The Future of Credit Card Rewards

In many ways this is the golden age of rewards. There are big initial bonus offers, fast earning for spend, and rich benefits.

Some readers would argue that five and six years ago was the golden age when programs were easier to abuse, but I’d disagree and the data backs me up — for program members at large there’s never been a better time, card issuer rewards expenses are at record highs.

There are risks though, and challenges for issuers.

  • Merchant swipe fees could fall whether as a result of regulation (as in Europe, Australia), litigation (big retailers want to discount cash payments, and accept only less expensive cards), or competition from new payment technologies.

  • Even if interchange rates stay the same, at the point where card companies are spending the entire interchange rewarding customers and rely only on APR (interest charges) to cover acquisition cost and eventually turn a profit there’s just not any more money card companies can invest to compete for customers.

As a result card companies are going to need to invest smarter to deliver value to customers, rather than simply spending increasingly more.

And airline co-brands are the best positioned cards to do this, because frequent flyer programs are fundamentally big data firms. Banks can deliver tailored value to cardmembers instead of taking an expensive scattershot approach.

  • Frequent flyer miles have been successful because of passion for travel and leverage from saver awards. Rebate programs weren’t new, but what made airline frequent flyer programs the most successful marketing innovation in history was delivering the kind of value that consumers dream about and will motivate them to alter their behavior over time in search of a reward goal.

  • That requires trust over everything else. Since programs are intertemporal, they require customers to take the leap of faith up front taking actions to save points now on the promise of value later. Devaluations, and especially changes without notice, undermine trust.

  • Consumers are skeptical. That’s why banks need to front value to customers. There’s no replacement for big initial card bonuses, not only to get consumer attention but to put customers in a place where they can redeem for value quickly, proving they’ve made a good decision about the card. Good redemption experiences increase the rate of earn going forward.

  • Rewards need to be high value. A 1% or 2% rebate appeals to some customers, but will never match something that costs 1% or 2% to a program but has a retail price four or five times as much. The best motivators are rewards customers value at a level far greater than those rewards cost to provide. That’s the magic of the saver award, the seat that would have otherwise gone unsold. The shift towards average value puts programs on a collision course with themselves.

  • Targeting benefits. Cards, especially in conjunction with travel data, are in a position to know and understand a tremendous amount. Experiences are offered by many programs, including banks and payment networks (“Mastercard Priceless Experiences”). Very few cardmembers know, investigate, or take advantage of them.

    And if experiences are marketed they’re rarely relevant to the cardmember based on schedule or interest. I’ve never paid for a round of golf or purchased golf supplies on my credit card, so why would a program send me information on a golf experience, my status as a mid-40s white guy notwithstanding?

    Instead if they know I spend a good deal on nice meals, that I’m traveling to a specific city, and they have a chef experience in the city while I’m there why not prompt me with the opportunity to participate? The point is to deliver the right message, to the right customer, at the right time.

  • Help customers use their benefits. Right now cards offer myriad travel and purchase protections, and those survive precisely because they’re rarely used. Price protection has become more rare as apps have developed to automate claims, even from tiny price drops. As benefits become costlier to provide they become untenable.

    Card companies need to flip the model from one where they hope customers don’t use the benefits to one where they help consumers use their benefits. That will mean fewer, more targeted benefits relevant to the csutomer.

    A company that emailed a cardmember after a long flight delay letting them know they have trip delay coverage and to send them the bill for hotel and meals, that emailed a customer when their co-brand airline partner loses their bags to let them know they can spend $100 a day on incidentals, wins the loyalty of customers in a deep, passionate way. Today most customers who have these benefits don’t know it, and those that know it don’t think about it, and that’s a lost opportunity to add real meaning to the customer experience when the cardmember cares about it most.

  • Data-driven cross selling. Why doesn’t Citi solicit AAdvantage members with wealth profiles for private banking, aside from public facing checking account signup bonuses, why doesn’t Chase solicit MileagePlus members for Private Client and You Invest? Shopping portal promotions should be funded by merchants seeking business currently going to competitors rather than sales they would make otherwise. Connecting a Facebook profile should be bonused — and data imported so key life events are known and can be targeted for spend.

    Chase thinks Sapphire Reserve can turn out a profitable product by cross-selling to cardholders, but this shouldn’t just be a last ditch effort that’s otherwise value left on the table, it should be a feature of every product/relationship.

  • Ride the rails of the program customers already value to drive spend inexpensively. Frontier and Hyatt have interesting takes on this, since spend directly earns status without a cap (without straight giving the status away). In this way customers who value the status, who are also customers most likely interested in the card product, are encouraged to spend — even while taking modestly lower rewards for their spend. It is crazy to move in the opposite direction as American and to some extent Delta have done, reducing the role of card spend in earning status rather than increasing it.

