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2016 Credit Card Rewards Report

2016 Credit Card Rewards

Picking a rewards credit card is a big deal, and the market can be difficult to decipher – with hundreds of offers available, numerous rewards currencies to choose from and various restrictions to watch out for. However, carefully comparing your options prior to submitting an application can be the difference between earning enough for a plane ticket versus a low-value gift card.

CardHub has therefore undertaken the task of reviewing the consumer credit-card rewards market for you. We analyzed every non-cobranded rewards credit card offered by the 15 largest issuers and devised a grading rubric to quantify issuers’ policies and provide a basis for consumer comparison. To check out our findings and get tips for choosing a rewards card, read on below.

Main Findings

 

Best & Worst Overall: Capital One offers the best credit card rewards program (for the second consecutive year), scoring 49% higher than TD Bank’s last-place program.

 

Note: Certain issuers were scored for the first time in 2016.

Yield Potential: The best rewards card yields $812.69 more than the worst rewards card over the first two years.

 

Strategic Redemption: Redeeming for travel is the best deal, yielding 54% more value than redeeming for merchandise, the worst option.

 

Earning Policies: Capital One has the most advantageous earning policies, scoring 51% higher than the category loser, U.S. Bank.

 

Redemption Policies: Discover has the most consumer-friendly redemption policies, scoring 107% higher than the most-restrictive issuer, Fifth Third Bank.

 

Eligibility & Transparency Standards: Navy Federal Credit Union and American Express set the clearest expectations, scoring 100% higher than TD Bank and First National Bank.

 

Best Rewards Credit Cards By Issuer

What’s the best rewards credit card each bank has to offer? CardHub determined the best card for each issuer based on how much monetary worth its rewards yielded through the first 2 years of account opening. Check out the results below:

Issuer (Total Rewards Cards*) Best Card Monetary Value of Rewards (Across 2 Years) Score (Max 5 Points)
American Express
(10 rewards cards )
Blue Cash Preferred
Blue Cash Preferred® Card from American Express
$965 4
Bank of America
(5 rewards cards )
bank-of-america-travel-rewards
BankAmericard Travel Rewards®
$1,180 5
Barclaycard
(3 rewards cards )
Barclaycard Arrival Plus
Barclaycard Arrival Plus™ World Elite MasterCard®
$1,529 5
Capital One
(5 rewards cards )
Venture Rewards
Venture® Rewards
$1,482 5
Chase
(2 rewards cards )
Sapphire Preferred
Chase Sapphire Preferred®
$1,338 5
Citi
(5 rewards cards )
Double Cash
Citi ® Double Cash Card
$1,141 5
Discover
(3 rewards cards )
Discover it
Discover it Miles
$1,284 5
Fifth Third Bank
(3 rewards cards )
rl rewards cc 300
Real Life Rewards® Credit Card
$716 2
First National Bank
(2 rewards cards )
first-national-bank-of-omaha-american-express
First National Bank American Express® Card
$956 4
Navy Federal Credit Union
(3 rewards cards )
Navy Federal
Visa Signature® Flagship Rewards Credit Card
$1,043 4
PNC Bank
(2 rewards cards )
Cash Builder
PNC CashBuilder® Visa® Credit Card
$998 4
TD Bank
(2 rewards cards )
TDBankFirstClass
TD First Class Visa Signature® Credit Card
$884 3
US Bank
(6 rewards cards )
FlexPerks
FlexPerks® Travel Rewards American Express® Card
$1,151 5
USAA
(6 rewards cards )
USAAAmexCashbackRewardsPlus
Cashback Rewards Plus American Express®
$859 3
Wells Fargo
(9 rewards cards )
Propel 365
Wells Fargo Propel 365 American Express® Card
$882 3

*For the purpose of this report we considered all non-cobranded, consumer rewards cards offered by each issuer. Detailed scoring for other cards considered in this report can be obtained by request.
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Tips for Choosing a Rewards Card

