Banks Pulling Back on Rewards Credit Cards

Summary

Episode Summary: "Banks Pulling Back on Rewards Credit Cards"

Podcast: WSJ Your Money Briefing
Host: J.R. Whalen
Guest: Anamaria Andriotis (Wall Street Journal Reporter)
Date: January 3, 2019

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Overview

This episode of WSJ's "Your Money Briefing" explores why banks are starting to scale back on the once-lavish credit card rewards programs that have benefitted consumers for years. Host J.R. Whalen is joined by WSJ reporter Anamaria Andriotis to detail the competitive history between major credit card issuers, the economics behind rewards programs, the phenomenon of savvy card users “gaming” the system, and how upcoming changes in interchange fees might disrupt the landscape for both banks and consumers.

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Major Discussion Points

The Rise and Peak of Rewards Credit Cards

• Era of Intense Competition: Over recent years, major issuers like J.P. Morgan, Citigroup, and American Express fiercely competed to attract cardholders by offering ever-more generous rewards and bonuses.
  • Quote (02:39): “Some of the biggest banks in the country have been going head to head...trying to figure what are the most generous points and other reward offerings they can put out there to get as many card users as possible.” – Anamaria Andriotis
• Setting the Standard: The American Express Platinum card became the industry benchmark, prompting competitors to create high-value rewards cards.
• The Peak (2016–2017): J.P. Morgan’s "Sapphire Reserve" card epitomized this period, offering sign-up bonuses of 100,000 points—a move that shocked even industry insiders for its generosity.
  • Quote (03:08): “That by many card executives was looked at as...how could they even do that? That is such a rich offer. How could it make financial sense for the bank?” – Anamaria Andriotis

Why Banks Are Pulling Back

• Consumers Getting Savvier: Many consumers maximize rewards by using multiple cards for different types of purchases, redeeming the best perks without accruing interest or late fees.
  • Quote (03:55): “Consumers are very savvy with how they're using credit cards...and they strategize what purchases to put on what cards in order to earn the maximum number of points or the most cash back possible.” – Anamaria Andriotis
• Financial Impact on Banks: While rewards have driven card usage, the cost to banks has been rising. Revenue from interest and fees is declining as more cardholders avoid balances, and the cost of rewarding these “gamers” climbs.
• Interchange Fees and Merchant Pushback: Merchants pay banks interchange fees on every credit card purchase, which fund these rewards. Large retailers (Amazon, Target, Home Depot) are pushing to lower these fees through litigation. If successful, banks fear they’ll have to cut back rewards further.
  • Quote (04:56): “That fee has become a substantial way that rewards programs are being funded...if the big merchants do get a big win and interchange fees go down...banks are concerned about what the future of these rewards, credit cards...can mean.” – Anamaria Andriotis

Cardholder Behavior: The "Gamers"

• Unredeemed Rewards: JP Morgan disclosed that credit card holders have accumulated around $6 billion in unused rewards, reflecting a trend of people amassing points for big redemptions rather than immediate perks.
  • Quote (06:23): “There were 5.8 billion dollars in rewards that its cardholders had not yet redeemed. That figure’s up 53% from the end of 2016.” – Anamaria Andriotis
• Churn-and-Burn Strategy: Some consumers, especially couples or families, sign up for cards primarily for hefty sign-up bonuses, use them for big redemptions (example given: round-the-world airfare), and then either shelve the card or switch to a competitor for the next bonus.
  • Quote (07:18): “[One couple] took those points to pay for airfare. That was part of their round the world trip in 2017... now considering whether to close one of the Sapphire Reserve cards.” – Anamaria Andriotis
  • Quote (07:31): “This taps into one big area of concern for banks in the credit card space...people who sign up the cards, use them to get the maximum benefits early on...and switch to a new card...causing headaches at the banks.” – Anamaria Andriotis
• Impact on Reward Structures: To counteract this gaming, banks are starting to reduce sign-up bonuses and scale back overall rewards. The era of ultra-premium rewards is likely giving way to a more conservative approach.

Banks’ Long-term Strategy: Focus on Younger Customers

• Building Loyalty: Banks are now less interested in short-term reward wars and more focused on attracting younger customers for long-term relationships—hoping that credit cards will be a “gateway” to other financial products.

  • Quote (09:37): “A credit card for many people is that first sort of financial product, you know, checking account, credit card for people in their 20s and so forth... and then hopefully be able to sell them other services.” – Anamaria Andriotis

• Aftereffects of Financial Crisis: The big push for rewards started after the last downturn, as banks sought new revenue outside slowed trading and mortgages. The pattern especially mimics American Express, but competition drove reward levels unsustainably high.

• Now: "Chipping at the Edges": Banks are unlikely to eliminate rewards but are looking for subtle ways to lower costs.

