Credit card rewards have become increasingly lucrative, as credit card issuers battle for customers. From 100,000 point sign-on bonuses to 6% cash back offers, it has never been a better time to be a credit card customer.
These rewards come at a steep price for banks. To find out just how much the top banks are spending on lucrative credit card rewards, MagnifyMoney reviewed data in financial and FDIC filings of the six largest credit card issuers representing 67.6% of the market.
The rapid growth in spending by credit card issuers to provide rewards is dramatic:
Rewards spending doubles
- Since 2010, what banks spend to support credit card rewards has more than doubled, from $10.6 billion to $22.6 billion.
- In 2016, the largest credit card issuers spent $22.6 billion on rewards, compared to $10.6 billion in 2010.
- In Q1 2017, credit card issuers spent $6.2 billion on rewards, compared to $5.1 billion in Q1 2016 — a 22% year-over-year growth rate.
The New King of Rewards Spend: Chase
- Chase leads the pack. Beginning in 2016, Chase has led the pack in total rewards spending. Spending on credit card rewards at Chase grew 123% since 2010, and Chase now spends more money on rewards than longtime American Express. Although the headlines have focused on the success of the Chase Sapphire Reserve® launch in mid-2016, Chase has been enhancing its entire rewards perks section since the Great Recession.
- American Express fades. American Express, long the leader in rewards, had the smallest increase in rewards spending with a 36% growth during the period of 2010-2017. With the loss of their deal with wholesale retailer Costco, American Express is offering more lucrative rewards on all its other cards.
- Citibank triples rewards spending. Citibank has the highest percentage increase in spending since 2010 (333%). Citi won the Costco deal and has also been busy launching its own rewards products, including Citi® Double Cash Card – 18 month BT offer (which can pay up to 2% cash back) and its suite of Thank You products.
Great News for Consumers — But What About Credit Card Issuers?
The best rewards credit cards have lucrative sign-on bonuses and rich ongoing rewards structures. But is this sustainable? And can the credit card companies make money?
MagnifyMoney conducted a national survey of people who opened credit cards in the last year. The results demonstrate that there is a method to the strategies being deployed by the largest issuers: it is a great way to create a loyal customer base.
- 44.5% of the people surveyed said they opened their accounts because of a sign-on bonus.
- But 85.4% of the people surveyed said that the ongoing features and benefits of the product were most important in their decision.
- Only 6.7% of the people surveyed said that they planned to cancel or close a card that they opened in the last year.
- Only 3.7% of people go from credit card offer to credit card offer for sign-up bonuses.
The results might seem counterintuitive.
However, former credit card executive and MagnifyMoney co-founder Nick Clements explains:
The purpose of a sign-on bonus is to encourage people to act. Most people do not wake up in the morning wanting to open a credit card — and a sign-on bonus is a way for a credit card company to encourage people to reconsider their options. It is no different from a sale in a traditional department store. But what really matters to consumers, as these results reveal, is the ongoing value proposition. People don’t particularly enjoy shopping for credit cards, and they tend to stay put once they do shift. The smartest credit card issuers are luring consumers with a big incentive (the sign-on bonus), and they are keeping them with strong ongoing value propositions.
Chase Sapphire Reserve® was probably the most successful product launch in credit card history. And it worked because it hit every button. The massive sign-on bonus gave people a reason to apply for a card. But the ongoing reward proposition was perfectly designed for its target audience. Those customers are going to stick around and become long-term customers.
As our survey found, there are people who like to go from credit card offer to credit card offer. However, this is a small group (only 3.7%, according to the survey). And credit card companies are becoming much better at identifying and rejecting these consumers.
Cost of Rewards
Cost of rewards is publicly disclosed by American Express, Discover, and Capital One in quarterly financial filings. For the remaining issuers, MagnifyMoney estimated the cost of rewards. For the estimate:
- Credit purchase volume is disclosed by the credit card companies. A simplifying 1.75% credit interchange rate was assumed to determine gross credit interchange.
- Debit purchase volume was provided by the Nilson Report. Actual debit interchange rates were pulled from the Federal Reserve.
- FDIC Call Reports for each institution were used to determine the net interchange rate across debit and credit.
- The difference between gross interchange and net interchange was assumed to be the rewards spend.
Credit Card Usage Survey
MagnifyMoney hired Survata to perform a national online survey of 1,000 adults who opened a credit card in the last year (the screening question).
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