Rewards cards aren’t one size fits all. Different factors – such as the type of rewards currency and earning structure – suit some consumers more than others. Our tips below will help you pick the right card:

  • Identify Your Spending Interests – Strive to get a rewards credit card that aligns with your spending habits and interests. For instance, if you rarely dine out, do not pick a card that offers high earning rates on restaurant spending – rather, pick a card with extra on travel or gas.
  • Consider Both Earning & Redemption Value – To gauge how much value a rewards card can yield, it’s important to look at both sides of the rewards equation. A card with high earning rates might have low redemption rates, and vice versa, and that can drastically skew the offer’s value proposition.
  • Avoid Hassle If You’re Forgetful – If you know you’re the forgetful type, stay away from cards that feature rotating categories requiring sign-up. They prevent customers from earning bonus rates if the spending categories are not “activated” each quarter, resulting in a lot of wasted time, energy and earning potential.
  • When In Doubt, Think Cash Back – You will never have to worry about rewards devaluation with cash back cards, as you will be earning rewards in terms of dollars and cents. Points and miles cards, on the other hand, are quite vulnerable, however, because credit card execs can jack up the number of points or miles needed for a free flight or hotel room whenever they please.
  • Don’t Rule Out Annual Fees – Often times, cards with annual fees offer better initial bonuses and higher earning rates than free cards. Therefore, don’t discount a card simply because it charges a fee, especially if it’s low. Just make sure the rewards you reap will sufficiently outweigh the fixed costs (which will most likely be the case if you spend more than the average American).

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Detailed Rewards Policies By Issuer

 

Qualifying Factor Max Points Amex BofA Barclays Cap One Chase Citi Discover PNC US Bank Wells Fargo
Offers Automatic Program Enrollment 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.7 1.0 1.0 1.0
Offers 100% Transparency In Displaying Redemption Rate Details For Non-Members 1.0 0.9 0.6 0.0 0.6 0.0 0.2 0.3 0.5 0.2 0.0
Does Not Advertise Points/Miles Cards as Cash Back Cards 1.0 0.8 1.0 0.7 1.0 0.5 1.0 1.0 1.0 1.0 1.0
Issuer Informs Customer of Remaining Rewards at Time of Account Closure 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 0.5 1.0 1.0
No Minimum Spending Required To Earn 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
No Overall Earning Limit Imposed 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0
Earning Rate Does Not Vary Depending On Amount Spent or Time Period 1.0 0.6 0.6 1.0 1.0 0.5 1.0 0.3 0.5 0.3 0.2
No Sign-up Required for Bonus Categories 1.0 1.0 1.0 1.0 1.0 0.5 1.0 0.7 1.0 0.8 1.0
Ability to Combine Earnings Across Your Accounts 0.5 0.5 0.5 0.0 0.5 0.5 0.4 0.3 0.0 0.3 0.5
Ability to Share Earnings With Other Members 0.5 0.0 0.3 0.0 0.5 0.5 0.4 0.3 0.0 0.5 0.5
Earnings Are Granted Despite Account Inactivity 0.5 0.5 0.5 0.5 0.5 0.5 0.4 0.5 0.5 0.5 0.5
Earnings Are Granted Despite A Missed or Late Payment 0.5 0.0 0.4 0.5 0.3 0.5 0.5 0.5 0.5 0.0 0.0
Earnings Do Not Expire By Date 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.3 0.0 0.4
Expired Earnings Can be Reinstated (Free of Charge) 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.3 0.0 0.5
Ability to Utilize Transfer Partners 1.0 0.6 0.0 0.0 0.0 0.3 0.3 0.0 0.0 0.0 0.0
Ability to Utilize Transfer Partners is Free of Charge 0.5 0.0 0.0 0.0 0.0 0.3 0.2 0.0 0.0 0.0 0.0
Ability to Use Earnings to Offset Any Travel Purchase or Receive Cash Back Without Sacrificing Value 1.0 0.3 1.0 1.0 1.0 1.0 0.2 1.0 0.5 1.0 1.0
Statement Credit Can Be Applied to Full Balance (instead of matching to specific charges) 0.5 0.2 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5
No Minimum Threshold Required to Redeem For Cash Back 1.0 0.0 0.2 0.0 0.6 0.0 0.0 1.0 0.0 0.2 0.0
Offers Low Redemption Value Volatility 1.0 0.5 0.8 0.3 0.6 0.8 0.4 0.6 0.9 0.6 0.6
Rewards Value Per $1 Spent 5.0 4.0 5.0 5.0 5.0 5.0 5.0 5.0 4.0 5.0 3.0
TOTAL SCORE 21.0 14.8 17.4 15.5 18.1 16.4 16.4 16.8 13.9 14.9 13.7
PERCENTAGE SCORE* 100.0% 70.6% 82.7% 73.8% 86.2% 78.0% 78.2% 79.8% 66.2% 71.0% 65.2%

