of the comments that flags them for "moderation"?
This can't be a coincidence. I have posted innocuous comments here of late that would generally post immediately, but instead have been held in "moderation." Is the site now screening comments to try to muzzle dissenting voices by not releasing from "moderation" comments that do not toe the line?
@Tiffany?
"Then again, in today’s economy market share seems to often be more important than profitability when it comes to how companies are valued."
Uber, Tesla, Netflix, Etc. These "companies" are EXACTLY how the 2000 dot com bubble started. Wow - people certainly have short memories...
I will avoid the "Johnny Come Latelies" and other imitators, and keep my eyes on the ball by sticking with the card that started it all and remains the best at it: the CSR.
In UR, the CSR offers a strong transferable currency (redeemable at 1.5cpp) that can be briskly earned thanks to broadly-defined categories, like "travel" that does not simply mean "air travel" (as CITI and AMEX define it), but means:
Airlines, hotels,...
I will avoid the "Johnny Come Latelies" and other imitators, and keep my eyes on the ball by sticking with the card that started it all and remains the best at it: the CSR.
In UR, the CSR offers a strong transferable currency (redeemable at 1.5cpp) that can be briskly earned thanks to broadly-defined categories, like "travel" that does not simply mean "air travel" (as CITI and AMEX define it), but means:
Airlines, hotels, motels, timeshares, car rental agencies, cruise lines, travel agencies, discount travel sites, campgrounds and operators of passenger trains, buses, taxis, limousines, ferries, toll bridges and highways, and parking lots and garages.
...in other words, one continuously earns points on things that one does every day without even thinking about points.
Also, beware what I call "points currency dilution", where one collects points in many different currencies, lured by the various CCs and their "lucrative" earning potential, and then winds up not having enough points in any one currency to be able afford that memorable vacation.
Lastly, one has to be mindful of loyalty "pairing", but which I mean as a United MileagePlus 1K/1MM/Life *Gold, earning points in CITI TY does me little good because UA is not a CITI TY transfer partners. That's a bad "pairing". On the other, UA and Chase are so tight there is no light between them. With the CSR, CFU and Ink Biz Cash, I am on pace to topping 1M redeemable points (i.e., UR points+UA miles) for the first time ever, after I include the 160K miles/points that I redeemed on award flights for my 2018 Year-end Asian Escapade (tm). That is what happens when one the sticks with the one and only one and original "lucrative" reward CC: the CSR. I used to hover yearly around 300K UA miles. I am about to triple that thanks to the CSR and its companion cards.
If it ain't brake, don't fix it!
G'day!
Ben, did it ever occur to you the reason why credit card companies keep improving their products is because airlines have made it harder for people to earn miles compared to the past? No one is going to pay high credit card annual fees if they don't see a good ROI.
As per your discussion of Amazon, it seems like credit card issuers pass the per-transaction rewards cost (not the initial bonus) through to the merchants via higher merchant transaction fees. If the current premium cards cost the retailer 2.6 percent, what's the stop the credit card companies from introducing a new tier at 3.9 percent (except, of course, any potential success of the current lawsuit challenging this practice).
In effect, the merchant fees constitute a...
As per your discussion of Amazon, it seems like credit card issuers pass the per-transaction rewards cost (not the initial bonus) through to the merchants via higher merchant transaction fees. If the current premium cards cost the retailer 2.6 percent, what's the stop the credit card companies from introducing a new tier at 3.9 percent (except, of course, any potential success of the current lawsuit challenging this practice).
In effect, the merchant fees constitute a privately leveled sales tax which is, presumably, eventually charged through to the end customer. The effect of highly rewarding premium cards with higher fees is a regressive redistribution of wealth in higher product cost for everyone upwards to those people who can afford, and be approved for, premium cards.
I'd like to thank those who carry card balances for allowing the rest of us who don't the opportunity to keep earning good rewards. This won't flip until people can pay off their debt.
