Cash-back rewards programs for credit card users are effective and relatively affordable tools to enable issuers to increase their market share at competitors’ expense, the results of recent study from the Federal Reserve Bank of Chicago suggest.
And while rewards cards tend to drive more card use among all types of cardholders, they may be most effective in getting inactive cardholders to finally pull their cards out of their wallet, the authors contend (
In a study that evaluated the reactions from 12,000 credit card accounts at a large, undisclosed U.S. financial institution both before and after they received a 1% cash-back credit card offer, the researchers found that spending and debt levels on average rose on accounts once they were enrolled in the rewards program. The study covered a two-year period beginning in June 2000.
Spending on credit card accounts enrolled in the rewards program during the first quarter after its introduction rose an average of $68 per month, while debt on those accounts rose an average of $115 per month over the same period.
Single cardholders spent $55 more on average per month during the first quarter after enrolling in a cash-back rewards program, while married cardholders’ spending rose by $95 per month during the first quarter. There were no significant differences in spending by gender, the study found.
But habitual credit card users did not necessarily rack up more overall debt after enrolling in cash-back rewards programs, the study found. Instead, “evidence from credit-bureau data confirms that consumers substitute their spending from other cards to the card with (a cash-back reward) and decrease debt on their other cards,” the researchers wrote.
In general, total monthly spending and debt accumulation did not increase significantly for “convenience” users who pay off their balances in full each month, or “revolvers,” who tend to carry a balance from month to month, Sujit Chakravorti, one of the study’s authors, tells PaymentSource.
But for previously inactive cardholders who signed up for rewards programs, “the level of new spending and debt was pretty significant, suggesting that cash-back rewards are quite effective in stimulating account usage,” Chakravorti says.
The study found that 11% of cardholders whose accounts were inactive for the three months before the rewards program’s introduction used their cards for purchases of at least $50 during the program’s first month. Among those previously inactive cardholders, spending rose to an average of $220 per month during the program’s first quarter, while their account debt rose by $167 per month during the same period. The researchers suggest these cardholders also shifted spending from other cards to the rewards card.
About half of the bank’s cardholders enrolled in the cash-back rewards program and, of those, enrolled accounts generated an average of $25 in rewards over a 12-month period. The average amount redeemed was $10.
Noting that the credit card industry has become increasingly competitive since collecting the study’s data and that some issuers are giving cash-back rewards as high as 3% to 5% in some merchandise categories, the study’s findings suggest that cash-back rewards “continue to be very important in acquiring new credit card customers,” Chakravorti says.
Even with a proliferation of cash-back rewards programs, the study’s findings suggest that “consumers do respond to financial incentives” and that “banks are paying out a relatively small incentive, on average, to get pretty significant results and are getting people to change their card-spending behavior,” Chakravorti says.
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