*Percentage Score is calculated by dividing the Total Score by 21 points.
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Methodology

This report analyzed the rewards offered by the 15 credit card issuers by outstanding balances. For each issuer, we scored all of their non-cobranded, consumer rewards cards according to the metrics laid out in the table, which encompass four main categories:

  1. Eligibility & Transparency – Max 4 points
  2. Earning Policies – Max 7 points
  3. Redemption Policies – Max 5 points
  4. Rewards Value Per $1 Spent – Max 5 points

TOTAL: 21 POINTS

Each individual’s score was ultimately averaged to determine a comprehensive overall score for each issuer, which we then convert to a percentage by dividing the total by 21.

Qualifying Factor Maximum Amount of Points Awarded How To Calculate Points Awarded
Eligibility & Transparency – Max 4 points
Offers Automatic Program Enrollment 1 Award max point if the card qualifies for this factor.
Offers 100% Transparency In Displaying Redemption Rate Details For Non-Members 1 Award max point if the card qualifies for this factor.
Does Not Advertise Points/Miles Cards as Cash Back Cards 1 Award max point if the card qualifies for this factor.
Issuer Informs Customer of Remaining Rewards at Time of Account Closure 1 Award max point if the card qualifies for this factor.
Earning Policies – Max 7 points
No Minimum Spending Required To Earn 1 Award max point if the card qualifies for this factor.
No Overall Earning Limit Imposed 1 Award max point if the card qualifies for this factor.
Earning Rate Does Not Vary Depending On Amount Spent or Time Period 1 Award max point if the card qualifies for this factor.
No Sign-up Required for Bonus Categories 1 Award max point if the card qualifies for this factor.
Ability to Combine Earnings Across Your Accounts 0.5 Award max point if the card qualifies for this factor.
Ability to Share Earnings With Other Members 0.5 Award max point if the card qualifies for this factor.
Earnings Are Granted Despite Account Inactivity 0.5 Award max point if the card qualifies for this factor.
Earnings Are Granted Despite A Missed or Late Payment 0.5 Award max point if the card qualifies for this factor.
Earnings Do Not Expire By Date 0.5 Award max point if the card qualifies for this factor.
Expired Earnings Can be Reinstated (Free of Charge) 0.5 Award max point if the card qualifies for this factor.
Redemption Policies – Max 5 points
Ability to Utilize Transfer Partners 1 Award 0 points if card has no ability, 1/3 points if card has 1-10 transfer partners, 2/3 points if card has 11-20 transfer partners or 1 point if card has 21+ transfer partners.
Ability to Utilize Transfer Partners is Free of Charge 0.5 Award max point if the card qualifies for this factor.
Ability to Use Earnings to Offset Any Travel Purchase or Receive Cash Back Without Sacrificing Value 1 Award max point if the card qualifies for this factor.
Statement Credit Can Be Applied to Full Balance (instead of matching to specific charges) 0.5 Award max point if the card qualifies for this factor.
No Minimum Threshold Required to Redeem For Cash Back 1 Award max point if the card qualifies for this factor.
Offers Low Redemption Value Volatility 1 Where possible, we took the average redemption values for these categories: travel, cash back, gift cards & merchandise, and subsequently, calculated the variance across them.
Award 1 point if the variance is 0, 0.8 points if the variance is under 2%, 0.6 points if the variance is under 3%, 0.4 points if the variance is under 6%, 0.2 points if the variance is under 7% and 0 points if the variance is 7% or more.
Rewards Value Per $1 Spent – Max 5 points
Rewards Value Per $1 Spent* 5 ≤ $379 = 0
$380 – 569 = 1
$570 – 759 = 2
$760 – 949 = 3
$950 – 1,139 = 4
$1,140 + = 5
Total – Max 21 points

