Cardholder appetite for elite/premium cards on the rise – How credit unions can benefit

People don’t like to pay fees, and many credit union members love their credit unions precisely because they don’t like the fees that big banks charge. But there is one area where members may be willing, and actually want to pay fees. Credit cards with high annual fees that also come with equally generous benefits are in high demand. And credit unions should take advantage of this increasing appetite for what are known as signature, premium, or elite cards, along with the high interchange rates that come with the card.

Two examples that have been in the news recently: The number of Citi Prestige cardholders increased six fold in the last 18 months, despite an annual fee of $450. For that annual fee, cardholders get a $250 annual travel credit that can be used to pay for airline fees; up to $100 to spend on TSA PreCheck or Global Entry membership, and a free fourth night on hotel stays, and may other benefits.

Chase Sapphire Reserve launched in August also with a $450 fee, and it immediately went viral, Many YouTube videos of people unwrapping their card were posted; every travel blog site touted this card as “best”. This new high-end signature card was so popular that after sending out “tens of thousands of cards”, Chase ran out of card stock and had to issue temporary cards. These cards carry rich reward programs including 100,000 initial bonus points, a $300 annual travel credit, triple points on travel and dining, airport lounge access, and several other benefits.

Granted, all of these benefits are a cost to the issuer; but these cards generate significantly higher interchange for the issuer. 2.10% + $0.10 is the lowest published rate for Visa Signature Preferred (Visa’s term for premium cards), versus an average of 1.55% + $0.10 across traditional card accounts.

Credit unions are unlikely to tread into the stratospheric $450 annual fee cards, given their fee adverse nature. But there is a happy middle ground to attract the affluent market, in fact one that’s taking off even faster than the ultra-premium cards. Known as Visa Signature cards and Mastercard World cards, these cards carry a moderate annual fee, usually in the range of $49 to $75, and provide enhanced rewards, such as triple points for travel, double points for dining, and the standard single point per dollar spent on all other spending. Data from credit unions that offer signature or world cards shows that these cards are far more profitable than traditional cards. Typical usage on these cards averages 25 times per month, versus 6-10 transactions per month on a traditional card. More frequent usage, combined with the higher interchange fees highlighted above translates into higher revenue, over $275 annual revenue per signature/world card versus around $50 per traditional card. Cardholders who are willing to pay an annual fee are invested in using their card to accumulate points, and are also much less likely to churn.

These cards typically come with higher credit limits, allowing the cardholder to make bigger purchases. For cardholders who revolve a balance, this corresponds to higher interest income to issuers as well, making these cards even more profitable. In exchange for the higher interchange, issuers take on added responsibility. In addition to the cost for the enhanced rewards, issuers of world and signature cards must provide (by self-hosting or out-sourcing):

• Phone Support. The level of cardholder support required by the “brands” (Visa, MasterCard) that the issuer must provide is significantly higher than with traditional rewards cards. In addition to 24/7 customer support with the option for an “early and on-going option to talk to a knowledgeable representative”, the issuer must also provide emergency cash disbursement and emergency replacement cards. The service must be offered toll free from anywhere throughout the world. Many issuers offer this level of support to their traditional cardholders today, so this requirement may not actually be an incremental expense.
• Credit Limit. The requirements of the issuer for credit limits and allowed revolving balance amounts entail correspondingly greater risks. Signature and World cards must allow at least a $5,000 credit limit. But given that the average credit limit is $12,000-$15,000, this requirement is easily met for most accounts.
• Enhanced Benefits. Issuers must pay for additional products for signature cards, such as Roadside Dispatch, Lost Luggage Reimbursement, travel accident insurance, auto rental collision damage waiver, and other brand-specific required services. These benefits are usually offered as a per account charge (i.e. a variable charge).
• Enhanced Chargeback Processing. In the case of a dispute with a merchant, a cardholder is typically encouraged to resolve the issue with the merchant first, before initiating a chargeback with the issuer. With enhanced chargeback processing, the cardholder may request the issuer to resolve the issue with the merchant. This benefit entails added staffing to perform the manual tasks of calling and tracking issues.

Summary

Demand for affluent cards with richer rewards in on the rise, and are highly profitable. Moving a cardholder from a traditional card to a signature or world card means increasing revenue per account by over $200. Offering these cards to attract new members means over $450 per account in new revenue. Even after taking into account the additional costs required to offer these cards, world and signature cards are far more profitable than traditional cards. They have higher interchange revenue, higher interest income, and lower churn. And given cardholders’ increasing demand for cards with annual fees that offer double and triple points, this is nothing but a win-win for both credit unions and members.