Just as credit card issuers start to benefit from recovering
Cash-back rewards were already on the rise, but the trend is intensifying as Americans look for immediate ways to offset rising costs, instead of saving loyalty points for future indulgences, according to industry analysts.
"During uncertain financial times, consumer behavior trends toward cash-back rewards, and the advantage is that when the cost of goods increases, so too do the cash-back rewards for every dollar spent," said Daniela Hawkins, managing principal at the financial services consulting firm Capco.
The increased consumer demand will result in more intense competition between card issuers that offer cash-back rewards, as well as tighter eligibility criteria for those programs, she said.
"Banks will likely revisit the creditworthiness of customers and limit access to cash-back rewards to focus on the mass-affluent sector,” said Hawkins, noting that wealthier consumers have suffered less economic harm from the pandemic and boomerang inflation.
American Express last week introduced its first
To keep pace with the industry’s leaders in cash-back rewards, card issuers need to create the impression that they are tailoring rewards for each specific customer, said Gina DeCorla, senior research analyst at Curinos, which provides consumer data and market research to financial institutions.
“Many credit card issuers relaxed their rewards rules during the pandemic, and others began giving higher cash-back rewards in top spending categories. So I think a lot of people are starting to expect this kind of customization to happen automatically," she said.
For example, Citigroup’s Custom Cash Card, introduced in June, gives customers 5% back in their top spending category on up to $500 spent each month. Other purchases earn 1% cash back. Similarly, the Venmo credit card offers 3% cash back in the category where customers spend the most each month, plus 2% in their second-heaviest spending category.
Meanwhile, JPMorgan Chase’s Freedom Flex card is giving users 4% cash back on purchases in their top spending category from Oct. 1 through the end of this year.
Issuers with the most versatile approaches to redeeming cash rewards will also gain an advantage, DeCorla said.
“Credit card users want many options — redeeming cash rewards to a bank account, paying off a credit card bill, transferring to another card — and they'll pick the programs that are easiest,” she said.
It’s less clear how inflation will affect credit card issuers with higher-end luxury and travel reward programs.
During the early stages of the pandemic, many of the value propositions on travel-focused cards were altered to reward users for spending on local dining and streaming services. Even as travel spending starts to rebound, issuers of such cards should continue to offer more rewards options to their customers, said Ruby Walia, a senior advisor for digital banking at Mobiquity, a fintech industry consulting firm.
“My guess is that this holiday season we’ll see a fair bit of travel, but issuers that are going to stay ahead of the curve will tweak their rewards programs to give consumers flexibility, as inflation either goes up or stays under control,” he said.
The competition in card rewards is now shifting in a way that helps those issuers that offer the most intuitive and innovative approaches to delivering cash back, Walia said.
“Credit cards that are more focused on earning miles have been steadily declining — that trend started before the pandemic and will continue,” he said.