*Rewards Value Explanation:
In order to calculate rewards-value scores, we identified the best card from each issuer by calculating the 2-year monetary value of each offer’s rewards (including initial bonuses), minus any annual fees.

When calculating the card’s rewards value, we picked the best redemption option – travel, gift cards, cash back or merchandise – and used the average value for that redemption option to convert rewards currency into monetary terms.

We used the following spending data from the U.S. Bureau of Labor Statistics to calculate each card’s monetary value. Exact values were used whenever possible, but in certain cases – such as “Travel” – we combined categories such as “Airlines,” “Hotels,” “Other Lodging” and “Public and Other Transportation” to create a more digestible list. We assumed that half of one’s utility expenses would be charged to a credit card, as certain types – electric bills, for example – typically aren’t plastic plastic-eligible. “Other” spending represents the sum of small household spending categories: healthcare, apparel and housekeeping supplies, for instance.

Annual Consumer Spending By Category

Category Annual Spending Source
Gas $2,611 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Groceries $3,977 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Restaurants $2,625 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Hotels $649 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Airfare $537 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Entertainment $2,482 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Drug Stores $608 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Utilities $1,869 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Movies $102 http://variety.com/2015/film/news/movie-ticket-prices-increased-in-2014-1201409670/
http://www.marketingcharts.com/traditional/on-average-american-adults-say-they-went-to-5-movies-last-year-39161/attachment/harris-americans-movie-going-trends-jan2014/
Other $13,063 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report
Total $28,523 U.S. Bureau of Labor Statistics Consumer Expenditures in 2013 Report

Ask the Experts

  1. What do you think are the characteristics of a good rewards program? Does this differ between consumer and business credit cards?
  2. Based on your knowledge of the market, how does reputation mesh with reality in terms of each major issuer’s rewards program?
  3. When should consumers first start focusing on rewards credit cards?
  4. How do credit card rewards programs make credit card companies money?
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Catharine M. Curran

Associate Professor of Marketing in the Charlton College of Business at University of Massachusetts DartmouthWhat do you think are the characteristics of a good rewards program? Does this differ between consumer and business credit cards?

Good rewards programs are those that members view as relevant and motivate consumers; they can build brand loyalty. This can be accomplished by having very clear stages to the rewards and multiple paths to get to that reward. If the path is too long or if there is some vagueness to the pathway, then consumers quickly lose interest. Getting quickly to the first reward can be very motivating. Bonus rewards along the way, little "surprises" are quite motivating especially if they are unexpected. The psychology of this is pretty compelling if you give someone a gift there is an obligation created so the return on this investment can be surprising. Consumers want to feel that the program understands their needs and preferences, makes them feel unique and special (ex. dedicated customer service for rewards members). The more rewards can be customized the better. But clarity is the most import feature: what is necessary to achieve this reward? Can I clearly track my progress toward that reward? Once I reach that reward are there any other hurdles I have to cross to use that reward? The redemption process should be seamless.

