|by Jason Steele|
In the aftermath of the successful passage of the Credit Card Bill of Rights, there has been much speculation on the future of the industry visa-vis reward cards (pun intended). On one side, you have myself and others who feel that the credit card industry was just throwing up so much smoke regarding having to cut back on reward programs. On the other hand, you have industry propaganda and some commentators declaring that era of reward cards will soon be over.
The Argument Against The Future Of Reward Cards
This argument boils down to looking at credit cards as a single market. In this view, it has been the people paying interest and late fees that have been subsidizing those who don’t. Now that late fees and interest charges will be curtailed somewhat, the credit card companies will have to go after the people with high credit ratings who don’t generally fall victim to interest and fees. Ezra Klein, the Washington Post’s newest commentator has been espousing that view. Last week, he made that argument here while this week he elaborates here while speculating that debit cards are actually our future. Klein argues that all of the money is being made at the lower end of the market in order to subsidize the higher end. Therefore, the industry is now going to flatten out it’s risk profile and start trying to make more money off of the higher credit score, reward card holders.
The best evidence I can conjure for this expectation is the insurance market. When insurance companies suffer losses in one area, they usually raise rates in another. A hurricane hits Florida and causes a billion dollars in damage, people 50 miles inland see their home insurance rates go up. After 9/11 when four large commercial aircraft were destroyed, aircraft insurers took the opportunity to raise rates on small, private aircraft.
The Argument In Favor Of The Future Of Reward Cards
I suppose it is possible that some banks might reduce reward card offerings to super-prime customers after the Bill of Rights goes into effect, but I doubt it. Credit cards are far more competitive than the insurance industry, and far more segmented. If the sub prime were truly subsidizing the super-prime, as Klein contends, why do credit card companies solicit super-prime borrowers so heavily? The whole point of rewards is to entice prime borrowers. It would be very easy for companies to not target people with high credit scores, yet most of their mailboxes are inundated with offers. Simply put, if I owned a business with with two products, one in which I made a profit and one in which I didn’t, why would I continue to stock, advertise, and sell the unprofitable one in order to subsidize the other? There is the concept of a loss leader, a product sold below cost just to get customers in the store, but that doesn’t apply to most reward cards, except perhaps the phenomenal Schwab card.
Ron Lieber, a New York Times consumer affairs reporter put it best when he wrote last week: “So will credit card companies kill reward programs or drastically scale most of them back? Of course not.” Lieber recognizes that the business model for the super-prime, reward card holding customer is largely unchanged in the aftermath of the new law.
Credit Vs. Debit
Klein argues in favor of debit cards over credit cards. Frankly, I think that argument is most powerful in terms of banks and merchants, who may get hit with fewer fees. For consumers, reward card holders especially, the arguments fall flat.
1. With a credit card, I get a free float until my statement due date. I keep that in mind sometimes when I make a large purchase right after my statement closing date, giving me up to 50 days of interest free finance on every purchase.
2. With a credit card, I get a charge back power if a merchant doesn’t deliver. For example, if you book an airline ticket with a debit card, and the airline goes out of business, you loose your money. If you used a credit card, you get your money back with no questions. With a debit card, outright fraud is the only way you might get your money back.
3. Lots of perks. For an extreme example, see Mr. Credit Cards review of the vaunted American Express Platinum Card.
4. No holdbacks. Hey Ezra Klein, try renting a car or checking into a hotel with a debit card. If you are lucky, the company may inform you that they have placed a huge hold on your account. Often, they fail to notify customers of this policy. Either way, they have the power to freeze your funds, usually when you are traveling and need them the most. It is the opposite of credit card float, where you are essentially floating your money. You probably won’t get any car insurance with your debit card either.
5. Finally, of course, there are the rewards themselves. Show me a debit card with 2% cash back, and I will start using my debit card every day. Until then, it stays in my wallet for ATM purposes only.