New technology will definitely bring fees down but there will likely be fees paid to banks for cards for a long time to come.
Data. The spending patterns of the well-off - and anyone using a card with a $450 annual fee is going to be well off - is hugely valuable and can be sold for a profit.
On top of that, aggravated spending patterns are also very marketable. Which chains are doing well at attracting affluent diners and which aren't. Are they Costa or Starbucks?
We know Facebook makes a lot of money from data mining. Why not Amex and Chase too?
The credit card industry is definitely growing stronger and people are indeed carrying balances. With student loan debt and credit card debt in the trillions, trust me, people are carrying balances, I see it everyday in my profession. Millennials may be less inclined to carry a balance but someone is definitely doing it. I think the future is the disappearance of physical cards as Visa and Mastercard push to put your electronic card with changing...
The credit card industry is definitely growing stronger and people are indeed carrying balances. With student loan debt and credit card debt in the trillions, trust me, people are carrying balances, I see it everyday in my profession. Millennials may be less inclined to carry a balance but someone is definitely doing it. I think the future is the disappearance of physical cards as Visa and Mastercard push to put your electronic card with changing card numbers on your phone for security. Also imo, look at the Marcus savings account by Goldman Sachs. They gathered $29 billion in assets in 2 years mainly from millenials by marketing through social media. They are looking to flip those customers into investing. The whole purpose of giving them 2% interest is to get them into the Goldman eco system, they are playing the end game. Just like banks/credit card companies. It's all about the end game and parlaying customers into other products, aka cross selling. I think we’ve reached the peak as far as multipliers for dollars spent in the lucrative dining and travel categories go, but banks have a little further to go in other areas such as transfer partners. Everyone is in a constant fight for Millennial dollars as the wealth transfer from the baby boomers starts to play out.
I think ffp devaluation really cuts back on how rewarding some of the cards are, chase dropping ke for example
How does Alaska make their program work? It seems like you can rack up enormous amounts of their miles without even flying them.
In America alone in the year 2017, credit card debt topped $1,000,000,000,000 with the average household credit card debt averaging just over $6,300. I know that the credit card companies offer outstanding rewards (compared to 10 years ago) but it's hard to believe that, with people's love of credit cards and buying now/paying later, the credit industry is doing anything but growing stronger.
At some point, the issuers will need to make money. Perhaps the answer is to have a punitive annual fee unless the cardholder has an expanded relationship with the bank. Citi does this by offering their CitiGold members a lower AF on Citi Prestige. I wouldn’t be surprised if Chase follows the introduction of Sapphire Banking with a requirement that CSR cardholders have a Sapphire banking account.
Forcing cardholders to keep >$75k assets at...
At some point, the issuers will need to make money. Perhaps the answer is to have a punitive annual fee unless the cardholder has an expanded relationship with the bank. Citi does this by offering their CitiGold members a lower AF on Citi Prestige. I wouldn’t be surprised if Chase follows the introduction of Sapphire Banking with a requirement that CSR cardholders have a Sapphire banking account.
Forcing cardholders to keep >$75k assets at the bank will reduce the number of people who hold multiple premium cards.
Maybe this is a silly question, but I do not understand why card issuers would "expect" to realize material finance charge revenue from premium cards aimed at (and generally held by) higher income consumers (including HENRYs). Then again Millennials spend differently than do Boomers, so maybe revenue modeling has not fully caught on to the incumbent nuances to that distinction yet. I do agree that we are probably near "peak award" for credit card use...
Maybe this is a silly question, but I do not understand why card issuers would "expect" to realize material finance charge revenue from premium cards aimed at (and generally held by) higher income consumers (including HENRYs). Then again Millennials spend differently than do Boomers, so maybe revenue modeling has not fully caught on to the incumbent nuances to that distinction yet. I do agree that we are probably near "peak award" for credit card use - hard to believe a blended-average award north of 3% (such as Amex Gold, depending on your spending patterns) is sustainable.