Are Rewarding and Costly Credit Cards an Unsustainable Business?

Travel businesses are way too herd-bound too often doing what competitors do for no reason other than that competitors are doing them. There’s a belief that other people are smarter, or that if you don’t follow the herd you stick your neck out and lose what Mel Brooks called ‘phony baloney jobs’.

Consultants, too, sell conventional wisdom or low quality analysis to the industry on a regular basis. Even knowing this I’m often surprised by the weakness of the thinking undergirding the work.

I received a pitch for a consulting firm’s new study, Premium Travel Reward Credit Cards: High Profile but Unsustainable, which argues that high reward, high fee cards are an unsustainable business.

In some ways this is important because it counters the Joe DeNardi claim that airlines are worth substantially more than the market values them at because the frequent flyer programs are so profitable. I’ve argued that rather than being able to expect 4% annual growth or higher it’s more likely that programs will face both revenue and cost pressures in the future.

The synopsis of the report though isn’t so tightly argued, offering four reasons the model will not stand the test of time:”

  • Top-tier issuers are already reducing their rewards. Points per dollar spent set at 100,000 one day are 50,000 the next, causing market confusion
  • Year-2 benefits are nowhere near as attractive as year-1 benefits, which will likely cause attrition.
  • A potential shift from accounts transacting (cardholders paying off balances monthly) to revolving (cardholders paying over the course of time) could upset issuer revenue expectations.
  • The reliance on interchange works in the U.S. market today, but if regulators follow the example of Australian, Canadian, or European regulators’ standards, the source for funding card rewards will end.

There are reasons to think that the new Chase Sapphire Reserve Card overinvested in new cardmember acquisition — that a 100,000 point initial signup bonus was too big to earn back on average across a portfolio of cardmembers, especially when some cardmembers will cancel in year two without that annual fee.

That may be right or wrong, though Chase Sapphire Reserve also offers a $300 travel credit offsetting the fee and rich ongoing rewards and is uniquely positioned within Chase’s cost model for processing transactions.

Meanwhile cards like US Bank’s new Altitude Reserve can keep customers who know that with a bonus on mobile payment transactions each year mobile payments are going to grow and become more prevalent, so come decision time for keeping the card there’s a strong argument that it will become more valuable not less valuable in the future.

Companies may well be overinvesting as they compete for consumer business, and there are threats to the model. But I don’t think the way the study is described captures those threats well at all.

Where Can I Earn 50,000 Points Per Dollar?

Mercator says that “Top-tier issuers are already reducing their rewards. Points per dollar spent set at 100,000 one day are 50,000 the next, causing market confusion.”

Here I think they must be referring to signup bonuses, Chase Sapphire Reserve entered the market with a splashy 100,000 point signup bonus offer. Ongoing earn per dollar spent hasn’t been reduced.

There’s no question that a 100,000 point singup bonus is more attractive than a 50,000 point one, however it’s smart marketing and cardmember portfolio management to:

  1. Vary the signup bonus so a big bonus doesn’t get stale, you can generate real buzz in the future while picking up cardmembers who would apply at the lower bonus (so you don’t overpay for all your new customer acquisitions)

  2. Pause while you do the data analytics on the performance of a new portfolio of cardmembers

The claim that issuers generally are cutting back on rewards in this space is false, if anything we’re seeing more changes that involve higher investment and continual introduction of new competitors from more banks (and I expect additional competitors still).

Whether Customers Keep a Card After Year One is Always a Concern

The claim that “[y]ear-2 benefits are nowhere near as attractive as year-1 benefits, which will likely cause attrition” really focuses on signup bonus going away after the first year, something true of every rewards card that has ever offered a big signup bonuse.

Secondarily the Sapphire Reserve Card had made it possible to earn two $300 travel credits in the first cardmember year. That was a loophole that has since been closed for new cards and one that was never offered on the US Bank Altitude Reserve. Both cards now give you a travel credit per cardmember year not per calendar year.

No doubt there will be customers who take the bonus and run, that’s hardly new but it’s a bigger concern as cardmember acquisition costs rise.

The Study is Afraid Customers Will Pay Banks Interest

This one seemed strangest to me: “A potential shift from accounts transacting (cardholders paying off balances monthly) to revolving (cardholders paying over the course of time) could upset issuer revenue expectations.”

