I receive compensation for many links on this blog. You don’t have to use these links, but I am grateful to you if you do. American Express, Citibank, Chase, Capital One and other banks are advertising partners of this site. Any opinions expressed in this post are my own, and have not been reviewed, approved, or endorsed by my advertising partners. I do not write about all credit cards that are available -- instead focusing on miles, points, and cash back (and currencies that can be converted into the same).
One Mile at a Time writes, prompted by the new Barclays card with transferable miles that he surmises banks are paying “somewhere around ~1.3-1.5 cents per airline mile when those points are converted.”
He gets there knowing that a bank really can’t rebate more than around 2 cents per dollar to a customer. That Barclays card will get you 1.4 miles per dollar spent with several currencies, and 1.3 – 1.5 cents per mile times 1.4 yields a cost of 1.8 to 2.1 cents on every dollar.
Not every point will be redeemed, there are other less expensive redemptions, so Barclays isn’t rebating a full 2.1% to each customer. However they incur other expenses to marketing and servicing the card, and card benefits while modest (Global Entry rebate, lounge access without free visits, etc.) aren’t free.
Looking at other cards like Citi Double Cash which is going to rebate you around the same amount in cash, as well as cards like the Chase Sapphire Reserve Card which let you earn 3 points per dollar on all travel and dining, and either transfer those points to miles or spend them directly on travel at 1.5 cents apiece, it’s clear they’re pushing a cost of around 2% on rewards alone.
Lucky is clearly not far off. What he’s hitting on is that there’s an upper bound to what banks can possibly pay to reward customers. That’s based on their revenue which comes from interchange (merchant swipe fees when using the card to pay) and revolve (APR when customers don’t pay off their cards each month).
And we’re pretty much at a place where banks are paying as much as they possibly can at current rates for the rewards and benefits they’re handing out. A decade ago banks were earning bigger margins on rewards cards, paying less to frequent flyer programs for benefits and points. In recent years, especially since American Express lost Costco, the cost to banks has gone up.
A few things to add to this discussion.
- Based on American’s 2015 10-K AAdvantage sold miles at an average of ~ 1.23 cents per mile. The largest number of miles were sold to Citibank at a price less than that (since many buyers, including program members, paid a higher price and that’s an average).
- That was before the latest deal with Citi and Barclays, a deal which raised the price that banks pay per mile (and unfortunately AA is less forthcoming in their filings than they used to be). The average is certainly higher today, even though they sell miles direct to consumers for less.
- In co-brand deals what the banks pay a loyalty program isn’t only a cost per mile. They pay for instance for program benefits (eg checked bags), they pay for use of the program name, and they pay for access to the marketing channel. And these things are accounted for separately.
- Transferable points deals are a bit simpler. And we pretty much know based on information from United’s 10-K and from Chase on the growth of their Ultimate Rewards products, that any increase in revenue being reported by MileagePlus is pretty much accounted for by payments for Chase transfers.
- Signup bonuses are often funded differently than ongoing miles for spend. That’s because the frequent flyer program has just as much incentive to see a new customer for the card as the bank does, that new customer represents a future revenue stream for both parties. The split on the signup bonus will vary tremendously from deal to deal.
- Co-brand deals are big enough business, the banks are the biggest buyer from airlines, that they have substantial leverage. Program devaluations would be much worse in many cases except for contract provisions banks insist on that limit how much they can devalue.
If you get Chase Sapphire Reserve, do much spending at all on travel and dining, and use your points you’re coming out ahead as long as you pay off your card each month — because Chase is giving you benefits worth the annual fee, and rewards worth as much or more than they’re generating in revenue.
This suggests a couple of things. First there’s really no more that banks can pay for rewards than they do today. And second if revenue shrinks they’re going to have to find new models to fund rewards cards, and those models cannot possibly be as rewarding as what we’re able to get now.