Rewards programs move toward flexible, immediate spending
By Cathleen McCarthy | Published: February 13, 2014
As frequent flier and hotel rewards programs get devalued, credit card issuers are offering a range of new ways to redeem your points, from taxi rides to paying your mortgage.
You may not get as much as you once could from saving up those frequent flier miles, but your rewards may be getting easier to use on everyday expenses -- and likely will get even more so.
Rewards card issuers are putting new emphasis on flexibility and immediate spending these days, forming innovative partnerships and experimenting with existing technology in order to expand options for redeeming points. As partner airlines and hotel chains continue to pull back on redemptions, card issuers are shifting their focus to the part of redemption they can control.
While the heyday may be over for stockpiling travel rewards courtesy of lavish corporate expense accounts, it's getting easier to use reward points on a daily basis -- to shave a few bucks off an online purchase, for example, or cover a cab ride.
Use points anywhere, immediately
Gone are the days when you had to apply your pile of points to a rewards program's curated selection of prizes. Increasingly, credit card issuers are allowing you to apply points like cash at the point of purchase -- anywhere, immediately.
Citi and American Express launched programs in November that allow you to apply reward points toward online purchases. Citi offers its ThankYou Rewards members a temporary, virtual credit card number called a Rewards Account Number to use for online purchases. When you register for it, your ThankYou point balance appears and you can select an amount to be applied to your purchase. You fill that number in as your credit card number when you're ready to check out with an online merchant.
"Let's say you want a Louboutin wallet and we don't have that in our collection," says Mary Hines, head of Citi's ThankYou program. "You create a Rewards Account Number and tie $200 worth of your points to it. If the purchase amount is $500, you get a credit for $200 against that charge."
The system is secure too, since the account number is only valid until midnight of the day it's created.
Similarly, American Express introduced the "Use Points for Charges" program, which can be accessed either through the AmEx mobile app or through your monthly online billing statement. Like other credit card rewards programs, including Capital One's Venture Rewards and Barclaycard's Arrival travel rewards, it lets you apply rewards points to any online purchase after the fact.
"We certainly have a big group of card members who like to earn points over time, then use them for something big like a trip," says Melanie Backs*, public affairs director at American Express. "But there's another group of card members who say, 'That doesn't really fit my life. What I'd like to do is use them for everyday items.' So now you have that option as well. It's opening up a lot of flexibility."
American Express is also experimenting with allowing use of rewards at point of sale. In certain New York City cabs, for example, a video screen on the seat in front of you flashes a message: "Would you like to use your points?" You then have the option of choosing to apply Membership Rewards points toward your fare.
In another move toward customer choice, AmEx recently added a feature to its SimplyCash business card, allowing cardholders to choose which category they want to earn 3 percent back on -- gas, hotel, dining, airfare, advertising or shipping. "In this situation, it's about earning, not spending, points but, again, getting rewarded for what you want to be rewarded for," Beck says. "It's all about customization."
Points to pay off loans
Wells Fargo has moved in a slightly different direction. In the autumn of 2013, it began giving credit card customers the option of using rewards to pay down loans. The bank already allowed customers with a Home Rebate Card to use their 1 percent cash-back rewards toward the principal on a Wells Fargo home loan. Now any of the bank's cardholders can apply their rewards to any Wells Fargo loans, including car and home equity loans.
For people who prefer points, it's about free money. They feel differently when they use points than when they use cash.
Citi ThankYou Rewards
"Wells Fargo is on the leading edge of using points to repay other loans," says Michael Misasi, senior analyst at Mercator Advisory Group. He doesn't expect many of us will be applying reward points to our loan payments in the future, however. "This type of program serves a very limited demographic and has more to do with the bank's focus on cross-selling services. It's the bank trying to provide customers with more value in exchange for their repeat business."
Are points-as-cash as effective as cash back?
This preference seems to come down to personality. "The type of consumer that prefers a cash-back program is typically very different from the demographic that gravitates toward a travel or other rewards program," Misasi says. "The latter is more interested in discretionary spending that doesn't come directly from their wallets."
Mary Hines agrees. "Whether someone selects a rewards card over cash-back generally has to with different mindsets," says Hines of Citi's ThankYou program. "A cash-back customer is very rational and wants that cash so they can use it any way they want. For people who prefer points, it's about free money. They feel differently when they use points than when they use cash."
People who prefer points often enjoy watching for deals. "In certain situations, you might be able to get a better value with points," Beck says.
That's certainly true for international travel -- if you are already planning overseas trips. Whereas the base conversion rate of Membership Rewards points is 1 point to 0.6 cents, if you transfer those points to a partner airline program, it's not unusual to get a $1,200 flight for 90,000 points (0.75 cents per mile) -- or better.
Special promotions can help too. American Express, for example, periodically runs a deal allowing cardholders to transfer Membership Rewards points to British Airways' Avios program at a 20 percent markdown. "A lot of people like that," Beck says.
Whether rewards earners choose to save or spend their points, however, flexibility is a plus. It's key to the popularity behind the travel component of AmEx Membership Rewards and Chase Ultimate Rewards programs. Both let members transfer points between frequent flier and hotel rewards programs and offer promotions throughout the year to take advantage of that.
Both Citi and American Express report positive response to the programs they launched before the holidays. "'Use Points for Charges' is really popular," says Backs* of AmEx. "We're seeing a lot of members using it. Many have been collecting points but not using them, and they're using them for the first time with this program -- which is great."
I think the idea is to make checkout as frictionless as possible.
Mercator Advisory Group
Will we soon be able to use points as easily as cash? A lot depends on how willing retailers and other vendors are to partner with card issuers. Amazon is forming partnerships with different issuers -- including Chase, Discover and AmEx -- to integrate their rewards points into the checkout process.
"I think the idea is to make checkout as frictionless as possible," Mercator's Misasi says. "Retailers that offer this option want their customers to be able to use any payment mechanism they want. I'm sure they have their own preferences -- their own co-branded credit cards, for example -- but there is one school of thought that says: 'Let customers pay however they want. Don't give them any reason to abandon that shopping cart.'"
*Correction: As originally published, this article misspelled the name of Melanie Backs. See the CreditCards.com corrections policy.
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