KEY POINTS

  • Competition driven by consumer card appetite in the US is hurting issuer returns. Card debt is hitting postrecession peaks in the US, thanks to rising consumer confidence. But that’s leading to more spending from banks as they work to capture and keep more customers, as well as increased delinquencies as lending gets riskier, which is making credit card lending a less profitable business. Return on assets (ROA), which Mercator defines as total income compared with total value of receivables, are at a five-year low at issuers, and should continue to fall through this year.
  • Card issuers can use rewards — consumers' most-valued feature — to build loyalty, but that can also drive up costs. Exclusive data from a Business Insider Intelligence survey of US cardholders found that two-thirds of respondents cited rewards-related offerings as the leading driver of primary card, or "top-of-wallet," status, defined as a user's most preferred and used card. That’s good for issuers, which have been emphasizing rewards as a way to grab users, but could drive up costs as rewards spending continues to skyrocket.
  • Issuers need to focus on building primary card status to win. To do so, they should find ways to use resources more strategically, and continue offering rewards while reducing costs. Instead of cutting benefits, which can reduce loyalty and drive users away, players need to find smart ways to drive top-of-wallet status so that volume and interest revenue can help compensate for rising costs.
  • Looking toward next-generation rewards in three key areas can help do that. Three newer types of rewards stood out among survey respondents' preferences:
    • Flexible rewards: Allowing users to redeem rewards in multiple ways from the same card (i.e. cash back, travel points, and hotel points) could limit competition for primary card status, help issuers spread out spending among partnerships, and push users to redeem less frequently or in smaller chunks.
    • Bonus rewards for e-commerce: As online shopping becomes a more important part of users’ day-to-day lives, layering additional rewards for some or all types of online purchases could help issuers build loyalty and attract key spend in a fast-growing segment.
    • Bonus rewards for shopping locally: Small and local businesses remain an important part of customers’ routines, so targeting existing loyal customers with offers to help them form habits around a given card for [...]