Chase Worried They’re Losing Money on Sapphire Reserve

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The Wall Street Journal reports that people inside Chase are concerned their Sapphire Reserve Card is too generous and they’ll never make back their investment and that the bank “is pushing for about $200 million in fresh cost cuts in the unit that oversees the card.”

Chase’s card income is down 15%, and new card signups are down 22%, year-over-year.

Sapphire Reserve had a 100,000 signup bonus offer for several months, in addition to a $300 travel credit which was redeemable twice during the first cardmember year (that loophole has since been closed). They expense acquisition cost over 12 months but expect to turn a customer profitable after 7 years.

The real question for the product comes as cardmembers face their first annual fee renewal. The Wall Street Journal picks up on the “5-24 rule” meant to “avoid signing up potential defectors.”

The big question is whether the consumers want to stay in this relationship. Customer renewal rates for premium credit cards can range from 60% to 90%, said Robert Hammer, founder and CEO of credit-card industry consultant R.K. Hammer. Some 5% to 10% of card holders tend to “shop around,” looking for new rewards, he adds.

Apparently Sapphire Reserve customers are both more focused on travel and dining 3x bonus spend (which is more costly to reward) than expect and are revolving less debt than Chase originally projected. Of course, American Express’s charge cards like the Platinum card for the most part don’t included revolving balances in their models at all.

At the same time the 100,000 point offer for a Chase mortgage is proving attractive to Sapphire Reserve customers with 4500 mortgages closed among this customer segment since the offer rolled out nearly three months ago. That’s “about twice the number of mortgage applications from other Sapphire card customers last year.”


Copyright: jetcityimage / 123RF Stock Photo

Cross-selling is one avenue that Chase can use to recoup their signup expense to the extent they’re acquiring new customers to the bank.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I honestly hate this card. Partly because of 5/24 blocking me from getting it, but mainly because it has ruined dozens of PP lounges. Unlimited guests mean a dozen wasted college students taking shots at the bar, trash everywhere, no food, and now access restrictions.

    It’s also brought a lot of people into the hobby that really shouldn’t be in it. Call it elitism, but that’s how I feel.

  2. They could do better at targeting customers with this card. Instead of going after millenials who want to “beat the system” they should have targeted high net worth customers. Somehow Amex does a much better job at this. I suspect a bunch of their customers are cancelling once their $450 annual fee comes due. Not waiving the first year would have filtered some of these people.

  3. The CSR is a wannabe luxury card. Sure, it has a high annual fee, but it’s just a gimmick after the $300 credit is considered. Call it what it is: a CSP on steroids.

  4. I agree with William, too many (non-qualifying) guests occupying the PP lounges. Recently I was given a 3 hour time limit in a PP lounge because it was overcrowded. Once inside I saw the problem: a group of 25-30 college grads enroute to Europe….and yes, plenty of selfies at the bar, trash and backpacks spread all over the place. One guest per cardholder is sufficient!

  5. I too agree with Willam seeing first hand at the Alaska Lounge in PDX having to put the dreaded sign out front NO PP. Lounges around the country are packed partially due to these cards. KimmieA also properly points out the demographic’s of who. I know I am a “mature” traveler of the old school but still.

    So Gary, his is my question will this card continue or be scaled back lessening it value over AMEX PLT? I have both but not sure I want to keep both.

    Thanks and keep up the great work

  6. Well, I think what Chase is noticing is that the higher spending, higher net worth folks they attracted don’t carry balances at the same rate as lower net worth folks do. This is in part the reason why the Amex traditional charge card model was based on interchange and annual fee revenue and not on interest income from folks carrying balances. Chase really should have seen that coming, since that is the reason Amex traditionally charged 3.5% interchange vs. the 2.5% Visa and MC charged (and also the reason fewer small businesses accept Amex since they don’t want to pay the higher interchange). The irony is that this could all be made up by the millennials that jumped on the CSR who are much more likely to carry balances and become very profitable for Chase. The issue is…are enough millennials going to stick around, or do they turn out to be a fickle bunch who take the rewards and run? I know what I would bet on, lol, but I think we are all biased by the fact that we live and breath this points stuff and assume everyone does. But just anecdotally, I’m in my 40’s and most of the people my age I try to talk about points with aren’t really interested. They just charge everything to 1 card and wonder why I would have more than 1 card. Most of the folks I know couldn’t be bothered with figuring out a whole point currency ecosystem for the sake of saving what they view as only “a few bucks” on a flight. Now whether millennials think that way as well is the key, but one I have very little insight into. Any millennials out there have friends like that too?

  7. The card killing PP isn’t the card’s fault. It’s PP for selling the benefit to chase. After travel credit, essentially over the CSP, you pay $50 more per year for up to 50% more points and more generous travel benefits. Is the $50 enough to offset the costs? Does it give chase a better percentage of my spend? Does it make me more loyal to Chase overall?

    I love the card and the program and hope Chase realizes, unlike Amex, that they have a suite of offerings. They may lose money on me as a CSR holder, but I am now have 3 Chase cards, a Chase bank account, and a Chase mortgage.

