Finance: The Sapphire Reserve card is great for consumers – but not JPMorgan (JPM)
JPMorgan Chase is planning to cut about $200 million in costs related to the unit that manages its popular Sapphire Reserve card
JPMorgan Chase is planning to cut about $200 million in costs related to the unit that manages its popular Sapphire Reserve card, according to the Wall Street Journal.
The bank already cut the rewards associated with the card in half back in January — initially, users who spent $4,000 in the first three months earned 100,000 rewards points toward travel, equivalent to roughly $1,500.
As a result of an overambitious original offering, Chase was able to spark adoption of its card, but it experienced significant losses nonetheless.
- Chase's Sapphire Reserve card challenged the entire industry, as it quickly became one of the most sought-after card products. After launching the Sapphire Reserve card, the bank exceeded its one-year sales goal in just the first two weeks and reported a 35% increase in new card accounts in Q3 2016, according to First Annapolis. The big signup bonus, travel credits, and ongoing points structure likely had a major impact on the bank's ability to get consumers to adopt the new credit product.
- However, even with this success, Chase isn't expected to post a profit from the card for years. Chase isn’t expected to break even on its Sapphire Reserve card investment for five-and-a-half years, even though the card has been a successful driver of adoption and usage for the bank's wider credit card portfolio, according to data from Sanford C. Bernstein & Co. research cited by Bloomberg. This is in part because cardholders aren't holding balances that would give the bank valuable revenue from interest, and consumers aren't renewing the card after earning the high original bonus.
Cuts to rewards programs are likely to become even more prevalent as associated costs continue to skyrocket. In Q2 2017, American Express, which is often seen as a leader in the premium rewards market, saw spending on rewards reach its highest point since nine years ago. And this is part of a larger trend in the industry among the largest issuers — the six largest credit card issuers incurred an estimated $22.6 billion in credit card rewards expenses in 2016, more than double the costs seen in 2010, according to Instinet data cited by the Financial Times. These issuers will begin to walk back rewards offerings further and invest in technology, such as machine learning, to ensure cardholders don't game the system by failing to renew after reaping the initial benefits.
- Identifies the costs associated with offering rewards for issuers and how they have increased over time.
- Details why credit card issuers continue offering high-valued rewards.
- Analyzes how the industry has evolved since 2011
- Explores how credit card issuers will advance in order to continue reaping the benefits of offering rewards without assuming increased costs.
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