  • Quote (10:45): “You can't go higher than what the industry has been offering. And if anything, what's happening is that they're chipping around the edges trying to make these programs less costly for themselves.” – Anamaria Andriotis

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Notable Quotes and Moments

• Rewards Peak Means Cost Cutting Ahead
  • “Certainly the peak has passed and now there are discussions about cost cutting.” – Anamaria Andriotis (11:20)
• Consumer Savviness
  • “For the consumers, it's a net win.” – Anamaria Andriotis (04:26)
• The “Gamers” Worry Banks but Are Playing by the Rules
  • “Perfectly within the rules...however, it is causing headaches at the banks.” – Anamaria Andriotis (08:12)
• Rewards as First-Tier Strategy
  • “A credit card for many people is that first sort of financial product...” – Anamaria Andriotis (09:38)
• On the End of the Rewards Boom
  • “No one's saying that rewards are going to end, but certainly the peak has passed...” – Anamaria Andriotis (11:20)

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Timestamps for Key Segments

• 02:39–04:52 — Discussion of intense competition and history of premium rewards cards
• 04:52–06:03 — Explanation of interchange fees and merchants’ legal pushback
• 06:03–09:24 — Gaming the rewards system; unredeemed points; consumer strategies
• 09:24–11:25 — Banks’ focus shifts to loyalty and cost management

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Conclusion

The golden era of lucrative credit card rewards appears to be winding down as banks grapple with rising costs, legal pressure on interchange fees, and increasingly savvy consumers exploiting rewards programs. While credit card perks will not disappear, the industry’s focus is moving toward cost-cutting and building long-term relationships, especially with younger customers. The episode offers valuable insights into both the economics behind the rewards industry and the strategies banks (and their customers) will likely deploy in the years ahead.

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Transcript

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.

[J.R. Whalen]

With your Money briefing. I'm J.R. whalen at the Wall Street Journal in New York. All those rewards, credit cards issued by the banks have delivered enormous benefits to consumers. Well, now the banks are saying hold on, and they're starting to pull back on the frills. We'll explain why in a moment. First, these money and market stories. You should know it's a lot cheaper to fill up at the gas pump. The Energy Department says gas prices on December 31st were down by 25 cents a gallon as compared to a year earlier. The Wall Street Journal heard on the street team quotes Jason Bordoff, he's founding director of Columbia University's center on Global Energy Policy, as crediting a fall in gas prices in part to President Trump taking a less strict approach to Iranian sanctions. Meanwhile, the folks at Gasoline Price Tracker Gas Buddy say the price at the pump could jump by as much as 35% as soon as May, with output cuts by major oil producers expected to boost the price of oil. And the latest casualty of the government shutdown could be your tax refund from the IRS showing up in a timely fashion. During a shutdown, the IRS can continue activities that protect government property, and the agency may bring in more workers soon to prepare for the income tax filing season. Now, the IRS hasn't announced a start date yet for the 2019 filing season. That that's the first under the tax law that Congress passed two years ago. Even during a shutdown, the agency still processes some tax returns that include payments and keeps computer systems running and continues criminal investigations. But the IRS generally does not conduct audits, respond to taxpayer questions outside the filing season, or pay refunds. For the past few years, banks have gone out of their ways, asking us things like what's in our wallet. And be sure to sign up for their rewards, rich credit cards. Well, now the tide is turning and those rewards may not be around for long. Wall Street Journal reporter Anamaria Andreotis is here with some details. So Anamaria, this is an area of fierce competition among banks, and it has

[Anamaria Andreotis]

been an area of fierce competition. For several years now, some of the biggest banks in the country have been going head to head. J.P. morgan, Citigroup, American Express is one of the largest card issuers as well. They've really been going head to head trying to figure what are the most generous points and other reward offerings they can put out there to get as many card users as possible.

[J.R. Whalen]

Seems like everyone is coming for American Express's Platinum card that sort of set the standard for rewards and benefits.

[Anamaria Andreotis]

That became the focus point for several of American Express's competitors in recent years. And really the peak of credit card rewards mania occurred in late 2016, somewhere between there and early 2016, 2017, when JP Morgan had the Sapphire Reserve card with 100,000 points for people who received the card and spent a few thousand dollars in the first few months. And that by many card executives was looked at as how could they even do that? That is such a rich offer. How could it make financial sense for the bank?

[J.R. Whalen]

Well, it made financial sense for the consumers. They ran out of cards. They couldn't produce the cards fast enough.

[Anamaria Andreotis]

Correct. And essentially what we've seen even since then is that consumers are very savvy with how they're using credit cards. And they have oftentimes many cards that they have with them, and they strategize what purchases to put on what cards in order to earn the maximum number of points or the most cash back possible. And banks are facing a situation where certainly, of course, they're still making money from credit cards. That goes without saying, but that the returns on cards are declin and they've been declining for a few years now. One reason for that is because of the rewards costs, which are rising. And they're rising because you have a bunch of savvy consumers who are using these cards to get the maximum benefits out of them, not carrying balances. So they're not paying interest charges, they're not incurring late fees. So for the consumers, it's a net win.

[J.R. Whalen]

So how do the fees that banks collect from these cards factor into all this?

