Credit Card Bonuses Are Breaking The Bank, But Won’t Go Away Any Time Soon

J.P. Morgan Chase warned that the financial performance of its card business was being dragged down by “rising costs on marketing and promotions.” This caused shares of other card issuers to drop on the day of the report, because the issue is industry-wide.

During the pandemic people largely kept up their non-travel and dining spend (bolstered in part by federal stimulus) but weren’t signing up for cards.

  • Banks became nervous about approvals. Small business lending was risky, and large companies were pledging not to do layoffs in 2020 making it tough to predict who would still have a job in 2020. The pandemic was rife with uncertainty.

  • But people still cancelled cards, though this was mitigated somewhat by benefits and retention offers. Card portfolios were shrinking.

  • Now banks are scrambling to attract customers and catch up. And the only tool in their toolkit, for the most part, is big up front bonuses (though they’re trying to make the products more compelling, too, and this can be costly as well).

Many of the richer rewards cards have spreadsheet models behind them showing that acquiring a new customer will break even in around seven years. I don’t ever believe these models. A seven year payback says to me “by the time we’re accountable for this, someone else will be in charge of the portfolio.”

Early on Chase filed SEC 8-Ks showing nine-figure higher than expected costs for its Sapphire Reserve card. When you introduce a product with a big bonus, where interchange at best covers rewards and benefits costs, you’re relying on consumer revolve to make money – a problem when a product attracts consumers among th least likely to revolve.

Chase is in some ways best-positioned to spend richly acquiring customers and their spend, because they lease Visa’s network for a flat fee and don’t pay incremental charges for spend. So the more spend they can push through (with revenue higher than marginal rewards cost) the better they’ll do. So it’s no surprise that Chase isn’t reversing course on using big bonuses to attract cardmembers,

JPMorgan management said they expect marketing expenses to stay elevated as the bank seeks to expand market share.

And this means that other issuers have to do the same for limited consumer attention span. Big bonuses really serve two functions,

  1. Attract attention and get consumers to act now. Even though a product may be the best on the market for a given customer, people are busy, so the challenge is making applying for a credit card lucrative enough that it becomes one of the top things to accomplish on any given day.

  2. Bridge the trust gap. Consumers don’t trust brands. Rewards require up front commitment and spending with the promise of receiving value in the future. A big bonus shows value to the consumer right away. And that’s important, not just for application, but also to get the customer using the product. When consumers redeem their points for a reward they prove to themselves the value of the decision they’ve made on the product, and increase their commitment to the product – moving it top of wallet for more spend.

Several years ago Barclays introduced their Arrival Premier card, since discontinued to new applications. Nobody applied. They didn’t offer an up front bonus, instead opting for an annual bonus based on a spend threshold. At industry conferences where I spoke everyone was rooting for Barclays to succeed (competitors!) because they were hoping there was a path forward to a world where big up front bonuses, and associated expense, were no longer necessary. Arrival Premier proved that bet wrong.

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. The game is pretty awesome right now – just concerned about annual fees increasing, points inflation and real inflation, which are all definitely offsetting some of the increased offers

  2. “The game is pretty awesome now….”.

    Until you try to use that wampum. Transatlantic one way business class is now 320,000 miles on DL, 110,000 on AA and a lot of ‘mixed cabin’ itineraries on UA. Momentum will carry these programs a long way, but peek around the corner and you’ll start liking those cash back cards more and more.

  3. @Sam – I agree. The current model is flawed for many reasons. Card issuers lose money and the inflation in number of points/miles inevitably leads to award devaluation (points/miles work like any other currency).

    People may feel good about getting a bunch of points or miles but, as you noted, when they go to redeem them and 80,000 hotel points gets the same room that cost 40,000 points 2-3 years ago or they try and book a Delta international business class ticket and find out it is over 200,000 miles each way there is a lot of bitching and whining.

    Economics works so there shouldn’t be a surprise. I expect more devaluations simply due to the large upfront bonuses offered now.

  4. Citi is desperately trying to get me to use their card, which currently sits at the number 3 position. It’s not worth much for rewards, but with a 30 year account, it marginally boosts my credit score, so I’m not cancelling it. They periodically offer 5% on restaurants and groceries, I pull it out for those categories, and once I reach the cap on the offer, it goes back to the back again. There is no way I’m profitable for them, but as a legacy AT&T Universal Card, as long as I use it once a year, they can’t impose a fee. And I think that’s the problem for banks, is that spending is stagnant. They need to replace the old people as they stop spending or die, but don’t want to take a chance on young people.

  5. Of course the credit card divisions of banks (under consumer banking) feel the struggle of higher costs. Banks are using a 10 year old model for credit cards that does not gel with the here and now. 10 years ago consumers didn’t not have as much awareness of credit card interest as they do now. Back then debit cards were still big. With the transition to credit cards for rewards since the debit cap, more people are earning rewards (and the subs) and not carrying a balance. Cash back and bonus categories are the expectation now versus magazines, merchandise, and 1 cent pp if lucky. These travel blogs and personal finance sites did not exist.

    The only way the credit card divisions stay afloat is with cross selling mortgages, personal loans, deposits, and brokerage. The big banks have done ok with this. Citi flex loan is for people who don’t know BTs are preferable and more than half as cheap. Amex has the ability to load up the cards with promotions paid by companies looking for advertising on the amex offers. 100,000 points is not sustainable for premium cards with high score requirements that precludes people most likely to carry significant amounts. Most of the smaller banks don’t offer what the the big banks do. I assume this is because they don’t have the opportunity to cross sell across the top markets like the big banks (with footprints in many major markets across the country) are able to. I don’t understand how executives can think 100,000 points for travel blog readers will bring them profit.

  6. Heh. It’s not my job to make the banks a profit, so I shed no tears for their losses. I will not even rub two brain cells together to try to solve this problem for them.

  7. The arrival plus card flopped because it wasn’t good.

    Card issuers are too binary in their thinking. Other than promo bonuses which are spammed by TPG and others, there are other courses they could take to reward loyalty.

    For example, AMEX or Chase could consider tier benefits for loyal customers.

    For example, after 5 years of holding Platinum, AMEX could offer something like a free bag or 2 on an airline of your choice. That’s just one example, there are many others. It beats some overpriced gym membership and a ChinaMart plus monthly subscription.

  8. Point devaluation season us upon us. Prices of fuel has gone up, and most domestic airlines have mortgaged their programs to the hilt. Still value left at the fringes, just don’t assume value with the big 3. Smoke ’em while you got ’em.

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