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I’ve written that I don’t believe Chase can ever make money on their Sapphire Reserve product. They appear to be spending the entire merchant swipe fee (interchange) on servicing and providing benefits and rewards to customers.
Any upside — indeed, even covering the cost of acquiring cardmembers with signup bonsues — would have to come out of revolve, from interest customers they accrue when they don’t pay off their cards. But with 785 average credit scores and $180,000 average incomes it’s not likely they’re getting all that much revolve.
Now Chase has shared that they’ve taken a $330 million charge in the second quarter for higher than expected redemption costs.
Chase’s take? We lose money on each customer, but we make it up on volume.
J.P. Morgan’s [Chief Financial Officer Marianne] Lake said that the recent charge, coming from Sapphire and other cards, is a good thing because it shows how engaged users are.
The cards division has seen strong loan growth, modest charge-offs and record low attrition rates, she said, alleviating fears from some analysts that customers would stop using the plastic after redeeming the sign-on bonus.
Chase’s card customers, especially those picked up in the last couple of years, have strong spending patterns, Lake said. “Engaged customers bring us more spend, they bring us more of their share of wallet.”
Naturally, Saturday Night Live‘s First Citiwide Bank comes to mind,
Paul McElroy: A lot of people don’t realize that change is a two-way street. You can come in with sixteen quarters, eight dimes, and four nickels – we can give you a five-dollar bill. Or we can give you five singles. Or two singles, eight quarters, and ten dimes. You’d be amazed at the variety of the options you have.
Customer #3: I was driving through Pennsylvania on the tollway, and to save time I was using the exact-change lanes. I had just run out of quarters, and I was getting a bit nervous when I spotted a sign for a Citiwide branch at the next exit. Let me tell you, it was a pretty good feeling.
Paul McElroy: I have had people come in with wrinkled ten-dollar bills to exchange for new crisp bills to put in birthday cards. We can handle special requests like that, usually in the same day.
Customer #4: I’d just returned from a business trip to London, and all the cash I had was a five-pound note. Citiwide wasn’t able to convert it to dollars, but they did give me four guineas, two crowns, four shillings, and ten pence.
Paul McElroy: All the time, our customers ask us, “How do you make money doing this?” The answer is simple: Volume. That’s what we do.
The truth is that this is a golden age of credit card rewards — not for signing up for cards just for the bonuses, but for actually being rewarded for using cards. At the very top end of the rewards market banks are spending more than seems rational on points and benefits in order to attract our business.
(HT: Jonathan W.)