Why is Chase completely revamping their Sapphire Reserve card?

When Chase Sapphire Reserve launched in fall 2016, it took the credit card world by storm. The card offered a compelling value proposition: triple points on travel and dining, transfer points to travel partners or redeem them directly against paid travel at 1.5 cents per point, and unlimited Priority Pass airport lounge access. It came at a premium annual fee, but most of that was rebated in the form of a $300 travel credit.

Chase Sapphire Lounge, Washington Dulles

The product was wildly successful attracting young, affluent cardmembers. But it wasn’t profitable. Early on Chase filed SEC 8-Ks outlining greater than expected costs. My understanding is that in the first five years after launch they’d cumulatively lost around $2 billion on the product.

• On the one hand, that’s just a few hundred million a year which is more or less tipping money for J.P. Morgan.

• On the other hand, losses are likely even great than that since they paid more money to re-up United as a co-brand credit card partner early in order to ensure continued Ultimate Rewards points transfers to MileagePlus.

Chase Sapphire Lounge, Philadelphia

The problems, as I understand it, were that:

• People used the card far more for travel and dining (3x earn) than for unbonused spend (1x earn). They can make money at 1x and 2x (since not everyone redeems points at 1.5x through the travel portal or transfers them to Hyatt) but not 3x.

• Cardmembers skewed high income and they tended to pay off their bills every month, so Sapphire Reserve underperformed on revolve.

Chase was awarding too many points for the spend running through the card, those points were too expensive to redeem, and there wasn’t enough revenue to offset this – let alone make back the marketing expenses (like initial bonuses) required to acquire cardmembers.

So it appears that Chase set out to re-engineer the economics of the card.

• Earning: They’ll no longer offer 3x on all travel. That’s going to mean savings on some of the spend that cardmembers were doing with the product.

• Higher annual fee: This is revenue straight to the product P&L bottom line for every cardmember. And they justify it through merchant-funded offers. They’re giving partners like DoorDash, Lyft, and Southwest Airlines airlines access to their highly desirable customers. Those brands fund these rebates (at least in some proportion). Put another way, cardmembers pay more (higher annual fee) to be marketed to.

• Better integration of Chase’s travel ecosystem: Chase had been bonusing purchases from Booking.com and Expedia with 3 points per dollar spend, but those online travel agencies are increasingly Chase competitors. Chase says they’re now the number three travel booking platform. Cardmembers are being pushed to use Chase’s platform with 8x earn on all paid travel booked there, and they’ve taken away the 3x incentive for booking through Expedia (since only hotel and airline direct spend earns the new 4x multiple).

  Meanwhile, they have their own internal ‘merchant-funded offer’ in the form of a credit for Chase’s own The Edit hotel portfolio. They’re driving customers to book premium hotels through their own platform, too. And The Shops at Chase has a credit, which is their online shopping platform.

• Lower redemption costs: Dropping 1.5x on all bookings through the Chase travel portal is going to help on the blended average cost of redemptions. First, because more travel portal bookings will be made at just 1 cent per point. And second because they’re negotiating direct deals that allow them to offer ‘up to 2 cents per point’ on curated redemption opportunities with hotels (that they’ve signed up with The Edit) and for air travel (where there’s enough negotiated margin). Those aren’t costing Chase the 1.5 or 2 cents apiece that cardmembers are getting, whereas the old 1.5x did come close to costing them for air travel.

• Incentivizing more (1x) spend: By adding a $75,000 spend threshold with benefits like IHG Diamond, Southwest A-List and more, customers have a target to shoot for giving Chase greater wallet share than just travel and dining spend which are in money-losing accelerator categories. They’ve structured the card to give consumers a reason to spend more in unbonused categories to reach this level. Plus, once they have these cardmembers in the portfolio, incremental spend is increasingly profitable.

Chef Nobu Learns Barbecue From Aaron Franklin, Thanks To Chase

Chase is delivering a lot of value with the new Sapphire Reserve product. I’m especially excited to use their The Edit credits in conjunction with PointsBoost redemption opportunities at 2 cents per point, while still earning hotel loyalty points and status credit at these same hotels, alongside both The Edit benefits and elite status benefits.

Alongside the other credits the card will offer, I’m going to get far more than the incrementally higher annual fee. And I’m going to be better off at 4x on air and hotel, while losing the rest of travel (like Uber). Plus I can book flights through their portal and earn 8x.

While the card is losing 1.5x travel portal redemptions (which are grandfathered for two years for existing cardmembers), I rarely used that option anyway.

• I avoided the portal because it meant dealing with an online travel agency for customer service when things went wrong. And it used to mean losing out on hotel points and status if booking hotels, but now The Edit portfolio solves this at participating properties (since those bookings receive points and status credit as well as elite benefits).

• I always transferred points to travel partners, and only for redemptions that were better than 1.5x.

• Now I will sometimes see 2 cent redemptions, and while it’s a matter of luck in some sense that’s okay – it’s like airline saver awards. You don’t always get outsized value, but the new system makes it possible to win more than before. I think of it as moving from fixed value redemptions back to a saver award chart.

Chase Points Are Better For Awards Than Paid Tickets

I did ask Chase executives about whether they were concerned about turning the product too much into a coupon book? American Express hasn’t pushed cardmembers away with their Entertainment Book-style Platinum card that forces cardmembers to jump through a lot of hoops to get enough value out of the product to justify its annual fee. But there’s a lot of frustration and fatigue. Chase contends that their credits are easy to use and already align with how their cardmembers behave. Plus, I’d add, the amount and value of the credits is really strong.

Ultimately they’re trying to get customers to lean in and give them more wallet share, both in terms of direct spend on the card and in terms of shifting their behavior onto Chase’s platforms in their travel and dining ecosystem. They’ve structured a lot of bonuses and credits as carrots to encourage this. I expect that a lot of Sapphire Reserve cardmembers (and potential cardmembers) will see the value, even if there’s a bit of chafing at a $795 annual fee and disappointment over loss in flexibility of 1.5 cent per point redemptions on all travel.