Excerpted from Reuters, “Credit Card Firms Slashing Rewards to Cushion Losses”, March 11, 2009
* * * * *
U.S. credit card issuers are slashing rewards, raising interest rates and increasing fees as loan losses mount, taking action to “maintain a certain profit level in the business.”
Reward programs are expensive for credit card companies—for example, Discover Financial Services posted revenue of $5.7 billion in 2008, while the net cost of its rewards program was $710 million—so issuers want to make sure they are worthwhile.
* * * * *
In a recent presentation to investors, JPMorgan said cardholders using its reward program showed a faster increase in spending, generated higher revenue and had lower credit loss rates.
But that does not mean card companies will keep offering freebies to attract customers. They are trying to determine which customers are good bets.
In addition, lenders are trying to pass on part of the cost of reward programs to merchants by offering joint promotions that could bring new businesses and customers to battered retailers.
Not only have rewards been cut back—it has become more difficult to cash them in.
Still, losing a few rewards may be the easy part. Other credit card companies are raising interest rates and increasing fees, or simply closing down accounts entirely.
* * * * *
But this strategy could backfire: Higher costs and fewer rewards could frighten clients away, reducing the risk of default but also cutting into card company revenue.
“The people who have better credit quality have more offers, and if you raise their rates too much they will in fact leave you for somebody else.”
Edit by DAF
* * * * *
Full article:
http://www.cnbc.com/id/29637583
* * * * *
Want more from the Homa Files?
Click link => The Homa Files Blog
* * * * *
The Homa Files 
July 21, 2009 at 6:57 am |
This doesn’t seem right. If rewards was 12% of annual revenue it would be one of the largest (if not the largest) expense of the company after labor. Is this an accumulated liability or the expense incurred this year? Or is it the liability incurred this year, even though some people may never cash out the points? Even that seems too high since over a decade it would be a line item of $5-10 billion on the balance sheet.