KEY POINTS

  • A credit card rewards program is an offering linked to a specific credit card that gives users the opportunity to earn redeemable points, or cash, after completing purchases. The popularity of these programs has had a massive impact on the credit card industry, with nearly every major card issuer competing for greater market share by trying to push out the most enticing offers.
  • The evolution of the credit card space into a market filled with high-value rewards can be traced back to 2011 when an amendment to the Dodd-Frank Act limited interchange fees on debit cards. Credit card fees were largely unaffected by the regulation, known as the Durbin Amendment, pushing issuers to look for ways to promote adoption and increase consumers’ appetite for credit. This led to massive increases in rewards programs, with issuers attempting to capitalize on their attractiveness to create powerful new revenue drivers.
  • The changes issuers made in response to the Durbin Amendment were largely successful in fulfilling their immediate goals. Credit card issuers with high-value rewards have been able to get consumers to adopt new card products, boost spending, and increase retention. In addition, greater rewards offerings and a stronger economy have led to an overall increase in consumer appetite for credit.
  • However, these rewards programs are expensive for issuers. Not only must issuers pay for enticing signup bonuses to bring in new customers, they also have to fund their increasingly attractive rewards structures. The six largest credit card issuers incurred an estimated $22.6 billion in credit card rewards expenses in 2016, more than double the costs seen in 2010, according to Instinet data cited by the Financial Times.
  • To cover these costs, issuers rely on credit card fees paid by both consumers and merchants. Two highly visible and well-known consumer fees include membership fees and interest. In addition, card issuers reel in considerable revenue from interchange fees paid by merchants as a percentage of each transaction processed. This cut is incredibly significant for card issuers — for example, in Q4 2016, Amex made $4.69 billion in interchange fees, representing over 59% of total revenue, while net interest income was just under $1.4 billion.
  • The credit cards rewards space will likely further evolve as issuers look to strike a better [...]