Reward Cards In A Post Bill of Rights World


Yesterday, I discussed one possible future of reward cards, where high annual fees earn rewards that were valuable to the cardholder, yet represented little marginal costs to the bank and the affiliated business.   As examples, I gave airlines that give away club memberships, priority perks, and two for one coupons.

Enter The Loss Leader

Another viable business model may be the reward card as a “loss leader”.   As you may know, a loss leader is a popular product priced at or below cost in order to entice a customer to bring other business to the merchant.   Typically, these are very high profile products that consumers purchase largely based on price.    Common examples include turkeys being sold at supermarkets before Thanksgiving.   The shopper at that time of year will visit a store to an insanely cheap bird, yet the store makes plenty of profit off of the stuffing, sides, beverages, and other items that they will inevitably purchase.

I would argue that my American Express Business Platinum feature a loss leader of 5% cash back on gasoline.   I got the card last summer when gas was $4.00 a gallon, and I used it almost exclusively for gas purchases.   Amex seems to have caught on, and will be reducing the cash back on gas to 3%.

When Schwab Bank introduced their reward card with an industry leading 2% cash back on all purchases, it seemed there had to be a catch.   They do require that you have a brokerage account with Schwab, even though opening such an account is free.   It seems like they will win with this card, even if they never make a penny off of it directly.  Their strategy may very well be to offer a fantastic reward card as a loss leader, go entice people to get a brokerage account.    Their reward card may as well be just free advertising for their brokerage services.

Want A Reward Card?  Then Open An Account With Us

Here is an article I came across about a person who got rejected for a Wells Fargo Credit Card, in part, because she did not have a checking account with them.    There were other reasons, but the bank seemed to give at least some preference to customers with who they already had a banking relationship.   Extrapolate this a bit further, and you can see where this is going.   Perhaps you want the new SuperDuper reward card from SuperBank.    In order to get it, you must have a checking account with direct deposit with your local SuperBank branch.   Maybe your insurance company will have an affiliated credit card, or perhaps your cable company.   It really doesn’t matter if the credit card makes a profit, as long as they get you to sign up for other profitable goods and services.

Banks Will Get Creative

I am not a banking industry insider, just a humble consumer affairs blogger, yet I came up with these ideas in a few minutes of my spare time.    I imagine the people who brought us double cycle billing, and payment due dates on national holidays will be at least as creative as I have been.   The good news is that these loss leaders are value added incentives, rather than punitive tricks and traps.

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