topic Re: Unprofitable Rewards in Credit Cards

Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 01:28:02 GMT

With the explosion of rewards cards and the number of rewards cards people carry today, one has to wonder when we go back to 1-2% rewards. Rotating categories and a handful of cards, getting 3-5% rewards on most products and services each time is easy to do. But card companies track profitability by cardholder, and when you use a card only when you can get rotaating 5% rewards or even 3% standard when they charge less than that on exchange fees, card companies in the future may decide it's not worth paying out 3-5% rewards for many of their customers.

I try to use each of my cards occasionally for 1% rewards in order to balance that out, but I think the 3-5% rates won't last forever. Card companies already have curbed churning because of the losses. They may curb the rewards. I don't think I'm very profitable for any of the card companies that I have cards with.

Re: Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 01:31:37 GMT

You may not be profitable but there are more people out there that are profitable.

Re: Unprofitable Rewards

simplynoir — Thu, 29 Aug 2019 03:34:14 GMT

@Anonymous wrote:
You may not be profitable but there are more people out there that are profitable.

This. You have to remember we are a niche group for the most part and not representative of the majority. For credit card companies to entice new and current customers to spend the rewards will always play a part. Banks have put restrictions on this to limit bonus earnings (Chase 5/24, AMEX once in a lifetime, spending caps on categories, etc) but they have to have them to get an advantage over the competition.

Re: Unprofitable Rewards

coreysw12 — Thu, 29 Aug 2019 03:53:32 GMT

@Anonymous wrote:
You may not be profitable but there are more people out there that are profitable.

I was going to say the same thing. When determining rewards models, banks don't look at profitability of individual customers - they look at the profitability of the product as a whole.

95% of us on MyFico might be maximizing our rewards spending and being unprofitable for the card issuer, but we're not the average consumer. Most people can't be bothered with juggling rewards cards. Most people just use whatever card in their wallet "has room on it". And more importantly, most people carry a balance each month, which makes the costs of rewards payouts completely irelevant to the bank's bottom line. For every 10 of us who aren't profitable, it only takes 1 customer carrying a balance month-to-month for the bank to break even.

Probably, the card issuers actually LOVE those of us who optimize and maximize our rewards - because we talk about how awesome the cards are to our friends and on internet forums, ultimately attracting more customers (who are probably more profitable) to their cards.

Re: Unprofitable Rewards

CreditInspired — Thu, 29 Aug 2019 12:18:44 GMT

@Anonymous wrote:
With the explosion of rewards cards and the number of rewards cards people carry today, one has to wonder when we go back to 1-2% rewards. Rotating categories and a handful of cards, getting 3-5% rewards on most products and services each time is easy to do. But card companies track profitability by cardholder, and when you use a card only when you can get rotaating 5% rewards or even 3% standard when they charge less than that on exchange fees, card companies in the future may decide it's not worth paying out 3-5% rewards for many of their customers.

I try to use each of my cards occasionally for 1% rewards in order to balance that out, but I think the 3-5% rates won't last forever. Card companies already have curbed churning because of the losses. They may curb the rewards. I don't think I'm very profitable for any of the card companies that I have cards with.

Hi and welcome to MyFICO

Personally, I dont care if the CCCs are profitable or not—but they’re plenty profitable when they make mulimillions of dollars annually off of swipe fees and AFs for those in the know; and NSF fees, late fees, over the limit fees on those who don’t use credit wisely. They’re making a gazillion dollars hands over fist.

I am taking advantage of every single reward that’s offered. One can’t worry about what a CCC may or may not change in the future. Everyday they make changes. And if a specific card’s rewards don’t suit me, I’m off to the one that does.

Re: Unprofitable Rewards

CreditInspired — Thu, 29 Aug 2019 12:21:37 GMT

@coreysw12 wrote:
@Anonymous wrote:
You may not be profitable but there are more people out there that are profitable.
I was going to say the same thing. When determining rewards models, banks don't look at profitability of individual customers - they look at the profitability of the product as a whole.