Research has shown that there are age effects, with millennials interested in different types of reward than baby boomers. Millennials like programs they can interact with through social media and through digital apps. Baby Boomers prefer different forms of interaction. Millennials are also more interested in rewards that are both relevant to them as well as socially beneficial. For example, the ability to earn reward points for Habitat for Humanity or other social cause that is relevant to them along with their personal rewards is very attractive (think Toms Shoes). The ability to pool and share rewards is also important to millennials. The other issue on which millennials and boomers differ is on privacy and security of personal data. Many millennials complain about the amount of information required to apply for programs; they are concerned about how this information is being used and who this information is being shared with. It is important that rewards programs recognize the difference between the age cohorts in how they structure their programs and address these concerns.

Business cards face the above issues as well as an understanding of the two audiences: the user and the business. If multiple employees are using the card then the benefits often accrue to the business and not to the user. Motivating the user to continue to use the card could be an area that is ripe for exploration.

Based on your knowledge of the market, how does reputation mesh with reality in terms of each major issuer’s rewards program?

Reputation is extremely important, again especially for millennials. Having firms that are value congruent with them is a key motivator for millennials. It is important that firms use social media to disseminate their foundation work and social responsibility commitments. Again, with the concern about privacy, the firm’s reputation for maintaining customer privacy is very important.

There was some interesting research done by Dan Ariely about the mere presence of the Visa logo on the door of a restaurant and how that influenced purchase decisions.

When should consumers first start focusing on rewards credit cards?

As recent stories in the news have reported, millennials are much more likely to use a credit card for all purchases, even those under $5, than any prior generation. The stated reason for using the credit card is ease of use, followed by rewards programs - the ability to get "free stuff" just by spending what they usually spend. The key here is to have a card that is universally accepted. Cash only businesses pose an issue for millennials and how they prefer to shop; if a credit card can be used to access cash (without excessive charges) that would be a true plus for millennials.

Many parents now use the refillable cash cards such as Visa Buxx cards for their teenagers and new college students. These cards get young people used to spending money on cards rather than carrying cash. Allowing the user and the parent to build rewards using these cards could be a very powerful tool for building loyalty.

Reward cards in other words are trending younger. Looking at card ownership, many milleninals start by getting a retailer credit card which increasingly are Visa or Mastercard.

How do credit card rewards programs make credit card companies money?

The primary way is through loyalty and usage. By building loyalty, people are willing to pay annual fees and building the propensity to use the card; the credit card companies make money on each use of the card. The more the consumer uses the card the more the credit card company makes. By giving bonus rewards for using the card at certain types of retailers or for certain types of purchases, the credit card companies can incentivize users to shop at certain retailers. By establishing these symbiotic relationships between retailers and card issuers, both sides benefit from the rewards programs: the card companies by offering attractive rewards and the retailers by driving traffic to the store or website.
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Brad D. Carlson

Associate Professor of Marketing at Saint Louis University, John Cook School of BusinessWhat do you think are the characteristics of a good rewards program? Does this differ between consumer and business credit cards?

Great reward programs are those that provide meaningful added value to consumers, while simultaneously building the brand and fostering stronger connections between the consumer and brand. In order to develop a reward program that delivers this kind of value, it is imperative that a company truly understands the desires and needs of their core customers, and this requires effective market segmentation, target marketing, and positioning (i.e., making sure consumers perceive a meaningful difference between your reward program and your competitors).

The best way you can develop a reward program that will truly incentivize consumers to use your card more frequently is to make it reasonable for them to achieve rewards that matter to them on some emotional level. The Southwest Visa card is a good example of this. Of course it provides points that can be redeemed for flights. However, what it delivers on an emotional level as a result of being able to travel more frequently is an opportunity to create memories and experiences...an unexpected getaway with a significant other, meeting up with your best friends for a weekend getaway, taking your family to see their grandparents. Not surprisingly, this ties in well with their long running slogan "You are now free to move about the country."

Although the specific tactics used by consumer and business cards may differ, the strategy should be the same...identify an unmet want or desire that is important to your core group of customers and then develop a reward program that helps satisfy those wants. Most importantly, as consumers use your card more frequently and consistently, they should derive more substantial rewards.

