The cost of credit card rewards are soaring as the competition for wallet share heats up. With six of the largest issuers spending more than $22 billion in 2016 for credit card rewards – defining the best value proposition for both the consumer and the bank is becoming increasingly critical.
The costly fight was evident in the premium travel market when Chase Sapphire Reserve challenged American Express as a new standard for high end travel credit card rewards. The Chase cards were so popular that the bank ran out of the metal for creating their cards.
The risk associated with the ever-escalating race for consumer adoption is the impact that these new offers have on the long-term profitability of the portfolio and the issuer. AmEx’s president of global consumer services is on record stating that his company is in a “hand-to-hand combat” with JP Morgan. In fact, over the last three quarters, AmEx’s spending on credit card rewards is on the rise.
At the same time, as expenses pile on, there are troubling indications that the U.S. economy is entering a slowdown. After substantial lending over the last few years, consumers are starting to default on their credit. The Federal Deposit Insurance Corporation (FDIC) noted that credit card charge-offs soared by 24.5% in the second quarter.
Increase in spending, coupled with a potential economic slowdown, signals a need for a careful re-examination of the acquisition-first strategy prevalent among many issuers.
For each product that banks are designing, it is possible to find a viable intersection between consumer preferences and profitability. The first step is to evaluate the competitive landscape and capture what consumers value most across the many perks and features that today’s credit cards offer. Understanding where the bank’s portfolio fits relative to the competition will help a discerning product manager decide whether or not a change in value proposition is possible.
How 30,000 Americans feel about these innovations
As part of our MoneyScreen program, we interview more than 30,000 consumers each year, asking them to evaluate payment options that exist in the market today, as well as new concepts that may redefine the landscape moving forward.
With the travel rewards ending up in the crosshairs of some issuers, it is critical to understand what kinds of offers are attracting the most interest. As part of MoneyScreen we had consumers evaluate 16 travel offers, including four premium offers that carry a meaningful annual fee.
The offers are evaluated in an extensive online survey where consumers are asked to evaluate one offer at a time across a series of diagnostics. In addition to capturing appeal and appetite for the product, we go deeper and measure impact on spend, barriers to adoption as well which features are most important in driving acquisition and, separately, long term usage of the product.
When we look at purchase intent we see a winner with widespread appeal, a large herd of cards in the middle and a few that have little appeal—at least to the mainstream.
What appeals and to whom
The Chase United MileagePlus® Explorer card tops the charts because it has rich features such as a 30,000 mile sign up bonus, and a 5,000-mile bonus when you add another user. It also has features targeted toward affluent users, which helps explain its widespread appeal. They include lounge passes and an annual 10,000 mile bonus for people who spend over $25,000 a year.
What propels this offer to the top of the pile is its appeal to a wide variety of people. It is number 1 for Gen X and Boomers, and makes it into the affluent’s top five. And while it is not in the top five for millennials, it is not far off the mark, with one in five interested in getting the card.
While the MasterCard® Black Card TM lands in the middle of the pack, it stands out as important for two reasons. Firstly, it is the highest rated premium card with an annual fee. Secondly, it does well with both millennials and the affluent. It offers double points when redeemed for airfare, lounge access, and other features that make it worth it, despite a price tag of roughly $500 a year.
Another curiosity worth noting is the Chase Sapphire Preferred® card. While it looks middle of the pack in these ratings, it rates number one with the affluent because it is relevant to their needs.
We have dozens of diagnostics for each of these concepts, but let’s focus on two: relevance and uniqueness. The MasterCard® Black CardTM stands out as being unique. Its mid-pack uptake reflects its average rating on relevance. Given that its appeal is affluents and millennials, it is an attractive acquisition offer.
The Chase Sapphire Preferred® card is seen by many as having very relevant benefits, but the current mix does not clinch the deal. It is more relevant than desirable. That signals a vital opportunity to tweak the offer.
The Chase United MilagePlus® Explorer card appeals across the board with a solid set of benefits that lead to the middle on relevance, and toward uniqueness. It clearly has elements with mainstream appeal. But is it too rich to be sustainable?
Is it time to de-escalate the travel benefits wars? The MasterCard® Black CardTM suggests that valuable targets are willing to pay for travel benefits. So does the United MilagePlus® Explorer card give away too much? Only time will tell.
There is much more to this story than just these data points. We have the richest set of competitive intelligence on credit card, payments, investment and insurance innovations in the United States and Canada.
To complement MoneyScreen, Maru/Matchbox delivers SmartChoice, a one-of-a-kind product optimization methodology. Our clients engage thousands of consumers in evaluating how an offer can be maximized to improve adoption and profitability. You can efficiently evaluate and war-game thousands of potential product designs and select the winning strategy, based on modeled impact to your profit and loss statement.
For more information on MoneyScreen and our database of payments benchmarks, or about our SmartChoice solution for optimizing your credit card offer please contact: firstname.lastname@example.org.