How Much Banks Spend on Credit Card Rewards: Study

Credit Card Rewards More Than Doubled Since the Recession, New Study Shows

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rewards have become increasingly lucrative, as 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 customer.

These rewards come at a steep price for banks. To find out just how much the top banks are spending on lucrative rewards, MagnifyMoney reviewed data in financial and FDIC filings of the six largest issuers representing 67.6% of the market.

The rapid growth in spending by issuers to provide rewards is dramatic:

Rewards spending doubles

  • Since 2010, what banks spend to support rewards has more than doubled, from $10.6 billion to $22.6 billion.
    • In 2016, the largest issuers spent $22.6 billion on rewards, compared to $10.6 billion in 2010.
    • In Q1 2017, 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 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 launch in mid-2016, Chase has been enhancing its entire rewards benefits 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 * (which can pay up to 2% cash back) and its suite of Thank You products.

Great News for Consumers — But What About Issuers?

The best rewards cards have lucrative sign-on bonuses and rich ongoing rewards structures. But is this sustainable? And can the companies make money?

MagnifyMoney conducted a national survey of people who opened 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 offer to offer for sign-up bonuses.

The results might seem counterintuitive.

However, former 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 — and a sign-on bonus is a way for a 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 cards, and they tend to stay put once they do shift. The smartest issuers are luring consumers with a big incentive (the sign-on bonus), and they are keeping them with strong ongoing value propositions.

was probably the most successful product launch in history. And it worked because it hit every button. The massive sign-on bonus gave people a reason to apply for a . 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 offer to offer. However, this is a small group (only 3.7%, according to the survey). And 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:

  • purchase volume is disclosed by the companies. A simplifying 1.75% interchange rate was assumed to determine gross 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 .
  • The difference between gross interchange and net interchange was assumed to be the rewards spend.

Usage Survey

MagnifyMoney hired Survata to perform a national online survey of 1,000 adults who opened a in the last year (the screening question).

*The information related to has been collected by MagnifyMoney and has not been reviewed or provided by the issuer of this prior to publication.