Is the Next Frontier of Rewards Credit Cards Already Here?

By: Nathan Johnson
Neet Shah

The rewards credit card is not on its way out, but it isn’t special anymore. In a market where bloggers make a living comparing points structures and consumer benefits of different rewards cards, it’s no longer newsworthy or innovative for retailers, banks, or other entities to have their own rewards card offering.

To the contrary, it’s practically to be expected.

The growth of the industry in the last decade has shifted the directive from finding ways to enter the competition to finding ways to differentiate from the saturated marketplace. In 2016 there were more than twice as many credit cards in circulation from the top card issuers (Visa, MasterCard, Discover, and American Express) than cardholders according to data from the Philadelphia Fed via the Nilson Report [1]. This balloons to nearly five times the number of cards to cardholders when factoring in holdings from smaller credit card issuers. This points to a reasonable supposition that the average American has a minimum of 2 active credit cards.

Rewards cards are a common contributor to this trend: consumers maintain different credit accounts to benefit from an increasingly diverse array of rewards options. Competitive differentiation for credit card issuers is increasingly not found in types of rewards – hotels, airlines, event access are already common features of recognized rewards cards. Since most rewards cards are offering the same type of rewards with slight variance, the differentiating factors become ways to access/apply and the level of rewards available.

Who’s Buying?

The 2017 edition of the Consumer Finance Protection Bureau’s biannual Consumer Credit Card Market report offers some key findings about the state of the rewards card that can be reasonably extrapolated forward to today:

  • Rewards card spend (as a share of all purchase volume) has shown consistent growth for consumers in all credit tiers since 2013.
  • In 2016, rewards cards comprised 88% of all general-purpose purchase volumes in the Y-14.
  • Consumers with higher credit scores spent proportionally more on rewards cards compared to those in lower score credit tiers. [2]

This rise in popularity and usage also brings the reality that offering rewards cards to consumers is not the competitive differentiator it once was. But just because everyone is doing something doesn’t mean it’s no longer worth doing. It just means that doing it takes a little extra work, a bit more planning, and perhaps also that some people are better positioned to continue climbing to the top of the pile.

As indicated earlier, rewards tend to fall into a few general categories –

  1. Cash or “cashback” rewards allow consumers to redeem rewards for cash or cash equivalents.
  2. Miles programs are common among co-branded cards between issuers and third-party airlines (eg Southwest via Chase or United via AmEx), enabling consumers to accumulate miles or points-for-miles with a specified airline when using the card.
  3. Other rewards may include travel benefits beyond airline or hotel chain rewards or VIP-tier access to high demand entertainment events.

Most of the purchases made across any rewards category were by cardholders of a “superprime” credit tier. Figure 1 offers a breakdown of rewards preference according to credit tier.

Fig. 1 – Purchase volume by rewards type and credit score tier, 2016 (Y-14) (Source – CFPB)

This data points to an interesting trend – consumers in higher credit score tiers are making the bulk of rewards purchases, and these rewards are more inclined to be lifestyle-oriented rather than cash-value rewards.

Captive Audiences

Card issuers seeking to acquire new clients within this population may have a few different options at their disposal to catch the attention of these discerning consumers. Given the demonstrated tendency of these cardholders to favor categories of rewards other than miles or cash, issuers may consider emphasizing the depth of their reward offerings rather than diversity – highly targeted offers featuring greater exclusivity and access.

By necessity, the pool of those capable of making such an offer will be small, as will those eligible to benefit from it. The issuers incur greater cost to themselves by enriching the benefit offerings of their cards, which is often offset by a higher-than-normal annual fee and stricter limitations on who can apply. The applicants will need to be able to absorb the higher cost of entry and the terms of maintaining their status.

As of this writing, these premium reward offerings are commonly found as exclusive partnerships between asset management firms or brokerages and their captive clients. It’s an arranged marriage of sorts between issuers with access to top tier benefits and a narrow range of applicants capable of meeting the bar for entry – typically manifesting in higher spending requirements and higher annual fees than more standard rewards offerings.

Some of the larger firms like Wells Fargo Advisors, Merrill Lynch, or JP Morgan Chase offer both exclusive and non-exclusive options, a long game worth playing with an eye on converting non-client cardholders to higher value clients of asset management services.

This is what we’ll call the “captive client” idea in action – existing clients demonstrate brand loyalty to their financial service entity of choice, whether as cardholders or brokerage account owners. The premium rewards tier available only to clients of services may appeal to those who have already established a rewards relationship with a card issuer.

The Cost of Exclusivity

As rewards programs turn increased attention to cost, the largest players have substantial scale advantages. Scale provides a cost advantage in administration and redemption expense, as larger issuers have greater economics of scale and purchasing power. While cost inequality is a current reality, cost competition will magnify the significance of this gap.

Even among large players, however, there is an increasing need to scale rewards programs. Traditional reengineering provides a foundation of program cost effectiveness, but scaling options including coalition programs and white labeling may provide a longer-term solution.

Figure 2 contains a sample net value to customer analysis framework, broken down to spend segments, for three prominent captive client credit cards.

Fig. 2 – Sample net value to customer by spend category

Established loyalty programs have always had a dual focus – to provide a well-rounded program that stimulates activity, while concurrently optimizing program cost efficiency to derive the greatest benefit from card activity. Traditional reengineering focuses on cost containment through program efficiency, typically resulting in relatively minor changes to the program; changes that have a bottom line benefit but do not significantly alter the customer value proposition.

While traditional re-engineering is and will continue to be a focus, large loyalty programs may require more substantive change to address loyalty cost. Externalization, through coalitions* and white labeling+, is an available route for large issuers to leverage their loyalty programs, minimizing cost. However, in an industry where rewards are a necessity, small issuers are left in the cold. Small issuers, however, can stay in the game by combining administrative and vendor negotiating power.

Rewards cards continue to be a dominant presence in an increasingly saturated and active consumer credit landscape. Asset management issuers with an eye on entering this space may consider some of these principles as guidelines to craft an attractive offering to existing clients capable of meeting the high bar for entry.


*Coalition programs with non-credit card merchants to increase loyalty program value and reduce administrative expenses.

+White labeling involves established rewards issuers managing other merchants’ loyalty using components of their own programs, without external use of the brand name. Without the branding concern, managing other card issuers’ programs is even a possibility.

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