When should consumers first start focusing on rewards credit cards?

I think the best advice for consumers is to avoid using credit cards unless you have the resources and restraint to pay your balance in full each month. If you decide that using a credit card is the right choice for you, be sure to spend some time getting acquainted with the variety of reward programs offered. If you are going to use a credit card, it makes sense to choose one that will offer you some type of reward for doing so and the Internet makes it very easy to quickly find information about various cards, their reward programs, and any related fees. Ultimately, try to pick a reward program that best fits your interests and lifestyle.

How do credit card rewards programs make credit card companies money?

There are many ways that reward programs make money for credit card companies.

To begin, credit card companies make money every time a consumer uses their card to make a purchase. For each purchase, the card issuer receives a payment of one to three percent of the transaction amount. Given that reward programs are intended to increase the frequency with which consumers use their card, the result is increased fees collected from retailers.

Additionally, credit card companies make significant profits from a variety of fees - annual fees, cash advance fees, balance transfer fees, late fees - and these fees are more likely to come into play for consumers who actively use reward programs. For instance, although not all cards charge an annual fee, those that do tend to have the best reward programs. Given that increased use of a card with a reward program will result in greater rewards, consumers are more likely to accumulate debt on these cards as they feel that the cost of doing so is offset by the rewards achieved. Consider that in April 2014, the average U.S. household credit card debt, for those households carrying debt, exceeded $15,000, with average credit card interest rates around 15%, and those rates increase if you have late payments.

Taken together, it becomes evident that credit card companies make money on nearly every dollar you spend. The more appealing they can make it for you to use your credit card, the more likely it is they will eventually earn additional profits from increased fees.
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Carlos Torelli

Associate Professor of Marketing at University of Minnesota, Carlson School of ManagementWhat do you think are the characteristics of a good rewards program? Does this differ between consumer and business credit cards?

Good reward programs are those that help the company fulfill their goals of deepening relationships with consumers (i.e., increased usage and revenue) while distinctively delivering value to the consumer (i.e., unique benefits). That is, good reward programs are sustainable over time because they contribute to the company's bottom line and distinctively deliver rewards/benefits that are aligned with consumers' needs and wants. Take for instance a co-branded airline mileage reward program. Such programs can be highly successful in increasing share of wallet (i.e., higher percentage of purchases with the company's credit card), while delivering unique benefits due to consumers' loyalty to the airline mileage program.

However, when these benefits are not unique, the program can become commoditized and lose its value in the eyes of the consumer. Because good reward programs are based on distinctively delivering value/benefits to consumers, their features have to be tailored to the unique needs of consumers. Thus features of consumer and business credit cards reward programs may be different, but the ultimate objective is to demonstrate to the customer that a card program distinctively addresses his/her needs.

Based on your knowledge of the market, how does reputation mesh with reality in terms of each major issuer’s rewards program?

When making any product choice, consumers should always pay attention to the option that best satisfies his/her needs. Reward credit cards are one of multiple options that should be considered and analyzed when choosing a credit card. There are a variety of reward programs that might or might not be appealing to consumers at different life stages. A savvy consumer knows to understand his/her needs, go through the different options available in the market, and then make the choice that provides the highest value in view of his/her needs. If you are not the kind of person who travels a lot, then airline mileage programs might not be for you and a cashback rewards program might be more appealing.

However, remember that good reward programs also contribute to the company's bottom line, so there is always a cost involved. Consumers need to assess the extent to which their intended usage (based on their distinctive needs) justify the cost (i.e., conduct a benefit/cost analysis). If the cost is not justified, a more basic credit card without "attractive" rewards might be a better choice.

How do credit card rewards programs make credit card companies money?

