In the latest example of an issuer cutting rewards in order to conserve profits, Citigroup Inc. is slashing some travel insurance benefits on its high-end credit cards. But while rewards programs are usually the province of card issuers, these insurance perks are required by the networks, to help distinguish their elite products.
Hence Citi's cutback risks denting the reputations of high-end network brands like Visa Signature and World MasterCard. The issuer will continue to provide the insurance, but at a level closer to the minimum required by the networks.
Visa and MasterCard "would like the shared benefits on these products to be as high as possible. Anything that's going to make my brand more premium is good, and this is going in the other direction," said Eric Grover, a former Visa executive and the principal of the consulting firm Intrepid Ventures.
High-end network brands "are intended to convey a level of benefits," he said, and now, "cardholder perception will be, 'Citi is doing it, but they're doing it on my Visa Signature.'"
Most major issuers have already cut their rewards programs as a result of the recession, deteriorating credit quality, and, especially this summer, in anticipation of the Credit Card Accountability, Responsibility and Disclosure Act, which President Obama signed in May.
That law, parts of which went into effect this month, has started squeezing issuers' profits. Many have reacted by raising interest rates and fees on existing cards; Citi said this month that it was adding annual fees to certain existing accounts.
Until now MasterCard and Visa, which do not issue cards, have been largely unaffected by the law. But Citi's new cutback shows that the networks' fortunes are intertwined with those of their issuer customers.
"The Credit Card Act has changed the economics of the industry and so therefore the type of offering, on everything from price to various services, including this one, is going to have to be re-rationalized," said Leigh Allen, a former Citi investment banker and the principal of the consulting firm Global Consumer Finance Advisory LLC.
Features like travel accident insurance have historically added "value to the relationship between the issuers and the card associations. Now one little chunk of it is going to fall by the wayside and maybe other pieces could follow," Allen said. "It's not a disaster in and of itself, but what else is going to happen as the industry reconfigures and re-rationalizes itself?"
Citi said last week that it is reducing the amount of "travel accident insurance" it offers on several elite cards, in some cases to a quarter of the former coverage levels, effective Oct. 1. It started informing cardholders of the change in July.
Such insurance is one of a handful of perks that networks require issuers to provide on high-end card brands, like World MasterCard and Visa Signature, as well as on cards that run on American Express Co.'s network. Other such perks include extended warranties on retail goods and car rental insurance.
Travel coverage on Citi's Platinum Select, Diamond, MasterCard World, Visa Signature, American Express and Professional cards is falling by 75%, from $1 million to $250,000. On its American Airlines AAdvantage World and Signature cards and its Amex Chairman card, coverage will be halved, to $500,000.
"In this difficult market environment Citi must make changes to its travel accident insurance coverage levels on certain Citi credit card products," Samuel Wang, a company spokesman, wrote in an email. "Based on our research the new coverage levels remain competitive with those in the industry."
