Crystal Cox/Business Insider
For credit card issuers, maintaining what's called "top-of-wallet" status is a priority.
- Card companies are shifting their rewards to target areas where consumers are still spending, like food delivery.
- But factors like declines in retail sales, challenges in acquiring new customers, and concerns around consumer credit, could impact card issuers' ability to finance rewards programs.
- "There's certainly a threat to the financial stability of some of those rewards programs," said Jordan McKee, research director of customer experience and commerce at S&P Global's 451 Research.
- While card issuing banks are more concerned with anticipated losses from consumers unable to pay bills like credit cards, rewards still remain a key driver of a card's popularity.
- Amex announced new offers for card members like double points on Grubhub and Seamless, while Chase is offering some cardholders 5x points on DoorDash and Tock restaurant orders.
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As consumer spending shifts away from travel and dining, credit card companies are rolling out rewards tailored to consumers' new shelter-in-place shopping habits.
Retail sales, which includes things like apparel, furniture, restaurants, and cars dropped by a record 8.7% in March, according to the US Commerce Department.
But in segments like grocery and food delivery, consumers are still spending. The same report showed that food and beverage stores were one bright spot, surging 25.6% from February, as US consumers stocked up on supplies for the coronavirus lockdown.
Credit card companies who rely on income from processing transactions are rolling out new rewards targeted to industries where consumers are still spending, like food delivery.
Last week, Amex announced new offers for its card members like double points earned on Grubhub and Seamless purchases through the end of this year. And Chase is offering its Freedom and Sapphire cardholders 5x points on DoorDash and Tock restaurant delivery orders.
The threat to card reward programs
Factors like declines in retail sales, challenges in acquiring new customers, and concerns around consumer credit, could impact card issuers' ability to finance rewards programs.
"With the risk of consumer spend declining as well as new card signups decreasing, there's certainly a threat to kind of the financial stability of some of those rewards programs," said Jordan McKee, research director of customer experience and commerce at 451 Research, which was acquired by S&P Global in December 2019.
Keeping customers is key, as one revenue source for credit card issuers is the transaction fee they earn on every purchase made with the card ("interchange," in industry lingo.)
"Card rewards are financed almost exclusively out of interchange revenue," said Eric Wasserstrom, managing director and senior equity analyst at UBS. "Not by coincidence, it means that the volume of spending literally finances the rewards."
Interchange fees vary per card, but typically range around 1% to 3% and are paid by merchants. That income then gets rerouted to fund rewards programs like cash back and points.
To be sure, rewards economics are not necessarily the top concern for these issuers, Wasserstrom said. Anticipating that many consumers won't be able to pay their credit cards in the coming months, Chase set aside $3.8 billion and Citi set aside $2.4 billion for their card businesses, according to first-quarter earnings reports.
Keeping 'top-of-wallet' status
While rewards are likely not a top concern for card-issuing banks given today's market conditions, offering points is still a key way to hang on to existing cardholders, which banks will need as they look toward recovery.
For credit card issuers, maintaining what's called "top-of-wallet" status is a priority.
"They want to be the de facto card that a consumer pulls out for any purchase, and rewards points have a lot to do with that decision," said McKee.
Earning rewards points in categories like travel and dining was cited by 40% of consumers as a main reason they use their primary credit card, according to a 2019 consumer survey conducted by 451 Research. And for cardholders with an annual household income greater than $100,000, 48% said rewards were the number one reason they use their card.
By offering rewards on things like restaurant deliveries, credit card companies can ensure their customers keep using those cards for purchases that are more relevant today.
"The benefit of offering those types of promotions with a delivery service is that it's top of mind for consumers at the moment," McKee said. And once a card is set up with a service like DoorDash, there's a "set it and forget it" mentality, McKee said.
And since card issuers make money on interchange fees for each purchase, becoming the go-to card for frequent purchases is a key way for them to secure revenue.
"I think what they're trying to do is align themselves with those high-growth verticals at the moment," said McKee. "The hope is that they remain that de facto card once normalcy returns, without having to offer that incentive for every transaction."
Shifting rewards toward things like food delivery can also save card issuers money. According to UBS's Wasserstrom, rewards on categories like food delivery tend to be less expensive to fund than miles.
"The answer to the profitability question is more about at what rate the card companies are acquiring these miles and then at what rate they're paying them out," said Ted Rossman, an industry analyst for CreditCards.com. Credit card issuers like Amex and Chase spend upwards of $3 billion each year on miles for airlines like Delta and United, according to media reports.
To hang on to new customers, Amex and Chase are also giving cardholders three extra months to earn welcome bonus points, typically offered to consumers who spend a certain amount within the first three months using the card.
Travel rewards become less relevant
"It's a challenging time for any credit card issuer that has a rewards card focused on the travel and hospitality verticals," said McKee.
And travel is a key reward for many high-fee cards, like the Chase Sapphire Reserve and Amex Platinum cards.
"Travel has been the most compelling credit card reward for a lot of people for a long time," said Rossman.
But with uncertainty around when global travel will resume, the annual fees may impact customers' decisions to renew. Chase said that it would offer a $100 fee credit toward the $550 annual fee on its Sapphire Reserve card for select members who are up for renewal this summer.
"I think that's really starting to show that they're acknowledging that people are getting less value from these cards," said Rossman. "There could be a lot more of this discounting to come."
But once consumers are able to travel again, these rewards will still be valued. Last week, airlines like Delta and United kicked off conversations about selling miles to credit card issuers at a discount, according to a report by the Wall Street Journal.
For airlines, it's a way to raise cash quickly, and for card issuers, it would save them money down the line when they ultimately give those rewards to their customers. And this has happened before, following the terrorist attacks on September 11, 2001, and during the financial crisis in 2008, for example.