[Anamaria Andreotis]

So pretty much every credit card has something called an interchange fee. Sounds dull, but it's very. Every time consumers shop with their credit cards, the merchants that they're shopping at pay a fee to the banks that issue that credit card. And that fee has become a substantial way that rewards programs are being funded and essentially allowing for these super generous rewards programs to be out there. What's going on is that there are a large number of merchants, including some very big ones like Amazon Target, Home Depot, that are essentially through lawsuits, pushing for changes to this interchange fee structure. And if they're able to get their way, that would lead to lower fees. And banks have this very much in mind right now and are concerned about what the future of these rewards, credit cards that are out there can mean if the big merchants do get a big win and interchange fees go down.

[J.R. Whalen]

What really surprised me in your story is that while people try to game the system like you said and rack and use different cards, they rack up as many points and rewards as they can. JP Morgan says its credit card holders have built up about $6 billion in rewards that they have not redeemed. I mean, why even go through this? Why even do this if you're not going to cash in the rewards?

[Anamaria Andreotis]

A couple things. That number is certainly a staggering number. The bank reported that as of the third quarter of 2018, there were 5.8 billion DOL and rewards that its cardholders had not yet redeemed. That figures up 53% from the end of 2016. And it could be a mix of things. It certainly could be that people don't redeem their points right away. So oftentimes consumers want to hold out and wait until they've built up a large number of points in order to redeem them for something big like airfare.

[J.R. Whalen]

Yeah. So for the trip to Hawaii, it's going to take more than a few trips to Walmart and Target.

[Anamaria Andreotis]

And also it's interesting because one of the couples who I spoke to for the story who basically took Chase points, which came out to somewhere around, they had amassed around 400,000 chase points.

[J.R. Whalen]

Wow.

[Anamaria Andreotis]

And they took those points to pay for airfare. That was part of their round the world trip in 2017.

[J.R. Whalen]

There are great photos of this in your story on WSJ.com go check it out. They're really good photos.

[Anamaria Andreotis]

What I thought was especially interesting about this couple is that they recently signed up for American Express's Platinum card. So they signed up for the Chase Sapphire Reserve. They each got 100,000 points when Chase had rolled out that card. Wow. They, they've been using it since then. And recently the husband Jason signed up for the American Express Platinum card. And the couple is basically now considering whether to close one of the Sapphire Reserve cards. So they signed up, he signed up for the Amex Platinum. He's going to get that sign up bonus point that's offered on that. And, and this taps into one big area of, of concern for banks in the credit card space. The story gets into Gamers, specifically people who sign up the cards, use them to get the maximum benefits early on in the life of having that card and then put the card in a drawer, forget it somewhere and switch to a new card to again do the same thing, get those early on benefits, those signup bonus points, perfectly within the rules. Sure, there's nothing wrong with it whatsoever. However, it is causing headaches at the banks and it's actually, it was interesting to see the data on this. The signup bonus offers have been one of the main ways to lure in cardholders and especially in that premium market with these cards like Sapphire Reserve and Platinum that charge several hundred dollars in annual fees, have generous rewards for travel, dining. It's, it's been interesting to see how those signup bonus points on average have been falling in the industry the last few. So basically what this all points to is that this rewards craze is starting to cause some real pain points for the banks that have been promoting it.

[J.R. Whalen]

So the folks who game the cards and they game the system hopscotch across cards could be veterans at all this, but the younger customers are the ones that the banks really need to get to, to build up loyalty. And that's the target of several cards out there.

[Anamaria Andreotis]

And that's something that J.P. morgan and Citi have been talk, talking about, which is that they're looking for sort of the, the long term here potentially, you know, bringing people in with a credit card. A credit card for many people is that first sort of financial product, you know, checking account, credit card for people in their 20s and so forth, bring them in and then hopefully be able to sell them other services, be it deposit accounts, investment services, wealth management. So the cards are increasingly, I would say, being looked at that way really. The origins of how banks pushed credit card rewards happened in the wake of the last financial downturn. Trading units, mortgage units, those had all slowed significantly. The banks were looking for an area where they could get significant revenue. And quite frankly, they really took a liking to American Express's model. I mean, a lot of this is kind of a replica of what American Express has been doing for decades, in particular with the premium card. Except now things have gotten so competitive that, you know, for several years if one bank rolled out something competitive, the other bank would respond and meet them, or at least try to meet them. So you had this buildup and now it's gotten to the point where you can't go higher than what the industry has been offering. And if anything, what's happening is that they're chipping around the edges trying to make these programs less costly for themselves. And I think most notable discussions, as we report in the story, have been playing out at several banks about how can they sort of scale back, how can they cut back on rewards? No one's saying that rewards are going to end, but certainly the peak has passed and now there are discussions about cost cutting.

[J.R. Whalen]

All right. That is Wall Street Journal reporter Anna Maria Andreotis joining us here in our studio. Anamaria, thanks for being with us.

[Anamaria Andreotis]

Thank you.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees that I don't really need it.

[Retail Industry Representative]

Inflation is me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Electronic Payments Coalition Spokesperson]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.