95% of us on MyFico might be maximizing our rewards spending and being unprofitable for the card issuer, but we're not the average consumer. Most people can't be bothered with juggling rewards cards. Most people just use whatever card in their wallet "has room on it". And more importantly, most people carry a balance each month, which makes the costs of rewards payouts completely irelevant to the bank's bottom line. For every 10 of us who aren't profitable, it only takes 1 customer carrying a balance month-to-month for the bank to break even.

Probably, the card issuers actually LOVE those of us who optimize and maximize our rewards - because we talk about how awesome the cards are to our friends and on internet forums, ultimately attracting more customers (who are probably more profitable) to their cards.

You’ve hit the nail on the head.

Re: Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 12:28:33 GMT

yup, most lenders (except axp) makes vast majority (up to 90%) of their profit from interest charges on balance carried.

Re: Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 14:44:39 GMT

I agree with most of what has been said above.

Forum members here that have a bunch of different rewards cards that use certain ones for certain categories are definitely in the minority compared to the whole. Most people I know like friends and family members simply carry 1-2 cards and use them for everything. While they may be getting rewards in one category, the majority of their spend will land in the 1% "everything else" category. This type of customer is far more common than people like us.

Re: Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 15:13:06 GMT

Some of these cards are essentially a loss leader -- the financial equivalent of a Black Friday doorbuster deal. These companies hope you'll be enticed to open an account and use its other products and services on which it actually earns money.

Re: Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 16:24:40 GMT

@Anonymous wrote:

I try to use each of my cards occasionally for 1% rewards in order to balance that out,

I agree with the comments of most of the other posters, just want to say I wouldn't advocate doing this because:

a) it may not matter, if the issuer is looking at the card performance overall rather than an individual

b) if they do look at it on an individual level, you are only going to profitable if your 1% use far outweighs the enchanced category, really negating the advantage of using the card. Basically, earning $100 and giving back $1 isn't going to impress them as making an effort!

Re: Unprofitable Rewards

coreysw12 — Thu, 29 Aug 2019 17:05:04 GMT

@Anonymous wrote:
Some of these cards are essentially a loss leader -- the financial equivalent of a Black Friday doorbuster deal. These companies hope you'll be enticed to open an account and use its other products and services on which it actually earns money.

There are a few articles online (in the WSJ, and others) about how the Sapphire Reserve is specifically a huge money-loser for Chase - they lose something like $200m/year from that card. But 3 or 4 years later, they still haven't made any major changes to it and they still actively try to get new people to sign up for it, with aggressive advertising and even referral bonuses for people who get their friends and family to apply for one. Sometimes a product isn't meant to make money directly - it's meant to entice people to sign up for and use other products, to generate buzz, and to lift their reputation. In the last 5-10 years, Chase credit cards went from "meh" to being the holy grail of travel card issuers, and the returns they get from that status is probably well worth the $200m loss they suffer on their top-tier card.

As a side note, their 5/24 policy is almost genius. Not only does it protect them from serial card churners who cost them the most profits, it adds an element of "but you probably can't get one" to their covetted cards, which makes people want it even more.

Re: Unprofitable Rewards

Aim_High — Thu, 29 Aug 2019 21:05:32 GMT

@coreysw12 wrote:
>> There are a few articles online (in the WSJ, and others) about how the Sapphire Reserve is specifically a huge money-loser for Chase - they lose something like $200m/year from that card. But 3 or 4 years later, they still haven't made any major changes to it

And hopefully they will be smart and not make changes. I saw one page of statistics that Chase revealed showing CSR's > 90% renewal rate, which is extremely high. I think they know that would plummet if they slashed benefits. (Statistics also showed CSR average FICO 785, average income $180K, and average spend $39K ($3250 per month.)
(Source: https://viewfromthewing.com/2018/02/28/chase-reveals-data-behind-sapphire-reserve-card/)

>> Sometimes a product isn't meant to make money directly - it's meant to entice people to sign up for and use other products, to generate buzz, and to lift their reputation. In the last 5-10 years, Chase credit cards went from "meh" to being the holy grail of travel card issuers, and the returns they get from that status is probably well worth the $200m loss they suffer on their top-tier card.