    Like many companies, they need to change focus from silos and look at lifetime value of each customer. If CSR customers have higher LTV, perhaps they need to adjust how they value the product

  8. Gary, I’d love to see some analysis on the cost side of this card from the Chase side. What value do they use when they carry a UR point on their balance sheet? What does it cost Chase when a UR point is transferred out to an airline or hotel? What is the UR breakage rate? What does it cost Chase to enroll a cardholder in PP, and what does each lounge visit cost them?

    (I’m sure some of this is proprietary, but you usually do a nice job of sleuthing this stuff out…)

  9. Why are so many people blaming crowding on Priority pass lounges on Chase? As mentioned, its PP selling it to them. Moreover, how about the fact that all premium cards offer PP these days.

    If you’re in a large US city though, yes, they probably are overwhelmed and will be disappointing… but the lounges are still valuable (to me) at smaller US airports and especially internationally

  10. Maybe Chase should be more worried about the continued devaluations of almost every transfer partner. I now have to think really hard before booking anything except economy awards because of ridiculous inflation of United and Singapore charts, imminent inflation of Hyatt, and almost utter worthlessness of the remaining partners except Southwest.

    I’m putting ALL my non-bonus spend on a 2x cashback card, as it’s getting hard to find even 2-cent redemption value with UR points.

  11. When a college kid or recent college grad with limited income can get a product that is marketed as a premium card with a huge sign up bonus to boot I’m afraid the card has been way over diluted. Once you allow everyone in the lounges the serenity is gone…..nowadays sometimes it’s just more peaceful to grab a coffee and sit in the terminal rather than fight the scrum in the lounge.

  12. …and on another note, what the heck did they expect to happen? They paid obscene amounts of money in commissions to the likes of TPG to peddle this card to every wannabe travel hacker in the country, who teaches them how to maximize it and avoid getting into debt. They wasted money getting their worst nightmare clients, and now are wondering why it’s not paying off LOL.

  13. Evan, while your point is good when the “reserve” card came on the scene it “tipped” the balance that was there. So many people went to that card that enable multiple guest access to the lounges, the rest is history.

    There is plenty blame to go around. An interesting note, my oldest son and his wife got and accepted an offer from AMEX PLT ( their both lawyers in DC so high income) when they asked me I suggested that they look at the Chase Reserve Card, they preferred the AMEX PLT ( partly I think of the status) They are in their mid 30’s which appears to be a hard target for the card companies

  14. “If PP is an actual problem they could change the unlimited guests policy.” – no kidding. There is no reason for unlimited guests. I would lose my mind if I walked into a lounged filled with a dozen backpackers all there off one card.

  15. I agree with several posters, there is enough blame to go around if we’re going to start pointing fingers. To Priority pass for partnering with every major “elite” card, and especially for them allowing this card to have unlimited guests. I’ve seen several lounges I use create new capacity limits on priority pass cardholders. As a cardholder, just because you can bring in half the airport does not mean you should, overcrowding is why those new capacity limits exist. Then there’s some blame to the various churners who took the hundred thousand points and cancelled the card. I got my card the first month and paid a fee, so not sure why some posters are saying they waived the fee the first year, if that was the case, I surely did not benefit from it. And to chase, they should have predicted the results of putting out a card with such an attractive bonus at sign up, it’s not like they don’t know that people turn their cards, it’s why they created the 5/24 rule. It will now be interesting to see what they do next. Are they going to cut benefits and risk more people canceling the card? Or are they going to bring in more benefits to entice retention?

  16. Unlimited guesting is bad, move it to immediate family and the problem improves immediately. At least the overcrowding problem. Chase’s revenue problem won’t be helped by that, unless it’s a cheaper cost to Priority Pass…

  17. I wonder whether Chase is shooting itself in the foot with this 5/24 rule.

    I know I’m just one data point, but I don’t think I’m alone: I’m barred from getting the CSR because of that rule, but if I did get it I’d put lots of travel and spending on it because of the 3X points that I currently use a Citi card for because it offers 3X. Chase Ultimate Rewards points are more useful than Citi TY points in at least a couple of very big ways, but the 3X Citi benefit keeps me spending with Citi since I can’t get the CSR.

  18. @steve – 5/24 is most certainly hurting Chase. Signup bonuses could be more restrictive, to limit churn, say you’re only allowed a few Chase bonuses every year or so, that would still allow those with many cards to pick up new cards. Say you really want the CSR for spend, you might pick that up even if there is no, or small, signup bonus.

  19. I’m a math guy for a living. And sometimes I just have to wonder what other math people are thinking. Chase is giving away $1600+commission in exchange for a $450 fee the first year, and between $50-$150 in recurring fees on an ongoing basis. This is a competitive and crowded space, and what nobody has figured out yet, other than Citi with the Prestige’s 4th nigh free award, is how to get me to keep my card. This game incentivizes people to close a card long before they are profitable.