As I said earlier, good rewards programs make money, otherwise they are not sustainable. At the core, rewards programs exist to deepen relationships with consumers. The goal is to reward desirable behavior (i.e., behavior that contributes to the company's bottom line). Rewards programs that contribute to an increased share of wallet make money by adding extra revenues over a baseline condition without the rewards program. This should always be the natural reason for implementing a rewards program. To the extent that the extra revenue offsets the program cost, then there is a positive impact on the bottom line. Sometimes rewards programs might not break even via added transaction volume/revenue (e.g., airline programs among low-revolving and affluent consumers) and need to be made sustainable by adding extra fees (to fully compensate costs). However, the best program is the one that delivers value to consumers and keeps them wanting to come back, even when a fee is in place. In this case, the fee can even become a "signal" of high value that consumers happily accept.
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Yuping Liu-Thompkins

Professor and Chair of Marketing & E. V. Williams Faculty Research Fellow at Old Dominion University, Strome College of Business What do you think are the characteristics of a good rewards program? Does this differ between consumer and business credit cards?

The answer to this question depends on good for whom. The consumer or the business? I will attempt to answer what I consider to be the key characteristics of a good program from both perspectives.

Good for consumers:
  • Real economic benefits. This is fairly straightforward. People like deals. With many reward credit cards (and general reward programs) in the marketplace right now, having real economic benefits has become almost the minimum requirement for survival.
  • Convey a sense of indulgence and/or prestige and status. These relate to the soft benefits of membership. When everyone is offering the equivalence of 1% cash back, the real competitive advantage then comes from the other non-economic, softer benefits. The airline reward cards are popular among frequent flyers not only because they can earn miles by using the card, but also because of the extra benefits (such as luggage policy, upgrades, and club access). Research has also shown that people may prefer rewards that give them a sense of pampering and indulgence.
  • Simplicity. The rules such as point ratio, reward threshold, and point expiration should be easy to understand. Too often marketers make the program way too complicated to understand. The consequence is that consumers simply stop using the program. Reward redemption should be relatively straightforward too.
Good for the program-offering businesses:

Although many of what's good for consumers make a program more appealing to consumers, they do come at a cost to the business. Every consumer would love a card that offers a 10% reward across the board. But no company can sustain that level of cost. So from a business perspective, there are other things to take into consideration in order to create a good reward program. These additional considerations are:
  • Controlled liability from unredeemed points. This is a real issue on many seasoned loyalty program marketers' mind, but can be neglected with a new reward program provider. Rather than realizing the problem too late, it's best to build systems in place to control liability right from the beginning.
  • Habit-forming. This is something that only started to receive some attention in recent years, because of a few popular press books on habit. Now everyone is thinking about habit. In my own research, I have looked at this. There are various design elements that may help consumers build the habit of using your card/product or impede that process. So in designing a good reward program, this element should be considered.
  • Good data analytics. Ultimately anyone can match what your card is offering, no matter how good of a deal it is. I believe the real differentiating point is how strong the data analytics behind the reward program is. The truly good reward programs crunch the data from the program and feed that intelligence into their marketing and partnership decisions.
For the second part of this question, I think the key differences will be coming from what kind of benefits are sought after for each type of card. Research has shown a need to match up effort with rewards. Since business credit cards are based on mostly utilitarian purchases, utilitarian rewards (e.g., $50 gift card to OfficeMax may be more appealing than a $50 spa gift card). The opposite is true for personal cards. Another big difference is that while consumers may be looking for status, business cardholders are looking for success. So a business reward card should focus on helping its cardholders achieve success with its business, or convey a sense of success. American Express, for example, is known for its OPEN Forum that provides useful information for small business owners.

Based on your knowledge of the market, how does reputation mesh with reality in terms of each major issuer’s rewards program?

I am not really aware of a big reputation market for credit cards. A lot of credit card signup and usage come from awareness (either through direct mailing of offers or through advertising). There may be die-hard fans that pay real attention to how credit cards compare and fare. But for a majority of consumers, this is a fairly low-involvement product. So it's often based on when they see an appealing offer, they would get it. The only credit card that has a real sort of reputation is American Express. But that doesn't seem to overcome the barrier of its high fees for some of the Amex cards. So overall, people are fairly deal-oriented when it comes to this market.