I agree and that strategy has worked. I think they have the best travel cards as a whole, not only the CSR but the accompanying cards that can earn transferrable UR points such as CF, CFU, and INK. And that doesn't even count all the partner cards with major hotel chains and airlines. Nobody can touch them right now. IMO, not even AMEX; at least for the majority of the population who doesn't travel frequently for business. I believe CSR and the trifecta/quadfecta of associated No AF cards gives you as much value as MR points with lower total AFs, easier ways to get statement credits towards the AF, and equal or superior travel protections.

Chase has solicited me for bonuses on new banking accounts or investment accounts and I admit I've thought seriously about giving them some of that business, so their strategy seems to be working to attract business.

>> As a side note, their 5/24 policy is almost genius. Not only does it protect them from serial card churners who cost them the most profits, it adds an element of "but you probably can't get one" to their covetted cards, which makes people want it even more.

True perhaps, for those of us "in the know". However, 5/24 is definitely not as well known to the average person. They just apply for a card, get turned down, and move on without really thinking about it. Until I started 'researching" cards online about two or so years ago, I hadn't heard of 5/24 or other bank rules about SUBs or applications.

Re: Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 22:58:05 GMT

Reward cards have ridiculous interest rates. When they pay less than 1/10th of a percent on interest on savings and you can lend that out to 10 people at 24 percent interest it isnt hard to make money.

Re: Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 23:20:39 GMT

I think it’s more likely that banks will raise interest rates and/or merchant fees and increase the cost of annual fee cards before closing down existing cards. We’re also likely to see the continued erosion of “soft” benefits (Citi axing travel perks, Amex dropping PP restaurants, nearly all cards eliminating price protection).

Re: Unprofitable Rewards

kdm31091 — Thu, 29 Aug 2019 23:35:01 GMT

I do think that overall, rewards have probably peaked. There's only so much a bank can afford to give out in rewards before it becomes a losing proposition. Years ago most cards were 1% so there was not much point in juggling several. Nowadays with competition, rewards have increased, but blogs, forums, etc have made rewards more mainstream. More and more people are jumping on the bandwagon. Huge signup bonuses are being milked by more people, which is why banks are starting to change the rules on SUBs and some are switching to the "x% for a year" model. Plenty of people do pay interest, and you've got interchange fees, yes, but I do think rewards are probably not going upwards from here.

I think we will see more "perks" eliminated price protection, extended warranties, things like that, first. This saves the issuers money. If that isn't deemed effective enough, I think banks could start to nerf rewards.

As for Chase, 5/24 is likely effective in weeding out unprofitable customers, but it's not like it's something the general public knows about. I think it does create a heighted sense of "I want a Chase card", simply because they are harder to obtain, which makes them seem more exciting, whether that's true or not.

In any event, probably not much point in worrying about it because it's out of our control. Enjoy the rewards for now and ride out the changes if/when they occur (I do think you're right that it will likely be in a downwards direction overall).

Re: Unprofitable Rewards

Anonymous — Thu, 29 Aug 2019 23:53:56 GMT

@Anonymous wrote:
I think it’s more likely that banks will raise interest rates and/or merchant fees and increase the cost of annual fee cards before closing down existing cards. We’re also likely to see the continued erosion of “soft” benefits (Citi axing travel perks, Amex dropping PP restaurants, nearly all cards eliminating price protection).

Interchange is set by the card networks, not the issuers (though the latter can game it to an extent by releasing cards that would have been e.g. Visa Platinum a decade ago as Visa Signature). This inflation is a significant reason why merchants are pushing to eliminate the "honor all cards" rule (and thus give them the power to simply reject rewards cards outright).

