Rewards bubble hasn't popped ... yet

Gusher of points starts to weigh on card issuers' bottom lines


Rewards bonanza should continue, for now Juan Rodriguez/


Rewards bonanza should continue, for now Juan Rodriguez/


If you’re like many credit card holders, you’re being bombarded with offers of reward points, miles and cash back. But experts warn that this Golden Age of card rewards won’t last forever.

As with the tech industry bubble in the late 1990s and the housing bubble nearly a decade ago, credit card rewards are at unprecedented levels. There are plenty of people enjoying the ride, tasting champagne and caviar on first-class flights earned with miles and points from credit cards.

Yet like those bubbles from earlier eras, there is no guarantee that the free-flowing stream of credit card rewards will continue indefinitely, experts say. When credit cards become less profitable than they are now, banks will have less money to shower on customers in the form of rewards.

“We are in a booming period for credit card rewards at the moment,” says Alex Johnson, director of Mercator Advisory Group’s credit advisory service. But he adds: “It is cyclical. All of these things are. When the level of rewards outpaces the profitability of the portfolios, the issuers start to cut back.”

The escalating cost of rewards weighs on card issuers' profits, according to a July 26 research note from CreditSuisse. “Most issuers called out the impact of higher rewards costs on revenue growth in the quarter as they attract new and existing accounts with competitive value propositions,” the note said.

To be sure, compared with the tech and housing crashes, any rewards slowdown would have much less of an effect on the U.S. economy. But it could spell an end to the rewards mania that has given birth to dozens of blogs about churning credit cards, to glowing media profiles of road warriors who game the system and to 40,000 or 50,000 reward points or miles for signing up for a new card.

Consumer spending drives rewards
There’s plenty of exuberance – and money – behind credit card rewards. In the first quarter of 2015, major card issuers including American Express, Discover and Citi said in regulatory filings that their spending on rewards is on the rise. Capital One said its spending on rewards rose 69 percent between 2013 and 2015.

The average sign-up offer for cash-back cards reached $161 in the fourth quarter of 2015, up 20 percent from the previous year, according to Mintel Comperemedia. For travel cards, the average number of points and miles offered was 40,000, roughly triple the figure from eight years earlier.

Credit card issuers are spending heavily on consumer rewards.


  $1.0 billion
 $1.4 billion
 $1.3 billion

American Express

 $6.4 billion
 $6.9 billion
 $6.9 billion

Capital One

 $1.6 billion
 $2.0 billion
 $2.7 billion
Source: SEC filings

That increased spending on rewards is fueled to a large extent by higher spending on credit cards by consumers. Consumer spending has stayed strong since the Great Recession, and much of that spending is being charged on credit cards.

“A lot more institutions are chasing after the consumer, because that’s one of the few stable sources of growth right now,” says Mark Vitner, senior economist at Wells Fargo. 

Credit card banking remains highly profitable, according to federal data. One of the main ways banks make money from credit cards is from the fees that are paid by merchants when a card is used, known as interchange fees.

Generally, as banks take in more money from increased interchange fees, they are spending more on card rewards, says Moshe Orenbuch, a research analyst with Credit Suisse who follows credit card issuers. Some issuers publicly disclose information about rewards in regulatory filings, but some of the biggest banks don’t. 

We are in a booming period for credit card rewards at the moment. It is cyclical. All of these things are.

— Alex Johnson,
Mercator Advisory Group

Orenbuch says he doesn’t see the current level of rewards ending “particularly soon,” but that could change if credit starts tightening.

Andrew Davidson, senior vice president and chief insights officer for Mintel Comperemedia, wrote a March 2016 blog post titled, "Predicting the End of the Credit Card Incentive Bubble."

“We know it isn’t sustainable, but most card issuers can’t afford to sit on the sidelines while competitors lure their customers with rich offers and are, therefore, forced to adjust their incentive strategies accordingly,” he wrote. “The result is an incentive bubble that is likely to burst. The question is when.”

What happens when interchange fees fall
Previous experiences in the U.S. and abroad show economic changes can bring about big cutbacks in points, miles and cash back. 

In 2011, many major banks, including Chase, Wells Fargo, SunTrust and PNC opted to scrap or scale back their rewards for debit cards. That shift followed passage of the 2010 Dodd-Frank financial regulatory reform law, which slashed interchange fees on debit cards.

With the fees cut roughly in half, the banks said they were unable to pay out the same level of rewards on debit cards. Some small banks and credit unions still offer rewards on debit cards, but they tend to be more meager than current credit card reward offers.

In the U.S., there are no regulatory changes on the horizon that would lower interchange fees on credit cards, which now average about 2 percent of the amount of a transaction. However, those fees are falling in other countries. In December 2015, the European Union put into effect a regulation capping interchange fees at 0.3 percent on credit cards. That led to the elimination of many reward cards.

When the regulations were passed, Capital One in Britain said: “The implications of significantly lower interchange revenue has also meant Capital One has had to review its cash back and rewards products for existing customers, several of which are no longer sustainable under current market conditions.”

There will be expanded redemption opportunities. The millennials will drive a lot of how these programs are tailored.

— Marc Berman,
Kobie Marketing

Some U.K. banks left rewards intact, but sharply raised annual fees on rewards cards. Others restructured the programs, offering generous cash back during an introductory period then lowering the percentage of cash back after a few months.

In the U.S., the National Retail Federation has praised the lowering of European interchange fees, calling it “a win all the way around.” In an op-ed, the organization urged Congress “to follow that example so American merchants and consumers can stop paying the bulk of the world’s swipe fees.” 

The idea seems to have gained little political traction here.

Issuers target card churning, other schemes
Some U.S. card issuers have begun to cut their rewards costs by limiting options for people who try to game the system to accrue reward points.

The issuers made it harder to sign up quickly for multiple cards, repeatedly sign up for the same card (known as “churning”) or to charge items such as gift cards that are redeemable for cash (known as “manufactured spending”).

For instance, American Express in 2014 went after churners, saying it would stop awarding sign-up bonuses to people who had previously had and closed the same type of card. In January 2016, AmEx cracked down on manufactured spending by barring people from transfering money from gift cards onto an AmEx reloadable prepaid service called Bluebird, which has a free bill pay feature. Bluebird is a service aimed at lower-income individuals without bank accounts, but some people used it to boost reward balances.

An expanding array of rewards options
Rewards are evolving, too, as consumer preferences change. Gone is the old model of earning airline miles that can be redeemed only for an award flight.

Today, companies that operate reward programs say consumers value flexibility and want a wide variety of redemption options suited to their lifestyles.

Some rewards card holders want access to elite experiences. The younger generation especially covet simple, straightforward and quick redemptions, says Marc Berman, a principal and consultant with Kobie Marketing, which specializes in company loyalty programs.

“There will be expanded redemption opportunities,” he says. “The millennials will drive a lot of how these programs are tailored.”

David Andreadakis, Kobie’s vice president of loyalty strategy, says reward programs are here to stay – in some form or another and regardless of economic changes. “Our increased sophistication in reward programs has given us the ability to tailor those awards to individual customers in a more refined way,” he says.

Consumer behavior, he says, hasn’t fundamentally changed in 10,000 years: Buyers respond to free stuff.

See related: 8 creative ways to build credit card reward points quickly, Options abound for redeeming reward points, Video: Credit card travel rewards tips from the pros

Published: August 8, 2016

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Updated: 10-28-2016

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