In the wake of the Great Recessions, Americans en masse got awfully nervous about opening new accounts and using credit cards. Open accounts peaked near 500 million at mid-2008, then plunged to 360 million by the third quarter of 2010, according to a 2013 report by the New York Federal Reserve. Some of that drop-off can be attributed to the credit crunch — not all who wanted a credit card could get one — as banks and issuers tightened their credit underwriting standards, making credit available largely to only prime and super-prime customers.
But consumers, once burned by the meltdown in the housing market, were twice shy when it came to all kinds of credit, according the New York Fed, and became very actively engaged in reducing their debt and cutting their credit-linked expenditures.
"An analysis ... reveals that households actively reduced their obligations during this period by paying down their current debts and reducing new borrowing," the report said.
A situation that card issuing banks were less than fully enamored with. Banks like financially responsible customers, of course, and like seeing consumers pay their bills on time. But banks also like it when customers use credit cards — and don’t live in constant terror of any kind of debt, as that kind of extreme aversion to credit is bad for business.
And so for much of the last decade, banks have worked hard to bring the customer base back — by making increasingly rich rewards offers and advantages to draw consumers into their customer families.
And the offerings have been impressive. The Chase Sapphire Reserve card, for example, debuted in 2016 with a whopping 100,000 point sign-up bonus after customers spent $4,000 during their first three months. American Express in response raised the points-earnings potential and ancillary rewards associated with its Platinum Card and Gold Card. Meanwhile, Discover rolled out the It card, which offers 5 percent cash back (in select categories) without any annual fees. And those are just the direct rewards — other benefits that have rolled out over the last several years also include automatic flight and room upgrades, Uber rides, purchase protection, exclusive access to restaurants, theater tickets and extended discounting at select partner merchants.
One might say that card issuers were throwing rewards at customers like they were going out of style — particularly in light of the fact that these days it seems they have in fact gone out of style. According to reports in the Wall Street Journal this week, it seems card issuers like Citigroup, JPMorgan and American Express — all known for their generous offerings in recent years — are now talking about slowing the roll of their credit card rewards. Why?
In short, they are too successful.
To give a slightly longer explanation, the generous rewards offerings are certainly drawing customers to banks and their cards, but they aren’t generating the types of profits that issuers were hoping to see. In fact, in some cases, being so generously rewarding is actually costing card issuers money, instead of making it for them.
Because being generous isn’t cheap. Chase, for example, has raised its spending on those rewards 123 percent since 2010, and banks on average spend around $22 billion a year on rewards programs, up from the approximately $10 billion they were spending on average nine years ago.
And those expenses are compounded by the type of consumers rewards cards tend to draw. So-called “points hackers” routinely sign up for cards, collect the points reward, and then simply let the card go dormant. And while such credit card hacking was once the hobby of a very small group of people, these days there are possibly hundreds of sites out there dedicated to teaching users how to game credit card companies and their points/cash-back reward systems.
It was once considered fringe to be a part of a community of card churners and deal hunters, and probably also a dirty secret to own dozens of cards. Today, though, it’s practically mainstream. There are tons of credit card blogs out there that teach spenders how to play the game, from creating complicated spreadsheets to setting up automatic payments.
But the larger trend, according to reports, is actually just customer responsibility. Consumers, according to reports, are also less likely to pay credit card balances late than they were a decade ago — or to run a balance at all. Which means the banks issuing cards to these consumers are paying them a lot to use the cards, but not getting “paid” in return with late fees or interest charges. Though many premium cards have higher annual fees to offset this tendency in the prime-credit customers, those annual fees aren’t covering the balance of customers who use their card rewards voraciously.
And so the perks pullback is on, and the rewards offerings are shrinking. Chase had already lowered the tremendous sign-on bonus for the Sapphire Reserve as of early 2018 and acted a few months ago to remove its price protection offering for card members. There are rumors that it will also stop allowing members to poll their points across Chase issued cards. Discover also eliminated price protections from its cards, as well as product warranties, flight accident and auto rental insurance coverage. Citi has not yet fully removed price protection, but has scaled it back notably since August. AmEx has been working to undercut the massive points bonus for signing up.
Will it work?
As always, that is the big question. Cutting back on rewards will certainly cut back on costs — but will it alienate regular (non-points hacking) consumers who may find that without the inducement of points or cash back, credit products are a bit less appealing?
To soon to tell, and of course it will matter what specific benefits got to the chopping block.
But for those who have become accustomed to card issuers willing to throw rich rewards their way merely to get them to give that card a chance? That era of consumer acquisiton seems to be definitively fizzling.