OR ARE THEY SIMPLY A VICTIM OF FAULTY PRACTICES?
Brian Riley, Director of Credit Advisory Services at Mercator, remains one of our favorite commentators when it comes to credit card reward programs. While we don't always agree with Brian's frequent warning that credit card reward programs are dead, we do agree that bad programs and faulty marketing practices in the space should be put to the firing squad.
In this latest installment, Brian examines the foolish practices of awarding huge acquisition bonuses for new cardholders while letting existing card holders churn. The economics simply don't work. He also examines the increasing trends associated with churn - or how to steal a card account from my competitor only to have it stolen back.
The Mercator study found that issuers placed 60 million new accounts in the market but volumes still held flat for open number of cards, at slightly more than 400 million. "You lose an account to another issuer; then you book a new one. That means your cost of acquisition was spent covering an account loss, rather than adding new volume."
The savvy cardholder - especially the high value, baby boomer, seldom-revolves type will open these new card accounts, do a transaction or two and then abscond with the bonus points or miles. Repeat. And repeat again. As noted in Riley's piece, "A recent J.D. Power study found that 47% credit card holders who had switched to a new card issuer in the last year did so for a better rewards program."
"A RECENT J.D. POWER STUDY FOUND THAT 47% CREDIT CARD HOLDERS WHO HAD SWITCHED TO A NEW CARD ISSUER IN THE LAST YEAR DID SO FOR A BETTER REWARDS PROGRAM."
We will concur that interchange regulations which lower fees for issuers and networks can be damaging to the future of credit card rewards programs. Just check the Australian marketplace for evidence. But we also believe the card issuers will never remove rewards given the huge damage it would cause within the highest spending segments and portfolios. Unless, of course, they all did it at once! But that would be collusion - something that central bankers and regulators from the EU to the US and beyond would find very interesting!
Riley points out that under the current scenario, card issuers can't really "buy" loyalty so much as lease it for a time. We also agree that AI and the use of the data that credit card reward programs spin off is the real answer to what lies ahead. We think Riley is dead on about that.