Road to rewards redemption gets easier

Discover drops hurdles, putting pressure on competitors


Credit card users are hungry for rewards, but they leave a fat slice of them on the table.

Like "breakage," the unspent amounts left on gift cards, millions of dollars in built-up credit card rewards go uncollected every year. Cardholders forfeit between 10 percent and 20 percent of the rewards they earn, according to industry estimates, putting the losses somewhere over $1 billion.

That could be about to change, however, as one big issuer tears down major barriers to redemption.

Road to rewards redemption gets easier

In November, Discover announced it stopped erasing rewards if your account is closed, goes delinquent or lies dormant for a long period. The company also eliminated the $50 minimum that cardholders previously needed to build up before collecting cash-back rewards, one of the higher thresholds in the industry

"What we're doing is giving customers access to rewards -- any amount, any time," said Heather Roche, vice president for rewards at Discover. Built-up rewards are credited to cardholders even if their account is closed, she said.

No other big issuers have announced plans to follow suit, but Discover's redeeming move could push them in that direction, market experts said.

"Discover has done some interesting things over the years," said card industry analyst Robert Hammer, CEO of R.K. Hammer investments. "They start trends -- others are going to look at this."

Regulators are pushing for simpler reward rules, increasing the pressure for easier redemption. Programs "can be highly complex, as consumers may face detailed and confusing rules about how they can actually use their rewards," Richard Cordray, director of the U.S. Consumer Financial Protection Bureau, said while announcing a report on credit cards in 2013. The consumer watchdog agency is studying whether to take action on rewards programs, he warned.

Trend: Easier redemption
Against that backdrop, Big Plastic has been lowering the barriers to redemption for some time, analysts said. The move is apparent in the cash-back category, where simplicity is a prime selling point.

Cash-back card Redemption minimum
American Express Blue Cash $25
Bank Americard Cash Rewards $25
Capital One Quicksilver None
Chase Freedom $20
Citi Double Cash $25 (initial)
Discover it None
US Bank Cash+ None
Wells Fargo Cash Back $25 research, January 2015

"The trend had been, other issuers had been lowering that (cash redemption) threshold, probably to $25 with most of them," said Michael Misasi, senior analyst at Mercator Advisory Group. The minimum redemption on the Chase Freedom card is $20, for example. It's $25 for both Bank Americard Cash Rewards and American Express Blue Cash, issuers said, while the Citi Double Cash card has an initial $25 redemption threshold.

Many big issuers have already removed expiration dates that cancel unclaimed rewards after a certain time. However, built-up rewards are usually erased when a card is closed or goes delinquent, making Discover's move a big step. Accounts may be closed without warning because of fraudulent activity. The higher the redemption threshold, the more money you're likely to leave on the table.

Money on the table
Financial services are the biggest source of rewards, at about $18 billion a year, according to a 2011 study by Colloquy, a loyalty marketing research firm. Consumers fail to collect about one-third of their loyalty rewards overall from travel, financial services and retailers combined, the study found.

Just how much of the losses are forfeited credit card rewards is difficult to pinpoint, but signs indicate the figure is large. In a November financial disclosure, Discover said it will deduct $178 million from its earnings to reflect the higher rewards amounts it will pay under its new policies. That suggests most of the amount will wind up in consumers' pockets.

Something north of 10 percent of earned rewards typically goes uncollected by Discover cardholders, Roche said. Hammer said that, across the industry, losses of up to 20 percent are not unheard of.

Other card issuers provide glimpses into their overall rewards, and the numbers are large. At American Express, the value of Membership Rewards points due to cardholders was $6.2 billion at the end of 2013, according to the corporate annual report. Another $2.2 billion in rebate and reward accruals was owed to cardholders, which includes earnings on cash-back cards.

"Rewards are still the No. 1 differentiator of credit cards -- they're what consumers think about most" when they pick a card, Misasi said. So for card issuers looking to attract new business, sharpening up the rewards program is an obvious move.

Rewards are still the No. 1 differentiator of credit cards -- they're what consumers think about most.

-- Michael Misasi 
Mercator Advisory Group 

However, consumers usually focus on the headline number for the maximum points, miles or cash they can earn on their purchases. Difficulties earning the maximum, or problems claiming their earned rewards, are less obvious.

Earning rewards is fraught
Losing earned rewards is just one pitfall for cardholders. There's also the problem of missing out on rewards in the first place because of spending thresholds or requirements to re-enroll in programs periodically.

"If a consumer has a 3-2-1 card, they think maybe I'll get 1.5 (percent), but for the issuer it's really about 1 percent across the entire portfolio," Misasi said, referring to cards with tiered rewards levels of 3 percent, 2 percent and 1 percent, depending on purchases.

While claiming rewards that you've earned is getting easier, hurdles to earning the maximum rewards amount still remain at Discover and other issuers. For example, Discover's It card offers up to 5 percent cash rewards on certain categories of merchandise, but cardholders must sign up online periodically to qualify for the top tier reward rate.

Having the periodic sign-up requirement "gives us an opportunity for the card member to engage with us," Roche said.

Overall rewards earnings are considerably lower. Discover expects to pay rewards equal to about 1.05 percent of overall purchases in 2015, according to its financial filing. That's up from 1.02 percent in 2014, excluding the one-time effects of the change in its redemption policy.

See related: 7 signs you need to cash in your rewards – now!

Published: January 20, 2015

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