    It’s odd, even the 5/24 rule is enough to drive up acquisition costs for other products and banks. Chase has enough good cards that I’m willing to be picky about my other signups — which means the banks have to deliver more value for me to sign up, which in turn, increases Chase’s acquisition costs to be competitive.

  20. I got the CSR – actually was offered it by my private banker and can honestly say I’ve never been into a PP affiliated lounge.

    What concerns me is a likely loss of benefits from the card. Now that Citi have removed so many benefits from the Prestige card I’m worried that Chase will feel there is no longer any need to maintain benefit levels with the CSR to remain competitive.

  21. I love this card. We use Chase cards (and especially this one) primarily because of their offers. I also have several Amex cards but hardly use them unless there are offers and because Chase gives you a better deal. There is NO WAY I’m ditching this card unless they take away benefits. Don’t understand why everyone isn’t using the Chase Sapphire Rewards. We also have a Freedom and Ink Plus card… use them all.

  22. I love the CSR (yeah, the 100K bonus was insane, but they corrected that) and if Chase keeps it pretty much as is, I’ll be happy to keep the card. But they do worry me. The first two changes you mention are really corrections, but what else are they going to change? Over-reward me to sign up, then change the benefits so that I drop the card. Who’s the idiot here?

  23. Im with u farsighted99.. I have the ink and southwest biz as well as CSR, working my way to get the CSP for the bonus then downgrading to freedom, will also get the CFU.. To all complement my CSR.. I agree that they shd have limitations with PP crowding otherwise whats the point if it will be as crazy as the rest of the airport.. Maybe only immediate family or 1-2 guests non related..

  24. I have the CSR and the Ink cards but I am focusing all my spending on the CITI card because of the transfer partners that CITI has that Chase does not have.

  25. I love my CSR but I will be cancelling upon renewal as I already have the JPM-R card which offers better benefits. I use PP lounges around the world and have not noticed a difference – no trouble getting into my only home lounge @SFO, @SJD or anywhere else. In fact it is easier to get into a PP lounge than a *G lounge because PP pays the lounges more $ for each guest. Good riddance to all the haters – Chase doesn’t need any more churners.

  26. Their real mistake was the 100,000 point signup bonus. It was compelling enough at 50,000, so they just wasted money and encouraged more people to churn who had no desire to keep it long term. I suspect they thought it was so great that it would advertise itself and save them advertising costs. And maybe it did.

    I agree that they have to look at a CSR customer’s full spend. I’m putting a lot of travel at 3x but because of that card also put a lot on the Freedom at 1.5x. If the travel got dropped to a lower multiple then I would move most of that spend back my 2.5% cash back card. Especially since it is getting so much harder to find ways to use points at better than 2% or even 1% in many cases.

    But honestly I don’t understand the payback for these credit card companies are going for.
    Giving 3x points or 2.5% cash back (3% the first year) on a Visa with only 2.5% interchange… They’re losing money off the bat other than interest. I guess that’s why they charge upwards of 20% interest, to make up for it. But then they should target people with bad credit scores, not good ones with the money to pay the balance off every month.

  27. Hi Gary,
    Does Chase perform income verification before accepting a new applicant? I’ve heard stories of friend’s friend (recent college grad with not much credit history) lying about his income and getting approved immediately for Reserve. I’m sure there were other circumstances that made his application look appealing to Chase, but I wonder if Chase’s plan to chase millennials may have let in some unscrupulous characters.

  28. Priority Pass has no qualms with selling as many memberships as possible – they make their money regardless of whether you are allowed to enter a lounge or not. Instead it is a lounge’s owner which is responsible for gating and even denying when it is apparent that their traditional direct revenue paying customers are receiving a degraded experience (as potentially noted by others here). Lounge owner’s aim to monetize their lounges to their maximum, but not at the expense of their traditional ticket-generating passengers who generate the lion’s share of revenue.

    I agree that many PP lounges in the U.S. can at times lose their tranquil ambience and I think the ubiquity of membership is part of this.

  29. Why blame CSR for Priority Pass overcrowding? They give out memberships like candy these days. I think I have 6 different credit cards that offer it.

  30. @Dan
    I am also a math guy for a living and I agree that Chase is not making any money off me and many others. I’m using the CSR card for travel and dining only. But because I have CSR I am also using the Chase freedom card for certain purchases, so I guess they are making a slight profit on that card. I think what Chase gained most with offering this card us killing the competition. I’ve been a Citigold and a loyal Citi card holder for a very long time, but since I got the CSR card I stopped using my Citi cards. All I’m using right now is three Chase cards and one Amex card. I intend to keep my CSR card as long as they will not reduce the benefits.

  31. My PP allows me and a guest only. Don’t know where the unlimited guests come from. If I spend $100K a year, pay my balance in full every month, how much money is Chase making off me. Assume it’s for hotel and restaurant spend. I too agree, finding value for transferred airline points is ridiculous. Lucky to find award tickets that come out to more than two cents in value.

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