Reward programs are not very rewarding for banks anymore

  • Issuers upped their rewards game during the pandemic to help customers stick to their credit cards.
  • A lot of cash is being poured into reward programs, but as markets shift, this spending may not be as fruitful anymore

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Reward programs are not very rewarding for banks anymore

When the pandemic was in full swing, credit card companies were facing fierce competition from debit cards as well as competitors like BNPL. Consumers in general became wary of revolving debt. As consumer interest wavered, credit companies scrambled to revamp their reward programs in the hopes that focusing on pandemic-era priorities like groceries and lifestyle items would make consumers stick around. 

The strategy worked but required some serious money. 

Six of the top issuing banks said they spent up to $68 billion in rewards and related costs, which is 43% more than their expenditure in 2019.

Trend line showing the percentage change in total credit card transaction value. While values were high in 2021,  they have been decreasing over the past two years.
Source: Insider Intelligence

While this strategy kept consumers stuck to their credit cards, this year, US credit card transaction volume is expected to increase only 2% year-over-year. This is unlike the last two years, where lenders experienced increases of 21.5% in 2021 and 9.9% in 2022. This means that while lenders have spent a lot on rewards, consumers may veer away from using credit or may even be experiencing difficulty paying back. 

On the other hand, funding cards is becoming expensive for banks. Stimulus checks and COVID-19 allowed customers to pay back their balances faster than before, which meant less interest income for banks. Similarly, as cost of living increases, consumers are more hungry for rewards – this is troubling for banks because consumers that may be unable to make good on their credit card loans might still be reeled in by attractive rewards. The Fed has noted before that rewards generally make consumers’ borrow more. 

Bar graph showing card rewards costs across top 6 issuers. Costs have been steadily increasing in the last 4 years.

This opens banks up to the possibility that while their expenditure on reward programs has risen a lot, their income from card loans may not grow that much. This may make the investment in reward programs heavily misguided- $68 billion dollar heavy. 

In this case, banks are likely to bring down their benefits, starting a chain of devaluing of reward programs across the country. But this move is not without its consequences: if the devaluing process is too heavy handed, high spenders may go out the door as well. 

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