If anything, I see interchange decreasing over time. The alternative is more and more stores surcharging and/or mandating minimums, or even simply no longer accepting certain networks (such as AmEx) or cards (if given that right). Though if interchange does go down, I fully expect rewards for spending to go down too--which may make using credit cards in general vs. debit or cash not worthwhile.

Re: Unprofitable Rewards

Anonymous — Fri, 30 Aug 2019 02:21:07 GMT

@Anonymous wrote:
@Anonymous wrote:
I think it’s more likely that banks will raise interest rates and/or merchant fees and increase the cost of annual fee cards before closing down existing cards. We’re also likely to see the continued erosion of “soft” benefits (Citi axing travel perks, Amex dropping PP restaurants, nearly all cards eliminating price protection).
Interchange is set by the card networks, not the issuers (though the latter can game it to an extent by releasing cards that would have been e.g. Visa Platinum a decade ago as Visa Signature). This inflation is a significant reason why merchants are pushing to eliminate the "honor all cards" rule (and thus give them the power to simply reject rewards cards outright).

If anything, I see interchange decreasing over time. The alternative is more and more stores surcharging and/or mandating minimums, or even simply no longer accepting certain networks (such as AmEx) or cards (if given that right). Though if interchange does go down, I fully expect rewards for spending to go down too--which may make using credit cards in general vs. debit or cash not worthwhile.

Actually, credit cards will continue to be the better option even if rewards go away. Neither cash or debit are secure in that losses are on the FI who issues the card.

As for rewards and losses, keep in mind that rewards customers are good for loss numbers. It’s far more acceptable to have some minor and controllable loss from consumers who use rewards but pay their bills to offset those consumers who don’t pay their bills and cost the bank a lot more. Then there are the ABS models like Capital One and Discover where risk is averaged by bucketing consumers to make overall portfolios look good to investors. Credit card companies need all types - transactors and revolvers - to maintain a balanced and profitable portfolio with an acceptable level of risk. The simple truth is that those of us who PIF and chase rewards aren’t directly profitable but we offset riskier customers who are theoretically more profitable but also much more likely to cause a loss.

Re: Unprofitable Rewards

Anonymous — Fri, 30 Aug 2019 02:32:06 GMT

Agreed. One or two transactions won't make me profitable, but may keep a computer algorithm from triggering my account as a "category only" rewards user. I do notice when contacting customer service that I receive different levels of customer service based on card use. I've gotten Christmas cards from credit card companies when heavily using a card for the year. I've gotten replacement cards the next day. And direct connection to a representative within 1 ring after dialing. And the opposite when the card is used much less.

Re: Unprofitable Rewards

Anonymous — Fri, 30 Aug 2019 08:42:21 GMT

@Anonymous wrote:
I do notice when contacting customer service that I receive different levels of customer service based on card use. I've gotten Christmas cards from credit card companies when heavily using a card for the year. I've gotten replacement cards the next day. And direct connection to a representative within 1 ring after dialing. And the opposite when the card is used much less.

While there may be some merit to what you said above, my personal opinion is that it's more coincidence than anything else.

Re: Unprofitable Rewards

NRB525 — Fri, 30 Aug 2019 10:15:23 GMT

@Anonymous wrote:
Agreed. One or two transactions won't make me profitable, but may keep a computer algorithm from triggering my account as a "category only" rewards user. I do notice when contacting customer service that I receive different levels of customer service based on card use. I've gotten Christmas cards from credit card companies when heavily using a card for the year. I've gotten replacement cards the next day. And direct connection to a representative within 1 ring after dialing. And the opposite when the card is used much less.

Maybe we need to better understand your perspective.

What is your definition of “heavily using a card”?

I presume you mean a paper Christmas card, not an email? Which bank or banks are these from?

What is your list of cards, and which do you use the most?