The U.S. credit card market presents a tough competitive landscape – even for best-in-class credit card companies. Complicating matters is an over-crowded payments scene and a highly saturated credit-qualified population. This intense environment makes acquiring new, profitable cardholders a significant challenge.
To beat competitors in the race for new business, financial institutions and credit card companies are throwing more money at creating compelling incentives. A range of introductory offers, such as cash upon approval, extended 0% APRs and reduced balance transfer fees are flooding mailboxes. Ridiculously high-value rewards programs, too, are entering the market at a breakneck pace – all in the name of attracting profitable cardholders.
But is it working?
Accelerated points and high-value redemptions can work for both the cardholder and the issuer, but companies must proceed with caution. That’s because today’s rewards credit cardholders are savvy. Many have learned how to “game the system,” using introductory offers to earn points, cash out and then cancel the card (or easier yet, go inactive).
Issuers of high-value rewards cards, such as branded travel credit cards, are no strangers to rewards “gamers.” For instance, one of our new financial institution partners came to us after a particularly poor campaign result. The financial institution mailed a high-value rewards offer to a million super-prime accounts earlier this year. The campaign resulted in a 0.5 percent book rate at cost of $70 per account. Forty percent of the new accounts were owned by gamers. All told, the campaign resulted in a loss of $430 per account with an overall loss of $860,000.
Credit unions can use high-value rewards to mutually benefit themselves and members by following a few tips:
- Leverage data to identify gamers: Even applying simple predictive techniques to third-party data sets can effectively predict gamer behavior. This is even easier when the applicant has an existing relationship with the issuer.
Here’s an example: One of the most important predictors of gamer behavior is the number of cards booked by the applicant in last few months. The higher that number, the higher the chances he or she will take advantage of introductory perks. Because this particular variable may be significant within a pool of risky applicants, it should be used in conjunction with utilization variables. In general, utilization is low among applicants with gaming tendencies, and high among risky applicants.
- Modify the sign-up bonus: Introductory offers should be designed with genuine cardholders in mind. The perks should be lucrative enough to draw in profitable cardholders, but dissuading to a gamer.
This can be partially achieved through a tiered bonus structure. For example, instead of giving 20,000 points in one payout after three months, the sum could be divided into separate payouts. 10,000 points could be redeemed at the end of first three months, followed by another 10,000 at the end of another three months. The elongated timeline is likely to discourage some gamers from applying.
Our data scientists work with several high-value rewards card issuers to apply the above approaches. The financial institution partner mentioned above eliminated 100,000 likely gamers from its subsequent direct mail campaign, and has gained more loyal cardholders as a result. To date, a greater percentage of new cardholders use their credit cards more often after the promotional period expires. They even produce continued spend at the same rate.
Credit unions are focused on their members. A great rewards program can provide outstanding benefits to responsible credit cardholders, helping solidify the long-term member loyalty credit unions need to survive. To be most successful, every rewards campaign should target cardholders who genuinely benefit from the program and maintain portfolio profitability in the long run.
It is never too late to start examining which cardholders should and shouldn’t receive an offer from your credit union. Yes, it will save you money. But more importantly, it will help build real, sustainable relationships that support the financial health of both the cooperative and its members.