Miles take a back seat to cash for credit-card holders; competition heats up and rewards get juicier
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| Cash-back credit cards are growing in popularity. PHOTO: GETTY IMAGES |
Forget about that free plane trip or the private dinner with a famous chef. When it comes to collecting rewards from credit cards, most consumers just want cash.
Cash-back rewards cards are increasingly popular with shoppers, prompting financial institutions to develop programs that, in some cases, return as much as 10% of spending. But the recent explosion in cash-back cards has some industry executives worried the market is getting overheated.
They say the hefty rewards aren’t sustainable for the banks and may not ultimately drive the brand loyalty that is the goal of such programs.
“I’m sure someone has a spreadsheet that tells them how they are going to make money, but you have to put in a lot of assumptions,” says David Nelms, chief executive officer of Discover Financial Services Inc., which issued the first cash-back card in 1986 and now offers several varieties.
Cash-back cards reward consumers by essentially rebating some of the money they spend. Instead of points, customers get cash they can use to reduce their credit-card bill, deposit in a bank or buy a gift card.
Toshinori Fukui, a 31-year-old Ph.D. student at the University of Houston, expects to collect about $900 in cash rewards this year by juggling four cash-back cards from big issuers. He plans to spend part of this year’s money on holiday gifts. “If I can cut costs by using credit cards, I am happy to do it,” says Mr. Fukui. “And if there is anything out there that is better than the combination of cards that I have, then I am going to go and get it.”
The cash-back craze follows a period in which card issuers expanded beyond traditional airline miles and hotel rooms to “experiences,” such as backstage concert passes and hot-air balloon rides. Then, customers started complaining that the reward-redemption process was too complicated and lengthy, prompting issuers to bulk up cash-back offers.
Nearly three-quarters of consumers surveyed earlier this year by website creditcards.com said they prefer cash rewards to other types of loyalty offers. Just 16% of those surveyed said they favored airline miles.
“Within our customer base, we are seeing cash-back as a growing category,” says Pam Codispoti, president of the Chase-branded cards business at J.P. Morgan Chase & Co. The nation’s biggest credit-card issuer has several cash-back cards, including Chase Freedom Unlimited, which offers 1.5% back on all purchases, and Chase Freedom, which offers up to 5% back in certain shopping categories.
In a new twist, USAA recently started testing a card in seven states that gives holders a hefty 2.5% back on all purchases, but only if they maintain a $1,000 monthly direct deposit in a USAA checking account. If they don’t have the direct deposit, they get 1.5% cash back.
“We think that checking-account relationship is the opportunity to create more interaction” with the customer, says Anne Arvia, interim president of USAA’s bank operations. The bank is also testing a checking account that doles out cash rewards for basic transactions like using a debit card or transferring money into a savings account.
Holiday shoppers may not be cashing in on lucrative perks if they're using the wrong credit cards. MarketWatch personal finance reporter Catey Hill and Lunch Break's Tanya Rivero discuss credit cards with the most generous perks, including one that could earn consumers up to $2,500. Photo: Shutterstock
Besides offering loftier cash-back rates, many of these cards are getting more complicated, even though they were initially considered simpler than other programs. Some of the richest offers are coming from American Express Co., which is trying to expand its credit-card loan portfolio. The credit-card company’s current offers include up to 10% cash back on purchases made at Amazon.com and 6% back at supermarkets.
Other card companies are offering as much as 6% back on some types of purchases for certain periods, prompting some customers to pay close attention to the ever-changing offers.
Jeff Hix, who lives outside of Omaha, Neb., plans his spending around such rotating offers. If a card isn’t paying a good cash-back rate on a category that interests him, he takes it out of his wallet.
“I don’t cook much, and if some fool at a bank thinks Boston Market is fast food and they will pay me 5% to sit down and eat there, I’m not going to say no,” says Mr. Hix. He estimates he will earn more than $1,000 in cash refunds this year.
Cash-back fans like Mr. Hix could backfire on card issuers because they are often more loyal to the offer than to the card brand. Furthermore, many consumers are more likely to remember a loyalty program that earned them a special vacation than some money off their credit-card bill.
“The whole idea of a reward is loyalty, but it is very difficult to create a memory or emotional attachment around cash,” says Barry Kirk, vice president of customer loyalty for Maritz Motivation Solutions, which manages card-loyalty programs.
Capital One Financial Corp. is trying to build more loyalty with its popular Quicksilver cash-back card by offering nonreward features. One example: Its “second look” option alerts customers if a tip that is input as part of a payment is unusually small or large.
“Consumers often choose a card based on rewards, but what keeps them around is control and security,” says Daniel Mouadeb, vice president of the bank’s U.S. card business.
Write to Robin Sidel at robin.sidel@wsj.com