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The Chase Sapphire Reserve card offers 50,000 points after $4000 spend within 3 months; triple points on travel and dining; a $300 annual travel credit; unlimited visit and guest Priority Pass for airport lounge access; Visa Infinite travel protections.
It was supposedly a card that finally figured out how to attract millennials when the truth is it was just a card that offered more total value than most that had ever come before and whose initial marketing was primarily online so new applicants skewed younger.
The value was so rich that word on the street was Chase didn’t even ever expect to make money on a new cardholder until they held the product for 6 or 7 years.
This past week Chase revealed data on its Sapphire Reserve cardmembers and it points us in a direction of understanding the economics of the card. Bottom-line, we can pretty much figure we’re cleaning Chase’s clock because we pay off our statements on time.
To be sure I am shocked by 90% renewals. It’s a $450 annual fee card (albeit made a whole lot easier with a $300 travel credit). We’re only dealing with the card’s early adopters, there’s a limited number of early signups that have kept the card so far. But that 90% figure is high.
And it makes total sense to me. Chase is spending way too much on its cardmembers, the value proposition of Sapphire Reserve is simply too good. I do not believe Chase will ever make money on this product.
A little bit of cocktail napkin math suggests that Chase is spending roughly the card’s full annual fee on cardmember benefits, and rebating close to their interchange revenue to customers for their spending. That would mean they’ll only make money on a cardmember who pays interest on balances, and they need a lot of cardmembers to do that to ever cover their acquisition costs (like the signup bonus) let alone turn profitable.
- There’s a $450 annual fee, but $300 is returned to most cardmembers in the form of a travel credit that applies to any travel – whether airfare, hotel, Uber, etc.
- The remaining $150 is quickly spend on Priority Pass (a less generous card would retail for $395); the Global Entry/TSA credit (which costs them perhaps $5 per year on average); Visa Infinite benefits, and customer servicing and service.
If they’re not making money on the annual fee, what about interchange? Chase gives cardmembers 3 points per dollar on all travel and dining spend with the card. Each point can be spent for 1.5 cents apiece towards travel, or transferred to a variety of miles and points currencies.
I don’t know what Chase pays for United miles, which are presumably their biggest transfer destination.
Prior to American’s new credit card deal with Citi and Barclays the average sale price of their miles was a bit over 1.2 cents apiece, suggesting that banks were buying miles for less than that.
I think we can assume that while miles transfers are more valuable for customers in many cases, they’re also less expensive for Chase. So let’s assume an average redemption cost of 1.3 cents apiece.
Chase’s rewards costs depend a lot on what percentage of transactions are in the travel and dining category, and of course what percentage of points are never actually redeemed.
Let’s look at the average customer Chase tells us about.
- $39,000 spend, assume 25% in triple points categories, yields 58,500 points at a cost of $760.50
- For simplicity let’s say Chase earns $780 off that $39,000 spend.
- Any margin would have to come from breakage, but is sensitive to whether customers spend more in the travel and dining categories and whether redeems cluster around costlier rewards.
If Chase’s acquisition cost at 1.3 cents per point costs them $650 they’re going to need a lot of customers to revolve balances before they ever make money on the card but at $180,000 annual income and 785 FICO scores you’re not getting a lot of customers who revolve.
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Obviously the numbers in this post are rounded and speculative. I’d posit though that it’s the same sort of hypothetical exercise that went into the bet about earning back acquisition costs from customers after 6+ years.
Chase has a great talking point that 90% of customers are keeping the card. That helps them make the case that customers will be around long enough to pay back the bank’s initial investment.
But it seems clear they can only make money on customers who fail to pay off their balances and pay interest. Yet the customers they’re attracting with the product seem far less likely than average to do that.
Of course that’s increasingly the case with all of the major rewards cards. Banks used to make money on interchange and then APR was gravy. However co-brand deals have gotten so expensive post-Costco that all that’s left is the APR. That’s similar to cards in Europe and Australia (with less lucrative cards) where interchange is capped, and issuers have to live off of the lending component of cards.
And that means everyone who is paying off their cards in full each month is beating the house.
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