Now American Express Platinum card is a charge card not a credit card. There’s a separate opt-in offer to be able to revolve credit, but that’s an indepedent decision to make available to consumers and isn’t part of the underlying value proposition of the Platinum card.

Other card companies offer the ability to revolve credit, to pay interest on a balance rather than paying off the card in full each month. That’s a separate profit center for banks although not necessary to make money on a rewards card.

The Revenue Model of Rewards Cards May Change – But Not for Awhile and Not for the Reason the Report Thinks

Concerns about the future sustainability of payment processing fees (interchange) are hardly new. I wrote about how legislation killed interchange for debit cards and how that ended debit card rewards (and eliminated free checking accounts for many) back in 2011. I wrote about legal challenges in the courts that could drive down interchange in 2012.

A year ago I laid out the full argument about threats to interchange and the future of rewards cards, how it was more likely we’d see lower interchange and therefore less rewarding credit cards than more rewarding cards a decade from now. In fact I included lower interchange and reduction in the value of rewards cards as one of 10 controversial things I believe two years ago.

However the claim that US regulators might “follow the example of Australian, Canadian, or European regulators’ standards” seems far off in a Trump administration, much more likely if Hillary Clinton had won the Presidency. As a result the federal regulatory threat to interchange has been put off.

In fact, contra the synposis of the report, a far greater threat to interchange and thus to rewards cards is competition from new payment technologies that simply drive down the cost of processing payments between individuals and businesses.

And in any case, Chase at least isn’t paying anything for incremental charges on their cards and has locked in fixed pricing from Visa for years into the future. So Chase’s premium rewards strategy is fairly locked in for a few years.

The threat, while real in the future, is hardly imminent — and at least as likely to be coming from a different source than the report identifies.

Is the Full Report Any Better? It’s Too Costly to Find Out

I thought I’d read through the full report to see if the analysis was stronger than the condensed version in the press release.

I share my own take on these issues here on the blog for free. (To be sure I also speak at industry conferences and have consulted with both bank issuers and hedge funds largely sharing directly what I share here for free.) To get Mercator Advisory Group’s take I’d have to pay $2450.

I’m reminded of Patrick Dempsey in Can’t Buy Me Love.

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 »

More articles by Gary Leff »


  1. Gary, I think that the days of churning etc are closing in and for me I welcome it. But then I have been flying a long time and remember the days when flying was fun and FC was FC, people actually dressed not coming on board in shorts ragged shirts. or one flight I had a blogger and his photographer dressed in pj’s for a long haul international flight. I and some others in FC shut the picture taking down.

    There are some really good helpful bloggers out there you being one having said that it’s the others that are ruining things for all of us

    I see things leveling out a bit. As equity capitol investments grow benefits will proportionally diminish.

  2. I don’t know who these consultants were, but they sound like they really don’t know what they are talking about at all. I’m sure 50,000 points per dollar spent is absolutely an unsustainable model….sheesh, did they even proofread this report they think they are going to sell? Getting customers to pay interest by carrying balances is the entire point of a credit card business…are these guys for real?

  3. I always assumed the strategy for high-end credit cards was largely centered around acquisition for the banks. The point, I assumed, is to cross-sell more lucrative financial products once you have them as a customer.

  4. I think the point is that $450 per year will only appeal to a certain level of customer who in turn can be subjected to cross-selling etc. As contrasted with the $95 a year CSP customer who may not be all that valuable, not to mention the nickel and dime customers that are approved for other affinity cards.
    Whether the $450 model is sustainable depends on how any new clients are retained and how much the client relationship is worth (as opposed to churners and those of us who are long-time clients just cashing in on the latest deal). But I am pretty sure that a card with good benefits (e.g. CSR) will fare better than the crap airline affinity cards that many will cancel they discover the emperor has not clothes.

  5. When I did consulting work in IT, if I came up with a product that is obviously incorrect my neck would be out there.

  6. I agree w Mark. If you become a Chase Private Client member, you can still get the 100k signup bonus for the reserve card. I think these will continue for upper echelon customers.

Leave a Reply

Your email address will not be published.