When should consumers first start focusing on rewards credit cards?

Consumers who have tons of personal debt to deal with probably should not be looking at reward credit cards, as these cards usually do not compete that well on interest rate and other terms and conditions. Even with some cards reward certain purchase categories at 5%, the interest rate for any personal debt is likely to exceed that. Hence, I consider reward credit cards to be more suitable for those who use credit cards more as a revolving account, a standard form of payment that they are going to pay off either each month or within very short intervals. So I would say the general rule of thumb is to eliminate credit card debt and high-interest personal loans first, and then consider getting a reward credit card.

How do credit card rewards programs make credit card companies money?

I may be wrong, but from what I understand, they don't really, at least not directly from the program, unlike some airline reward programs do. Instead, reward programs are a way of getting consumers to sign up for the card and to use the card more. Credit card companies can then make more money out of transaction fees, interest income, etc.
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Morgan Ward

Assistant Professor of Marketing at Southern Methodist University, Cox School of BusinessWhat do you think are the characteristics of a good rewards program? Does this differ between consumer and business credit cards?

A good rewards program is relevant. That is, the rewards need to mean something to the consumer. The rewards need to be attainable and differentiated. That is, people need to, at some point, actually procure a reward and also feel that the reward is somewhat unique to the card they are using. Also, the reward has to be clearly understood and expressed to the consumer. We only use things that we understand!

When should consumers first start focusing on rewards credit cards?

I think the rewards programs should be secondary to interest rates when consumers are choosing an appropriate card. Sometimes, a credit card will offer compelling rewards but it’s at the cost of the financial health of the customer insofar as the customer has to incur high interest rates and penalties for non-payment.

How do credit card rewards programs make credit card companies money?

Not my area of expertise, but my understanding is that the reward providers pay the credit card companies for the opportunities to provide the rewards. It is a marketing cost like any other and it gets these companies access to leads that they can parlay into a longer term relationship with a customer.
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Hooman Estelami

Professor of Marketing at Fordham Schools of Business What do you think are the characteristics of a good rewards program? Does this differ between consumer and business credit cards?

The main characteristic that a good rewards program has is its relevance to the consumption patterns of the cardholder. Programs that align their reward points to the purchase behavior of the buyer, for example with respect to product categories dominant in the shopping basket, tend to benefit consumers most, and at the same time bring higher transaction volume to the cardholder. The nature of this relationship has to be researched closely through analytics to find the right matching customer for the right program.

Based on your knowledge of the market, how does reputation mesh with reality in terms of each major issuer’s rewards program?

Reputation does not have to be an indicator of a good program. In fact, research on brand positioning in certain financial markets shows that brands with higher reputation levels do not always offer the better deals. This is simply because they are able to benefit from the recognition associated with their brand names and consumers tend to trust them for the same reason, yet they may receive a less competitive offer simply because they have been mesmerized by the brand.

How do credit card rewards programs make credit card companies money?

Increased transaction volume translates into higher fees collected from the sellers. Increased transaction volume also translates into more opportunities for charging interest on balances, and other forms of fees. Partnerships can also result in revenue generation for the credit card companies.
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Alexander Chernev

Professor of Marketing at Northwestern University, Kellogg School of ManagementWhat do you think are the characteristics of a good rewards program? Does this differ between consumer and business credit cards?

Successful loyalty program create value both for customers and the company.

For customers, loyalty programs can create three types of benefits: (1) functional benefits, such as extended shopping hours (e.g., Costco) and access to special offerings; (2) monetary benefits, such as cash back or points; and (3) psychological benefits, such as sense of belonging, affiliation, or exclusivity.

For companies, loyalty programs create value by (1) increasing customer loyalty and purchase quantity, (2) providing companies with data reflecting the behavior of each individual customer, and (3) enabling the company to conduct one-on-one communications and develop customized special offerings/promotions

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