The Future of Credit Card Rewards

In many ways this is the golden age of rewards. There are big initial bonus offers, fast earning for spend, and rich benefits.

Some readers would argue that five and six years ago was the golden age when programs were easier to abuse, but I’d disagree and the data backs me up — for program members at large there’s never been a better time, card issuer rewards expenses are at record highs.

There are risks though, and challenges for issuers.

• Merchant swipe fees could fall whether as a result of regulation (as in Europe, Australia), litigation (big retailers want to discount cash payments, and accept only less expensive cards), or competition from new payment technologies.

• Even if interchange rates stay the same, at the point where card companies are spending the entire interchange rewarding customers and rely only on APR (interest charges) to cover acquisition cost and eventually turn a profit there’s just not any more money card companies can invest to compete for customers.

As a result card companies are going to need to invest smarter to deliver value to customers, rather than simply spending increasingly more.

And airline co-brands are the best positioned cards to do this, because frequent flyer programs are fundamentally big data firms. Banks can deliver tailored value to cardmembers instead of taking an expensive scattershot approach.

• Frequent flyer miles have been successful because of passion for travel and leverage from saver awards. Rebate programs weren’t new, but what made airline frequent flyer programs the most successful marketing innovation in history was delivering the kind of value that consumers dream about and will motivate them to alter their behavior over time in search of a reward goal.

• That requires trust over everything else. Since programs are intertemporal, they require customers to take the leap of faith up front taking actions to save points now on the promise of value later. Devaluations, and especially changes without notice, undermine trust.

• Consumers are skeptical. That’s why banks need to front value to customers. There’s no replacement for big initial card bonuses, not only to get consumer attention but to put customers in a place where they can redeem for value quickly, proving they’ve made a good decision about the card. Good redemption experiences increase the rate of earn going forward.

• Rewards need to be high value. A 1% or 2% rebate appeals to some customers, but will never match something that costs 1% or 2% to a program but has a retail price four or five times as much. The best motivators are rewards customers value at a level far greater than those rewards cost to provide. That’s the magic of the saver award, the seat that would have otherwise gone unsold. The shift towards average value puts programs on a collision course with themselves.

• Targeting benefits. Cards, especially in conjunction with travel data, are in a position to know and understand a tremendous amount. Experiences are offered by many programs, including banks and payment networks (“Mastercard Priceless Experiences”). Very few cardmembers know, investigate, or take advantage of them.

  And if experiences are marketed they’re rarely relevant to the cardmember based on schedule or interest. I’ve never paid for a round of golf or purchased golf supplies on my credit card, so why would a program send me information on a golf experience, my status as a mid-40s white guy notwithstanding?

  Instead if they know I spend a good deal on nice meals, that I’m traveling to a specific city, and they have a chef experience in the city while I’m there why not prompt me with the opportunity to participate? The point is to deliver the right message, to the right customer, at the right time.

• Help customers use their benefits. Right now cards offer myriad travel and purchase protections, and those survive precisely because they’re rarely used. Price protection has become more rare as apps have developed to automate claims, even from tiny price drops. As benefits become costlier to provide they become untenable.

  Card companies need to flip the model from one where they hope customers don’t use the benefits to one where they help consumers use their benefits. That will mean fewer, more targeted benefits relevant to the csutomer.

  A company that emailed a cardmember after a long flight delay letting them know they have trip delay coverage and to send them the bill for hotel and meals, that emailed a customer when their co-brand airline partner loses their bags to let them know they can spend $100 a day on incidentals, wins the loyalty of customers in a deep, passionate way. Today most customers who have these benefits don’t know it, and those that know it don’t think about it, and that’s a lost opportunity to add real meaning to the customer experience when the cardmember cares about it most.

• Data-driven cross selling. Why doesn’t Citi solicit AAdvantage members with wealth profiles for private banking, aside from public facing checking account signup bonuses, why doesn’t Chase solicit MileagePlus members for Private Client and You Invest? Shopping portal promotions should be funded by merchants seeking business currently going to competitors rather than sales they would make otherwise. Connecting a Facebook profile should be bonused — and data imported so key life events are known and can be targeted for spend.

  Chase thinks Sapphire Reserve can turn out a profitable product by cross-selling to cardholders, but this shouldn’t just be a last ditch effort that’s otherwise value left on the table, it should be a feature of every product/relationship.

• Ride the rails of the program customers already value to drive spend inexpensively. Frontier and Hyatt have interesting takes on this, since spend directly earns status without a cap (without straight giving the status away). In this way customers who value the status, who are also customers most likely interested in the card product, are encouraged to spend — even while taking modestly lower rewards for their spend. It is crazy to move in the opposite direction as American and to some extent Delta have done, reducing the role of card spend in earning status rather than increasing it.

While there are lessons from the success of airline programs this is not a prediction of where they are headed but where card programs are headed, less reward spend but more impactful through better use of data and tighter collaboration with partners to deliver experiences.