The issuing market has seen an about face in customer acquisition strategies, but the traditional rewards playbook may be no longer fit for purpose as both BNPL and Apple Card reshape consumer expectation
Recent months have seen big issuers in the United States pushing the envelope to attract new custom. Provisions put in place by the big lenders for an anticipated wave of defaults never panned out in this market – thanks to a stream of stimulus payments that, where possible, consumers used to pay down outstandings.
Now, with the funding taps back on at the major banks, building profitability is the order of the day and that means attracting and building relationships with affluent, confident consumers. According to Verisk Financial Research, whose latest market report on the United States was recently published, some four fifths of purchase volume on credit cards takes place on rewards cards.
JPMorgan's reconfiguration of its rewards and benefits on Sapphire credit cards has been the highest profile such move, with cardholders being feted with new bonus categories and point multiplier increases, along with brand-new lounges in major airports for holders of certain Premium variants. Bonus points on, for example, the Chase Sapphire Preferred card could be worth as much as $1,250 in travel.
Cashback too is an ever-increasing phenomenon: as noted by Gary Brennan of Verisk Financial in our Payments News Digest, the Venmo credit card is currently offering double cashback rewards until the end of this year. The travel and entertainment sectors, traditionally the focus of rewards programmes, were among the worst affected by the pandemic, leading many issuers to emphasise or augment cashback rewards to incentivise spending as the economy recovers.
This credit cards market is undergoing a historic change: issuers currently have more opportunity to invest in their product offerings without compressing margins due to better-than-expected credit quality trends during the pandemic. Balance transfer offers too are on the rise, with U.S. Bank's Visa Platinum Card offering an introductory zero-percent APR that lasts 20 months for qualified applicants. However, the sharp rate of increase for balance transfer offers over the summer is from a reduced, crisis-induced base, and it remains to be seen if consumers will be lured into switching given the exceptional sophistication of loyalty programmes here.
This makes cobrand partnerships even more important differentiators, with Big Tech brands increasingly prevalent and powerful. Perhaps the most notable is the Mastercard-branded Apple Card issued by Goldman Sachs, which, reported Forbes, doubled its cardholders to 6.4 million last year. The second quarter saw card spend intensify as issuers battled to attract big spenders, funding rewards inflation with interchange revenue: merchant revenue, which includes interchange and acquirer revenue, has overtaken net interest income as the primary source of income, once the pandemic-affected spell from 2020-22F is put aside.
It should not be forgotten also that Buy now, pay later (BNPL) is on the rise, meaning that issuers need to pay close attention to drivers in that market, which is increasingly a significant consumer option, especially among the young. Although making up a mere two percent of B2C e-commerce sales in the country last year and arguably targeted at a different segment, BNPL's purchase value is soaring, up by more than 130 percent in the first quarter of this year. The credit card is, as of 2020, responsible for 40 percent of B2C e-commerce. It is necessary, as the rising cohort of potential credit cardholders emerges, for credit card issuers to sweeten the deal in ways that take account of consumers' need to feel they are being treated fairly when it comes to fees and interest (often cited in probes of BNPL's appeal, though not the primary draw it seems).
The pandemic has also accelerated the uptake of mobile and contactless payment methods and, given this context, the new real-time payments system, FedNow, due to launch in 2023, should further boost alternative payments and their provisioning ecosystems: again, credit card issuers need to look at the nuts and bolts of why the Apple Card has been so successful in crafting user experience.
Issuers must also bear in mind the need for the credit card industry to move its profit pool focus away from interchange, into which it has increasingly leaned in recent years as a funding source for rewards: that revenue stream may come under pressure in coming years as the interchange cap lobby increasingly finds an understanding ear in a Washington that is currently, to put it crudely, in a pro-consumer rather than pro-Wall Street swing of the partisan political cycle.
For now, the brakes are off, at least for unsecured lenders with deep pockets. Store cards and private-label competitors could be under a lot of pressure because of the upswing in cashback. Will such issuers lower acceptance criteria and go sub-prime? Things are changing fast in the American credit cards industry, with the landscape set for convulsive reshaping. Verisk Financial's Gary Brennan sums it up: "The glut of credit rewards and balance transfer offerings from issuers have come at an appropriate time for American consumers, who had been easing their financial pressures through government stimulus but are now taking advantage of a favourable credit environment, thus pushing the US cards market to new profitability levels."
Learn more about how the US cards market has been impacted by the pandemic and how issuers are responding as the economy reopens and the profit pool evolves in Verisk Financial Research's latest US cards and digital payments research report
About Verisk Financial Research The market-leading online, interactive database and data dashboards covering the global cards and payments industry in detail, plus a range of data-packed country and regional reports. Leveraging financial cards data going back to 2010 – and forecasts up to 2022 – our unique datasets cover 72 countries around the world and feature more than 250 metrics per market.