Consumers are shopping for ‘points,’ and it’s hurting issuers

Credit card users are becoming savvy reward point shoppers, and it is tripping up some banks and issuers.

For example, in the second quarter of 2018, JPMorgan Chase said that it had to record a $330 million charge because credit-card customers were redeeming points faster than anticipated. In July, the Marriott hotel chain triggered a wave of customer complaints when it decided that Starwood Preferred Guest American Express (SPG Amex) credit card users will get two — not three — Marriott points for each dollar spent. Marriott had acquired Starwood along with its rewards loyalty program in 2016.

This was not always the case. For years, the decision of which credit card to use was an emotional or irrational one. Users might favor an American Express card because they are attracted to the brand, for instance. Or they might go with a credit card from their primary bank because that was where they banked.

That has changed. The credit card market in the United States has matured. The number of reward points, miles and cash back awarded for each dollar spent is now the most important factor in a consumer’s top of wallet decision.

Users are not only more rational in their choice of card, but they are also investing time and effort to find ways to maximize their return from reward points. For example, many users — recognizing that the highest value comes in the form of travel redemptions — are diligently consolidating spending on one card in order to accumulate the substantial number of points usually required for that.

As users become savvier reward shoppers, banks and credit card issuers will have to focus more resources on designing card loyalty programs that are engaging. Otherwise, there will be an increase in dormant accounts where users keep the card only to earn the annual or introductory bonus. For example, some savvy SPG Amex card members already know that all they have to do is pay the introductory annual fee of either $0 or $95 thereafter to earn a free night at one of Marriott’s properties which is worth more. If a credit card’s points are not rewarding enough to users, they will simply shift spending to another card.

While offering rich sign-on bonuses have been effective to attract users, these are costly and not sustainable. Instead banks and issuers can differentiate themselves from competitors by enhancing the redemption experience, addressing users’ lifestyle needs and gamification.

Increasingly, a credit card’s redemption experience is a key factor influencing users’ spending decisions and card preferences. According to Simon-Kucher’s proprietary research, credit card users who redeem reward points spend 134% more per month compared to non-redeemers. We also found as many as 80% of redeemers stick to the same channel they chose in their first redemption. By making redeeming points easier, simpler and more convenient, banks and issuers can enhance stickiness and customer engagement.