Recently the Wall Street Journal wrote about banks trying to control rapidly spiraling rewards costs. I didn’t take seriously the idea that banks would cut back on rewards to consumers to do this because they are offering rich rewards for a reason: they need to do so to attract consumers which earn them a piece of every transaction (plus annual fees, and interest when they don’t pay off their bills).

To me the biggest takeaway was the more parenthetical note in the piece, that Chase says they aren’t going to stop cardholders from moving points between their different accounts. Back in April there were reports across multiple sites that Chase was considering eliminating the ability to do this. And then we heard nothing — so it remained a risk in the background.

And the ability to combine points is the key to my multi-card Chase strategy to maximize rewards.

• Create a Chase hub, that means getting a Chase Sapphire Preferred Card or Ink Business Preferred℠ Credit Card whose points transfer to miles.

• Then getting a variety of Chase no annual fee cards that earn at faster than 1 point per dollar.

• Moving the points from the no annual fee cards to the Chase Sapphire Preferred Card or Ink Business Preferred℠ Credit Card, increasing the value of those points by making them transferable to airline miles and to hotel points.

That lets you take advantage of the most Chase bonus categories possible, without racking up several annual fees, and ensures you never have to earn just one point per dollar.

You can thus transfer points earned from all of the cards earning Chase Ultimate Rewards points to:

• Airlines: United, JetBlue, Southwest, British Airways, Virgin Atlantic, Air France KLM, Singapore Airlines, Iberia, Aer Lingus
  
• Hotels: Hyatt, Marriott, IHG

Josh Barro though takes on the broader claim about banks backing off of big rewards in New York magazine concluding “so long as we’re mostly worrying about banks wanting higher profits, I wouldn’t worry too much about what that means for card rewards.”

He points out that Barclays tried to offer a card giving out bonuses each year as a reward for spending, rather than upfront bonuses. That effort failed. I’ve long argued that up front bonuses are important:

1. For consumer attention in a busy world, moving getting even a good card from number 20 to top 5 on the to do list.
   
2. To show customers value up front, so they will trust they’re making a good decision with the card. We know that when customers redeem and get value out of their points they start to accumulate faster.

This isn’t just a matter of moving from one equilibrium to another, a collective action problem, if only all banks would stop offering big bonuses no one would need to. And the rich rewards for ongoing spend are necessary to incentivize running transactions through each bank’s products. (Remember that incremental transactions on the Visa network may not even be costing Chase anything.)

The risk to rewards in the long run is that each transaction becomes worth less to banks, and therefore they spend less to attract those transactions. There are three ways this could happen.

1. Merchant leverage. Costco pays almost nothing to accept credit cards. Amazon is in a position to extract a great deal. Retailers generally are pushing for lower swipe fees, and American Express has been lowering fees to attract more small businesses to their platform.

2. Government regulation. That’s what killed debit card rewards in the US (Durbin amendment to Dodd Frank financial reform) and it’s transformed the rewards card landscape in Europe in Australia. It’s far less likely in the U.S. under the current administration but becomes a threat again if Democrats re-take power.

3. New technology. New ways of processing payments compete against traditional Visa, Mastercard, and American Express networks and compete down the price those networks can charge and what the banks are able to keep. Over time this seems like the biggest threat to rewards.

In the meantime there are certainly products in the marketplace that are losing money. I believe Chase loses money on Sapphire Reserve, even with their lease of Visa’s network. Losing money after the run up in pricing for recent co-brand deals is less common than many would think actually.

And as a result issuers need to tweak their offerings to contain costs — and so we see Citi scaling back the 5th night free hotel benefit from Prestige, and lots of cards running away from price protection now that it’s so easy to use (and thus more costly to pay out on). Chase no longer covers unlimited Priority Pass lounge guests for Reserve cardholders, no longer awards points on the $300 in travel spend that they rebate each year, and no longer awards that $300 twice in the first cardmember year.

David Gold, who ran the United card and directed Ultimate Rewards at Chase and was at American Express before that, tells Barro that “[r]ich reward cards aren’t going away, but benefits and features that provide “outsize value” and cause customers to become unprofitable may be at risk.”

Put another way, as I’ve written for over 15 years, any opportunity that offers orders of magnitude better opportunities than the rest of the industry won’t last over time. Regression towards the mean can always be expected. Enjoy each benefit while it lasts, and always watch out for where new value is being offered.