Credit card rewards: Two key findings

Credit card rewards: Two key findings

The return on rewards cards investments can be huge, study shows.

August 26, 2016

Among credit card portfolio optimizers, few hold a candle to rewards.

Yet, age-old misperceptions keep some credit unions from adding the lucrative programs to their credit card products.

The notion that rewards are superfluous generally manifests in one of two positions:

Misconception 1: Rewards offer little return when compared to the expense.
Misconception 2: Rewards are most beneficial when cardholders don’t redeem points.

Credit card experts have long contended these positions to be false. To investigate the validity of their intuition, TMG and strategic partner IQR Consulting set out to analyze the data generated by 12 months of activity from 400,000 credit card accounts issued by TMG clients.

They found:

1. Rewards offer high returns

A recent CUNA Strategic Services and Buzz Points survey showed cost was the biggest concern about adding rewards. Nearly 60% of respondents named it their No. 1 concern, and 90% ranked it among their top three concerns.

The return on rewards cards investments, however, can be huge. In fact, the TMG-IQR’s team’s analysis revealed rewards cards are 79% more profitable than their no-frills counterparts.

Within the study, the effect of rewards cards on engagement levels was evident. Larger ticket sizes and more transactions generated higher purchases and balances regardless of the size of the issuing credit union.

The higher engagement combined with the increased interchange and fee income associated with rewards cards created high enough yield to completely offset the costs of rewards programs.

Although the expenses studied by the TMG-IQR team were significantly higher on rewards cards (71%), the income earned by interchange, interest, and fees on rewards cards was a whopping 76% higher than the income generated by nonrewards programs.

2. Rewards yield highest return when cardholders actually redeem

It’s easy to understand how finance professionals view rewards, and especially rewards redemption, as an expensive “payment” to cardholders.

As it turns out, an unused or latent rewards program is the most expensive rewards program possible simply because the issuer is not reaping the highest return on its investment.

The TMG-IQR team of analysts found cardholders who redeemed their points spent roughly $890 per month, nearly triple (186%) that of their nonredeeming counterparts.

Average balances, too, were higher among redeemers, who generally carried a balance around $3,000. This is 55% higher than balances carried by rewards cardholders who did not take advantage of the points they earned.

What did this mean for the issuing credit union? Seventy-two percent higher revenue per card among redeemers.

The longer an issuer can keep a rewards cardholder redeeming, the better.

In the TMG-IQR study, cardholders who had redeemed points four or more times in the past made more than three times more purchases per month than those who had only taken advantage of the program once before (to the tune of $3,202 per month).

The addition of rewards takes an investment. This can be a hard pill to swallow, particularly for owners of a stagnant or declining portfolio.

Yet, that same weak credit card program could become your credit union’s strongest asset.

BRIAN DAY is director of digital strategy for TMG.