What Could Attract Customers to a Credit Card with a $450 Annual Fee? High Value
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What Could Attract Customers to a Credit Card with a $450 Annual Fee? High Value

Lavish rewards programs interest big spenders who do not want to be bound to one affinity program

September 20, 2016

Credit cards used to be a staple of adult life, almost a financial rite-of-passage. Yet more and more people are going without them: an estimated 63 percent of millennials do not have a credit card. So where does this leave major credit card companies?

Building up rewards programs.

According to The New York Times (NYT), there is an "arms race among large credit card issuers, which are introducing increasingly lavish rewards programs to capture affluent consumers who spend large sums on travel and recreation, but no longer want to be bound to one particular hotel or airline's affinity program."

The premium cards attached to these programs come with a hefty price tag: $450 per year. However, for an increasing number of people, these numbers add up. They care more about bottom-line value than elite service and high social status, even when it means paying such a high annual fee.

There are a number of major players in the game. JPMorgan Chase threw its hat into the ring with the popular Chase Sapphire Reserve card, and American Express has long been a participant.

"American Express used to have a stranglehold on the high-end market, but folks like Chase and Citi are coming hard after their crown," said Matt Schulz, an analyst at CreditCards.com. "It's the best time in years to shop for a rewards card."

Indeed, American Express was the first company to issue a premium card—the Platinum charge card—and it reigned supreme for a long time. Then, in 2014, Citi revamped its Prestige card to compete with the Platinum by offering similar rewards—free hotel stays, airport lounge and private golf course access, transferable points that could be redeemed for airfares and upgrades—and spending incentives. Travelers on a budget flocked to the Prestige.

The Chase Sapphire Reserve card was released last year and has proven extremely popular, especially with millennials. One reward that separates it from its competitors is the big sign-up bonus. This is what interested Amber Cooney, who works at a nonprofit lender and is planning an international honeymoon next year. Although she has been more of a casual credit card user in the past, she realized that her spending patterns and careful planning with points and rewards could earn her free vacations.

"Rewards cards made travel a reality for me," she said. "I went from seeing Niagara Falls and calling that my international travel to visiting four different countries."

So far, her points have paid for airfare to Argentina and hotels in Paris, and she intends to use her Chase card to travel to Japan this year.

Premium rewards are even leading some consumers to switch to credit cards as their primary method of payment. Ben Schlappig is a travel blogger without a fixed address who lives mainly in hotels. He plans to use his Chase Sapphire Reserve on most of his future purchases; almost all of his money goes toward dining and travel, and the card offers triple points on those two categories.

It is true that Chase's definition of "travel" is somewhat flexible, including services such as Uber and Airbnb. So far, customers have already spent $1.5 million on those two services using their Sapphire Reserve card, which earned them 4.5 million points according to Chase Spokeswoman Amy Bonitatibus. However, there is a fear that some of the rewards eventually will be eliminated.

"It's an incredible deal," said Schlappig. "The card is almost too good to be true. I think a lot of people are scared that some of the perks will be cut."

Although Bonitatibus claims that Chase is not currently planning any such cuts, there is a trend among loyalty and points programs for the issuer to eliminate rewards that are costing them too much in profits. Two years ago, American Express dropped free access to American Airlines' Admirals Club lounges for holders of its Platinum card, and Citi did the same this year for those customers with its Prestige card. Such frequent changes to perks programs lead to changes in the value of the issuer's reward miles and points, and this prompts some customers to change from one card to another.

And demand for premium cards is on the rise, according to the issuers. A Citi spokeswoman claimed that the number of Prestige cardholders rose by sixfold over the past 18 months, and American Express states that membership among its Platinum cardholders is "large, growing and loyal."

This could spell trouble for traditional airline, retail, and hotel cards issued by banks. Research conducted by Packaged Facts in 2009 showed that 55 percent of adult Americans had at least one affinity credit card at that time; last year that number had dropped to roughly 43 percent. And this trend is likely to continue as the millennial generation comes of age.

"If you look at the behavior of millennials, it's clear they're not going to commit to a relationship with one credit card, or brand, the way their parents did," said David Robertson, publisher of The Nilson Report.

Even he is reconsidering his own card, an American Airlines card issued by Citi with an annual fee of $450.

"I look at it now, and it's just a question of, do I want to spend the time to think about the value proposition on an alternative?" Mr. Robertson said. "There's much to be said about inertia."