, , , ,

Insight: Have we reached peak luxury reward card?

WM Circle Logo

By: RickFerguson |

Posted on April 21, 2017

As we reported back in April, the launch of a new U.S. bank luxury rewards credit card prompted analysts to wonder if the U.S. credit card market could handle another luxury reward credit card. They certainly couldn’t point to the Chase Sapphire Rewards card – the luxury credit card with its $450 annual fee had signed up nearly 1 million new accounts less than a year after launch – a smashing success that positioned J.P. Morgan Chase as a serious threat to American Express’s longstanding hold on the luxury credit card market. The Wall Street Journal reports, however, that despite the tremendous acquisition effect of the Sapphire card, J.P. Morgan Chase executives are openly questioning whether those accounts will ever turn a profit. Are we seeing the beginnings of a backlash against the golden age of reward credit cards?
By Rick Ferguson

Despite its initial success, J.P. Morgan Chase execs are souring on the Chase Sapphire card. Have we reached peak reward card?

By any public measure, the Chase Sapphire card has been a smashing success for J.P. Morgan Chase. Even as the financial services giant reported disappointing second quarter earnings, analysts were quick to highlight the success of the Sapphire card.

Money quote from Motley Fool:

“There was one area in particular where JPMorgan Chase shined last quarter. Credit card sales volume was up 15% in the quarter compared to the year-ago period, meaning that people used their cards more in the three-month stretch this year. While higher consumer spending helps to explain this, the success of JPMorgan's Chase Sapphire Reserve card shouldn't be overlooked… ‘One of the biggest drivers… in card revenues has been the extraordinary success we've had in capturing new Chase Sapphire Reserve accounts,’ said chief financial officer Marianne Lake on the bank's second-quarter conference call. Lake went on to note that ‘both the fourth quarter and the first quarter were extraordinary in terms of the number of accounts we acquired,’ as well.”

What Lake didn’t point out in that quote was the extraordinary cost associated with those new accounts: J.P. Morgan Chase famously offered new cardholders a whopping 100,000 point sign-up bonus; even as they later reduced the bonus to 50,000 points, it’s easy enough to do the math to understand how much rewards liability now sits on J.P. Morgan Chase’s books. Add in the generous rewards now required to compete in today’s luxury card market, and the news that J.P. Morgan Chase executives are now blanching at the high costs associated with the Sapphire card.

Money quote from the Journal:

“Gordon Smith, head of J.P. Morgan's retail-banking business, this month ordered up cost trims at the unit overseeing cards, the people familiar with the matter said. A bank spokeswoman, Trish Wexler, said any midyear cuts would take into account overall expense targets regardless of specific products. ‘As part of any planning process you're always looking for ways to eliminate waste,’ she said. ‘That's just good fiscal hygiene.’ Still, internal concerns about the [Sapphire] card are growing -- surprising for what has been seen as a blockbuster at the nation's largest bank by assets. At recent meetings, senior J.P. Morgan employees reviewed models questioning whether the card would make money and when, the people familiar with the process said.”

In addition to the sheer cost of delivering on the card’s value proposition, J.P. Morgan Chase executives are concerned about attrition. The Journal reports that premium card renewal rates can range anywhere from 60 to 90 percent – and if J.P. Morgan Chase finds itself on the short end of that spread thanks to increased competition, the Sapphire portfolio might find itself mired in red ink. The report also notes that, again thanks to increased competition, consumers have become more savvy about shopping around for the best reward card deals, and have become much less likely to revolve card balances.

Only J.P. Morgan Chase knows for sure how soon that complex financial equation will take to balance out. All reward programs begin life in the red; incremental behavior over the lifetime of the customer’s relationship with the brand offset program launch and acquisition costs over time – and it’s easy to get impatient to see the return when you’re sitting on literally billions of unredeemed points. Still, J.P. Morgan Chase CEO Jamie Dimon appears to understand that recouping the investment on all of those new accounts will take time: "You expense the acquisition costs over 12 months. The benefit comes over seven years," Dimon said on the earnings conference call.

The Journal also reports that 4,300 Sapphire cardholders “have applied for new mortgages with J.P. Morgan under a program offering 100,000 reward points” - twice the number of mortgage applications from other Sapphire card customers last year. Those numbers are indicative of the critical need to understand the value of the cardholder’s entire relationship with J.P. Morgan Chase, rather than basing program profitability solely on credit card financials.

If bank executives really are concerned about Sapphire profitability, the worst thing they could do is order draconian cuts to the reward program funding rate or otherwise slash card benefits. Doing so in such a brutally competitive premium card market will only drive down the retention rate, and send the portfolio into a death spiral from which it would be unlikely to recover. Instead, the bank should take Dimon’s seven-year view and concentrate on delivering the best reward program experience it can to all of these new Chase cardholders. They’ll respond with loyalty – and the Sapphire card will prove to be a best-practice example to the industry, rather than a cautionary tale.

Rick Ferguson is Editor in Chief of the Wise Marketer Group.