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This story appears in the June/July 2009 issue of Cards&Payments.
It is a sign of the times. More and more credit card issuers are patting revolvers on the heads with rewards for the most basic acts of responsible credit management and are promoting tools to help those cardholders refrain from overspending.
Discover Financial Services two years ago blazed the trail into rewards for revolvers with the Motiva card. When cardholders make on-time monthly payments for six consecutive months, they receive their next month's interest back as a "pay-on-time" bonus. They also receive the cash-back bonus rewards offered on all Discover cards.
This past March, Citigroup Inc. followed that lead with Citi Forward, a Visa-branded credit card that features tools and rewards to help cardholders manage their spending and card use. Citi lowers the interest rate on Citi Forward card purchases by a quarter percent and awards Citi ThankYou reward points for each month cardholders stay under their credit limits and pay their monthly bills on time.
Typical reward cards enable cardholders to earn cash back or points toward miles, events or merchandise with each transaction, but the value of such rewards does not typically surpass the cost of interest if cardholders revolve balances. Despite high interest rates, some cardholders in recent years have built up balances they could not or did not pay off–bad for the cardholders, but good for generating interest income for issuers.
But with rising charge-offs of all types of loans creating higher risk for lenders, issuers are starting to see the logic in rewarding cardholders for paying down balances while providing tools to help consumers understand and manage credit more wisely, observers say.
"For years, credit card issuers have encouraged cardholders to take on more debt," says Gwenn Bézard, research director at Aite Group, a U.S.-based consultancy. "But with these products, the issuers are encouraging cardholders to get control of their debt."
Megan Bramlette, a managing partner at global research firm Auriemma Consulting Group, considers Motiva an attempt by Discover to attract more revolving cardholders. "Discover cardholders are the least likely to carry a balance, and the balances they do carry are significantly smaller than the balances carried by people who use MasterCard or Visa," she says. "It's a measured attempt, and a smart move. They don't want to bring people on who are unlikely to pay."
Bramlette expects the emergence of similar cards that reward good behavior and more tools from issuers to help cardholders better manage their spending. The goal is to lower risk of delinquencies but also to promote good will during tough times, she says.
"Banks are being more conservative," Bramlette says. "And they're doing everything they can not to be perceived as the bad guy."
Social Benefits
Good will among social-networking enthusiasts is the driver behind the Citi Forward MySpace card, which awards additional ThankYou points for socially or environmentally beneficial activities, such as opting out of paper statements, volunteering or donating to charitable organizations.
Both Citi Forward and Citi Forward MySpace cards enable cardholders to set customized billing dates, track their spending by category online, and receive e-mail or text alerts for such events as payment-due dates, receipt of payments and balances approaching credit limits.
When Citi began exploring the possible market for the card two years ago, researchers assumed such a product would appeal to consumers ages 18 to 30, says Terry O'Neil, Citi Cards executive vice president. Indeed, younger consumers have become more fiscally conservative because of the recession, according to a recent study by Charles Schwab Corp. (
But Citi expanded its target market to consumers as old as 40 after 74% of participants in that broader age group indicated in focus groups they would find such credit- and spend-management features appealing on a new card, O'Neil says. Some 82% of research participants told Citi they needed more help managing their finances.
"It became clear to us that the appeal of this product was much wider," O'Neil says. "Now, more than ever, consumers are looking for help managing and protecting their credit."
Key components to Citi's marketing of the card are a variety of free tools, including monthly bill-due dates customers can set themselves, e-mail and text-message alerts, online spending-analyzer tools and credit-education resources at UseCreditWisely.com.
Discover, long known for online spending-analysis tools tied to its cards, recently began heavier marketing of the tools beyond Motiva.
In August, Discover extended the marketing duties of "Bright Idea," the chummy, talking ball of light it launched with commercials for Motiva, to a broader "Brighter" marketing campaign. Bright Idea chats with individuals and groups of consumers about their spending habits and tells how Discover's Paydown Planner can help them spend smarter.
Holders of any Discover cards can log on to Discover's Web site and use the free Paydown Planner to calculate how much they need to pay each month to clear their balance by a certain date. The figures given by the Paydown Planner are based on the terms and conditions unique to the cardholder's individual account. It even considers whether interest rates vary on the balance for different types of purchases or balance transfers.
Better Planners
Discover did not develop the Paydown Planner and Motiva card in response to the current state of the economy but instead to help cardholders become better financial planners, says Kelly Tufts, Discover Card director of marketing planning and strategy. "Consumers told us they often used paper and pencil to figure out how long it would take to pay down their balances," Tufts says. "They didn't like having to dig up their old statements to enter their [annual percentage rate]."
The Paydown Planner plugs in consumers' card-interest annual percentage rates and other information automatically, Tufts says. Cardholders can set goal dates for paying off balances or determine how long it would take to pay off balances if they chip in a certain amount above minimums each month.
Brian Riley, senior analyst at TowerGroup, an independent research firm owned by MasterCard Advisors, called for a shift in the focus of card rewards in a March 2008 research note when the recession was just getting warmed up.
"Mainstream programs that offer vacation plans and high-end products to reward card usage may not suit consumers suffering from a decrease in confidence in the economy, reduced disposable income and less easily available credit," Riley wrote. "In an environment that demands better credit quality for their portfolios rather than more spending, issuers will have to adapt their programs to ensure better payment and account maintenance rather than spending velocity."
Issuers can reward cardholders for reforming delinquent behaviors even on traditional reward cards, Riley now says. Cardholders forfeit reward points once they reach a certain level of delinquency. That is certainly a fair rule, as issuers face the prospect of losing money if cardholders default on their debt altogether, according to Riley.
But issuers could use those reward points troubled cardholders have earned as incentive to get back on track, Riley says. "Rather than just vaporize, customers could use points to pay late fees," he says. "You're building loyalty among those customers."
But as holders of Forward and Motiva cards pay off their balances, Discover and Citi should be prepared to move those cardholders to traditional reward cards before other issuers offer them better deals, Riley says.
Perhaps offering cardholders carrots for handling credit cards responsibly will become irrelevant if consumers adopt more fiscally conservative spending habits. But in a time of rising delinquencies, rewarding cardholders for keeping credit under control makes sense. CP