While there are lessons from the success of airline programs this is not a prediction of where they are headed but where card programs are headed, less reward spend but more impactful through better use of data and tighter collaboration with partners to deliver experiences.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. They’re headed the other way–rewards programs are moving to fixed value redemptions and none the other way. Just checked out a ticket on United over Thanksgiving and the net value of points was right at a penny a point. That’s the future.

  2. Maybe the Golden Age for bank credit card users since the banks have destroyed the whole concept of Frequent Flyer Loyalty programs with their enrolment bonuses and card benefits/accelerated earnings. But for those of us who actually fly to earn our miles, the huge devaluation of the value of program miles, the reduction of RDM earnings on most discount fares and for those not holding upper tier status…well these have become the worst of times.

    Maybe you’re too young (or make too much from credit card referrals) to remember the true Golden Age when frequent flyer programs began and in their first decade or so. Earnings for flights were quire generous and route and other flight related bonuses unknown today. Not to mention awards where we received not only a return F ticket to just about anywhere on the planet for about 100K, but also received a week’s hotel stay in a suite, and a luxury rental car for a week! Maybe international F was not as luxurious as today, but the service and inflight catering was impeccable and there was truly a degree of exclusivity.

    So except for credit card churners and earners, these are the doldrum days of FF programs…in fact they can no longer be called Frequent Flyer programs, nor really even Loyalty programs.

  3. I agree with DavidB, the golden age of frequent flyer programs is well behind us. It was great while it lasted but sadly it’s gone. I’m now thinking what’s the point of large signup bonuses when airlines and hotels have cheapened them and continue to do so? It feels like my collection of points and miles is rapidly going the way of the Reichsmark during the Great Depression. Soon, I will need to bring a wheel barrel of United miles to the airport for a flight to Fresno.

  4. “Maybe you’re too young (or make too much from credit card referrals) to remember the true Golden Age when frequent flyer programs began and in their first decade or so. Earnings for flights were quire generous and route and other flight related bonuses unknown today.”

    True but then I look at e.g. the Barclay Aviator Red card that for a $95 annual fee and just one purchase (even for a buck) hands over 60K AA miles that are also valid on OneWorld carriers.

    Yes those old PanAm special frequent flyer meals were nice but these days I’ll take 60K miles for $96 any day.

  5. @Blue, yep. I just did 4 nights at the Singapore Andaz on points and cash. The new formula brought it in at just about a penny a point.

    Also did a night at the Park Hyatt Sydney last month for 30k points. That was good value, seeing the standard rack rate was $800 +. Best enjoy as many of those as you can. I think it’s heading for a penny a point.

  6. @Blue – this is the third complaint I read on the valuation of a Thanksgiving redemption. On peak dates, they’d rather have no award redemptions at all, so they’re pricing us out with crap valuations. They’ll still need award redemptions to fill planes throughout the year, and the only way to do so is to offer prime redemption values. The days of high-valuation off-peak redemptions are over, but in the long run, I expect close to the same values in shoulder seasons, and maybe slightly increased values off-peak. If they do indeed decrease values overall, they’re bound to lose a good chunk of travelers to Delta.

  7. It seems to me that the value of credit card programs is tied to the value of frequent flyer programs. No point in earning points through sign up bonuses and spend if the value of those points undergoes major devaluations. More and more programs are getting rid of opportunities to get good value out of redeeming points. Further, devaluations really undercut the consumer’s trust of particular brands.

  8. I love your marketing insights, especially under the topic “Help customers use their benefits.” Yes, who does that? Incredibly, USBank messaging me when I make a purchase, making it simple to burn points with just a return text, is the innovator — managing to tie technologies together to provide a nearly real-time push to use my points. I’d probably bite if I ever saw a message offering more than a penny a point.

    Citi tells me they notice I’m flying soon and not to worry, they’ve got my back — but that’s where it ends. The first airline that notices my flight has been delayed and (knowing that I carry their co-branded credit card) reminds me of my flight delay insurance with a link to the benefits page, owns my business. Also a good time to remind me of my lounge benefit and offer me a drink.

    Most other banks are content to tell me that my credit card was just used for a large charge, in a foreign country, or at a gas station. Only useful information if they’ve recently given away my personal information.

  9. Recognizes that most ‘loyalty’ programs are now just financially engineered green stamps collection/redemption programs. Travel and loyalty have little to do with the non-travel related margin enhancement.

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