Last August Chase introduced the Sapphire Reserve, which has been immensely popular with consumers.
It’s no surprise. When the card was first introduced it had a 100,000 point sign-up bonus upon completing minimum spend (the bonus is now 50,000 points upon completing minimum spend), and it comes with a slew of perks. These include triple points on dining and travel, a $300 annual travel credit that automatically applies towards any travel purchases, a Priority Pass membership with unlimited guesting privileges, and much more.
The card is working great for consumers, but how is it working for Chase? Well, while it’s very popular, it looks like they’re having trouble making money with the card, per a story that the Wall Street Journal is running today. According to this story:
- Chase is pushing for $200 million in cost cuts in the unit that oversees the card
- Chase exceeded their 12-month sales target on the card within two weeks of when it was introduced
- Chase’s second quarter credit card income fell 15% compared to last year, with the number of new card openings falling 22%
- While Chase expenses the customer acquisition costs over the first 12 months, it typically takes seven years before they make money on a customer
- According to a source, renewal rates for premium credit cards are 60-90%, which is a pretty broad range, and we’ll see what it looks like for the Reserve, given that the card is coming up on its one year anniversary
- Fewer cardmembers than expected have been financing charges, which is a way that issuers make a lot of their money
- Cardmembers have been using the dining and travel bonus categories more than expected, where they can earn triple points, and presumably it’s an area where Chase loses money
- Chase’s hope is that cardmembers with this card engage with them more in other ways, through mortgages, banking, etc.
Individually I don’t think any of these points are especially surprising, but it’s a good overall reminder of how this is very much a “long game” for card issuers.
Essentially the Chase Sapphire Reserve costs consumers $150 “out of pocket” per year (there’s a $450 annual fee, but I imagine almost everyone benefits from the $300 travel credit, since it’s automatic). For that you’re earning triple points on dining and travel, getting a Priority Pass membership, etc.
Furthermore, when Chase was offering a 100,000 point sign-up bonus, that was worth ~$1,500 in travel. If the real “out of pocket” on this card is $150 per year, that means it takes 10 years of those fees to cover the acquisition cost. I imagine Chase’s margins are smaller than that, when you factor in the Priority Pass membership, travel protection, purchase protection, etc. So then the math boils down to the following:
- How much are cardmembers financing charges (which is a huge source of income)?
- How much are cardmembers spending in non-bonused categories (they’re making money on every transaction there)?
- How much are cardmembers spending on dining and travel (presumably they’re losing money on each transaction there, since they’re offering the equivalent of ~4.5% rewards)?
So it’s going to be interesting to see how this card, and perhaps the “premium” millennial market, evolves. The Sapphire Reserve has done an amazing job getting millennials into the premium card market, but how long will it take for that to pay off for Chase?
(Tip of the hat to View from the Wing)