Rewards Programs in the Credit Card Industry

What is going on with Rewards Programs in the credit card industry?  Several high profile programs are in the news and it begs the question on whether or not this type of program has reached its tipping point and have customers become jaded with getting points? Or are corporations walking away from them because they are too expensive to maintain?  Let’s take a look at American Express’ partnership programs since they are in the news lately.

American Express’ Membership Rewards and partnership programs are a critical component of the portfolio that allows the card company to fill the spending gap between them and other international credit card companies who charge a lower discount rate.  Their prime and prestige global exclusive rewards program partnerships with Costco (Canada), JetBlue (800 daily flights and served 82 destinations in the United States, the Caribbean and Latin America) and Starwood (14 brands, more than 1,270 properties in some 100 countries) allowed their cardholders to earn and burn points and created “point junkies” who cashed in on lots of exciting perks, including cash back, gift cards and travel exclusive to these brands. Such deals are lucrative to card issuers and partners as they allow both entities to tap into a new market of dedicated and high-spending travelers.

  • In 2014, Costco announced that, after a 15-year relationship, their Canadian locations will stop accepting the American Express card and will begin to accept the Capital One Platinum MasterCard. In 2015, Costco US announced its new US partnership with Citigroup’s Visa card, ending their exclusive 16-year relationship with American Express. The card is still accepted but no longer exclusive.
  • In 2015, JetBlue announced it had reached a new credit card agreement with Barclays, in place of its longstanding 10-year deal with American Express, ending the lucrative and loved TrueBlue program.
  • In 2015, Marriott International (global leading lodging company with 19 brands with more than 4,200 properties in 79 countries and territories, and $14 billion in sales) announced its intentions to purchase Starwood Hotel that boasts one of the industry’s leading loyalty programs, Starwood Preferred Guest(SPG®).  The main concern for the international financial community, and for Starwood loyalists, however, is what will happen to their elite international rewards points and prestige status with the American Express card. Marriott’s reward program is affiliated with Visa card and is considered low end.
  • In 2016, Fidelity is thinking about canceling its affinity card, which is furnished jointly by Amex and Bank of America, and possibly joining forces with Visa or MasterCard.

These co-branded cards accounted for 23 percent of over $1 trillion in worldwide card spending in 2014 for American Express.  American Express’ stock has fallen on the Dow by 22% over the past year vs. 7% for all Dow companies. The company is currently trading at 11.6x on a one-year forward price-to-earnings ratio as compared to the industry average of 18.2x. The discount has widened over the past few quarters on higher expenditures toward services, marketing, and new partnerships.  The company is targeting cost savings of $1 billion by 2017, which should boost its operating margins.

What is the profitability of these programs for both the partner and company?  With the plethora of rewards and partnership programs in the marketplace, American Express might be a first mover in the decoupling of rewards and partnership programs that are no longer lucrative.  The financial services industry is getting lots of practice in discovering the intricacies of entangling an intentionally sticky rewards and partnership program.  Which company is next?