Economic Trends Threaten the Future of Credit Card Loyalty Programs

4 Traits That May Chart the Course for Credit score Card Rewards

Bank card rewards packages are going through critical challenges in 2024 and past. Ongoing financial uncertainty is impacting the expectations customers set for his or her favourite loyalty packages, with bank card rewards packages experiencing a singular set of headwinds. The cocktail of traits within the mixer may spell a nasty hangover for bank card reward packages – particularly for these cardholders who carry a revolving steadiness.

Development #1 – Customers are in search of sensible worth from Loyalty Packages

Analysis has proven that with out a vital change on the earth financial surroundings, customers will proceed to be worth oriented and worth delicate.

A 2023 IAG/Avios (UK) examine discovered that 92% of customers are turning to loyalty packages for on a regular basis spending to make their cash stretch farther. Greater than 50% surveyed stated they’re actively on the lookout for new methods to gather factors and maximize their return after they spend cash.

Customers are additionally proving to be extra fickle. Because the pandemic, about 75% of US customers had been reported to have tried new purchasing behaviors in response to financial pressures. This took the type of 40% attempting a brand new purchasing technique and 36% testing out a brand new model.

These findings apply to each the US, Latin America, and Europe, the place the rising value of dwelling is shrinking shopper buying energy. Customers are clearly on the lookout for worth, and the worth delivered by card rewards packages will likely be examined severely within the coming yr.

Development #2 – Customers are stacking up costly bank card debt

Customers have been spending (possibly overspending) since Covid relented. Bank card debt has risen steadily, going from $1,081 Billion in 2021 to $1,151 B in 2022 (6.5% improve) and $1,231.8 B in 2023 (6.9% improve). Bank card delinquency charges rose above 2% in Q3 2022, nonetheless low in comparison with historical past, however a notable improve since Covid. Bank card charge-offs have risen steadily all through 2022.

The six largest issuers of bank cards within the U.S. paid $67.9 billion for reward redemption and associate funds in 2022, persevering with a dramatic progress pattern over the previous 5 years. The 2022 numbers signify a 23.7% improve ($13.0 billion) from 2021 and a 55.0% improve ($24.1 billion) from 2018.

The worth equation for rewards cardholders will likely be examined by excessive balances and rates of interest. Bankrate has been monitoring bank card charges since 1985 and stated on this article that as of year-end 2023, charges have by no means been larger. As of December 27, 2023, the common bank card price was 20.74 %, up 4.44% for the reason that starting of 2022.

A US examine confirmed that buyers with revolving balances had been charged extra in curiosity and costs than they earned in rewards throughout 2022. Customers who establish this nasty math could churn out to different types of fee merchandise and search out worth and low cost presents in desire over card rewards.

Development #3 – Money again may change into extra enticing than factors packages

Responding to the patron cry for worth and assist with month-to-month budgets, massive scale loyalty packages and bank card issuers have created extra alternatives for cardholders to earn worth by “each day spend” classes. For instance, Avios (40 million members) has added American Specific, Uber, Nectar, and Barclays to encourage on a regular basis spending.

The Sensible Marketer not too long ago printed analysis accomplished along with Interact People who confirmed a pointy rise in pursuits in having the ability to “Pay with Factors” on the level of sale or at an ecommerce web site. The findings make sense contemplating the craving of customers for worth, comfort, and selection with their loyalty program forex.

In that analysis, 84% of respondents point out they’re extremely or considerably doubtless to make use of PwP sooner or later and that they’re most definitely to take action in each day spending classes grocery, on-line shops, and comfort shops. Essential to card issuers, the examine confirmed that roughly 76% of respondents are keen to contemplate switching their bank cards to maximise PwP advantages.

Development #4 – The worth of money reductions may outshine bank card rewards

Reductions for settling the tab at eating places, espresso outlets and different retailers with money at the moment are on the menu as retailers seek for methods to handle and scale back rising credit-card transaction charges. Since bank card surcharges are both not authorized or are merely unpalatable to customers, retailers are providing reductions between 2-3.5%, when clients settle their invoice with money, sending the message that “if you happen to select to pay by card, the low cost will likely be eliminated.”

Between 2020 – 2022, the incomes price for every greenback spent on a normal function rewards card grew from 1.4 cents to 1.6 cents per greenback. Incomes charges are about the identical throughout credit score rating tiers aside from customers with scores above 800. Over this similar interval, the common base price of money again packages have elevated, whereas the identical for Mileage and Factors packages has decreased.

Savvy customers can simply do that “loyalty math” and will discover larger perceived worth in money reductions, additional eroding the perceived worth of utilizing rewards playing cards or the complete class of loyalty packages within the restaurant sector.

To summarize:

  • For the close to time period (3-5 years) customers will proceed to be value-oriented and price-sensitive
  • Consequently, customers will more and more view loyalty packages as a method to handle budgets and make their cash stretch farther.
  • Rising shopper bank card debt creates a actuality the place customers can not ignore the truth that curiosity expenses and costs charged by banks surpass the worth of rewards earned.
  • Reductions supplied by eating places and different retailers for paying with money threaten the competitiveness of the everyday bank card rewards worth proposition.
  • The recognition of money again packages over mileage and factors packages tied to bank cards will proceed to extend as customers search to handle their approach out of debt and deal with loyalty packages as sensible instruments to cut back debt.

The chance to bank card rewards admittedly impacts these customers who carry revolving balances greater than different cardholder teams. In accordance with Bankrate, 49% of bank card holders are carrying a steadiness from month to month, up from 39% in 2021. Card issuers can not afford to disregard the potential disenfranchisement of almost half their portfolio.

As a stop-gap measure, card issuers may think about moderating annual charges and sky-high rates of interest, however we all know that’s not more likely to occur. As an alternative, issuers ought to think about including companions in “each day spend” classes and adopting card linking options to create extra instant worth for cardholders. Additionally they want to enhance the expertise of loyalty program members by including Fintech enabled personalised choices, interactions, and rewards to maintain cardholders engaged with their merchandise.

The threats to bank card rewards are made extra acute as legislators are urgent for service provider processing reform by the Credit score Card Compensation Act 2023. Taken collectively, it’s time for card loyalty professionals to reassess their fashions and make modifications to make sure their competitiveness into the long run.

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