Capital One (COF) is on to something with its new Quicksilver credit card. No, I'm not talking about the mild use of profanity in ad campaigns (we've all seen how well that plays out). I'm referring, instead, to the idea that big-bonus, needlessly complex credit card rewards program are likely to become a thing of the past.
In a recent interview, Capital One executives explained that it launched Quicksilver, which offers 1.5% back on all purchases, after research revealed customers wanted more straightforward loyalty programs that forgo reward caps and spending bonuses. (The card effectively replaces Capital One Cash, which gave 1% back on all purchases and then a 50% bonus on whatever cardholders earned during the year on the anniversary of activation.)
Credit card rewards programs have never been particularly accessible, but they became increasingly complicated during the cash-back craze circa 2010. Issuers recognize consumers are likely to opt for a card that advertises the best return of rewards, but big cash back on all purchases isn't exactly a good business proposition.
Costs are often mitigated by applying a big, flashy earnings percentage (typically 5%) to a particular spending category. But retail reporter Matt Brownell does a good job of highlighting why this tactic lacks broad consumer appeal in an article on Daily Finance (pointedly titled "The Worst Thing About Rewards Cards and How to Fix It"):
I recently got an email from Bank of America encouraging me to sign up for its BankAmericard Cash Rewards Card. It looked like a good offer. I could get a $100 bonus just for spending $500 in the first 90 days, and any rewards I redeemed into my Bank of America checking account would be boosted by an additional 10 percent. It also provides 2 percent cash-back on grocery purchases year-round, which would fit in nicely with my existing spending habits (and would encourage me to cook rather than dine out).There's just one problem: The card's marquee cash-back category, with a 3 percent reward rate year-round, is gas. I live in New York City. And like many New Yorkers, I don't drive.
To avoid alienating prospective cardholders, Brownell suggests letting them customize bonus categories a la the U.S. Bank Cash+Card. This fix may be a marked improvement for consumers (though some may not want, or be able, to commit to spend on certain categories). But it could easily create a logistics/expense-containment nightmare for most financial firms.
One tactic some issuers have used, in terms of broadening appeal and, I suspect, managing costs, is to offer 5% cash back on rotating categories. But these programs, too, can ultimately prove underwhelming.
For one, cardholders are typically required to enroll each quarter to be eligible for the big bonus, which creates a completely unnecessary point of friction for consumers. (The official word from Discover and Chase, which both offer popular cash-back cards with rotating 5% categories, is that enrollment is required as a means of engagement, something readers familiar with my past columns will know I think banking could use less of.)
Secondly, categories change not just from quarter to quarter, but also from year to year. So, for example, Chase cardholders who signed up for the Freedom card in 2012 thinking they would get 5% cash back on groceries at some point in 2013 were sorely disappointed. Similarly, Discover More cardholders who got cash back on airfare/hotels in 2011 didn't have the same opportunity in 2012. (I'm not sure how prospective cardholders gauge whether Discover's It card, which replaced the More card in January, is right for them, since the issuer is using terms like "Fresh for Spring" and "Summer Fun" to describe 2014's quarterly categories.)
These fluctuations and requirements can frustrate consumers. They get the sense that their issuer is trying to take advantage of them, and they don't like having to spend hours to maximize rewards. To paraphrase a popular Internet meme, no one has time for that.
Bottom line, 5% as a selling point is highly overrated. It's also increasingly unsustainable.
In a blog post for Bank Innovation, Brett King of Moven predicts smartphones will drive credit card rewards programs to extinction. "As smartphone usage increases rewards becomes easier and easier to redeem, there will be a decrease in the net number of customers who no longer claim rewards, and therefore marginal profitability will be hammered," he writes.
Furthermore, a big source of funding for banks' credit card reward programs the interest paid on purchases could shrink as consumers become more financially responsible and pay their balances in full.
"In the era of the quantified self the self-aware customer won't make spending decisions based on cash-back, miles or trinkets offered they'll make spending decisions based on whether they can afford to make a purchase," King writes.
I'm not so sure Americans will ever wean themselves off of credit enough to make rewards programs a thing of the past. As this other Daily Finance article explains, credit card debt is falling, but it's still very high.
I do agree, however, that big cash-back categories will become increasingly difficult to execute, making straightforward rewards programs a clearer value proposition for financial firms and consumers.