Why US Credit Card Bonuses Are So High — And Why That May Change
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One perk of being an American? Access to uniquely high credit card welcome bonus and earning bonuses. 100,000-point offers have been dominating headlines the last few months and have only slightly cooled down in 2017. We have cards that can earn 5x or 3x rewards on bonus categories, 1.5x points on every purchase, 2% cash back on everything — even 10% cash back on bonus category purchases. Today, I’ll take a look at why the US has such high bonuses compared to the rest of the world, and why it may change (for the worse) going forward.
With few exceptions, credit card welcome bonuses are significantly higher in the US than the rest of the world. During my three years working in Japan, I routinely came across United co-branded cards with offers of 3,000 and 10,000 miles — bonuses my Japanese co-workers were excited to pursue. Compare that to the currently available 50,000-mile bonus for the United MileagePlus Explorer Card here in the States, or the 70,000-mile bonus if you’re lucky enough to be targeted for the higher offer. The Japanese version of the Gold Delta SkyMiles Credit Card from American Express is offering an 8,000-mile welcome bonus, compared to 30,000 bonus miles here in the US — and we’ve seen 50,000-mile offers in the past as well.
Other countries don’t fare much better. Flying Blue co-branded cards available to residents of the Netherlands have bonuses beginning at 2,500 miles and increasing to 20,000 miles — but the highest bonus is only available with the card that has a €600 (~$636) annual fee! Australia may be the closest in the world to American bonuses, with a few Qantas cards running significant welcome offers and the Australian American Express Platinum Card awarding a 100,000-point bonus. However, you’ll need significant Qantas points to book an award on that airline (and will have to pay ridiculous fuel surcharges), and the Australian Platinum Card carries a $1,200 AUD (~$925 USD) annual fee.
Even if you earn some of the same transferable loyalty currencies overseas, their value is not the same as in the US. American Express Membership Rewards cardholders in Canada can only transfer to Aeroplan, Alitalia, Asia Miles (Cathay Pacific), British Airways, Delta, Etihad and hotel chains including Hilton and Starwood. Even then, many of the transfer ratios are worse than here in the US.
What’s the reasoning behind the great deals we get here in the states? Three things:
Competition, Interchange Fees and Culture
The market to get new cardholders in the US is a fiercely competitive one. There are so many card issuers and so many different products that issuers need to have large bonuses and perks to attract customers. We saw what happened last year with the introduction of the Chase Sapphire Reserve with a 100,000-point bonus: Amex responded in kind by sweetening the benefits of the Platinum Card® from American Express and the Business Platinum Card® from American Express. The competition and number of card issuers in foreign countries is nowhere near as high as in the US.
Second, card issuers use frequent flyer miles and reward points to encourage American consumers to swipe their cards as many times as possible. This is because they earn a fee for each transaction. These interchange fees — falling under the broad umbrella known as merchant transaction fees — are charged by a card-issuing bank to an acquiring bank for the acceptance of card-based transactions. More simply said, merchants are charged by card issuers for the privilege of being able to accept your credit card. These fees are not insignificant and drive billions of dollars in revenue each quarter for credit card companies. The more they incentivize us with rewards to use the card, the more fees they receive.
Internationally, interchange fees are much lower than in the US. In 2015, the European Parliament voted to limit interchange fees to 0.3% on personal credit cards, considerably lower than the roughly 3% here in the States. That means there’s no profit margin for card issuers to incentivize a consumer with a rebate worth 1-3% to swipe their card. Similar legislation and interchange minimization practices have occurred in Australia, New Zealand and South America.
Third, America is a credit-crazy culture, with the average American household operating on plastic and carrying thousands of dollars of credit card debt. This is not the case around the world, where there is much smaller desire for and access to personal credit. Therefore, there’s no requirement for the rewards that go along with the credit. If you plan on visiting Japan with your wallet full of credit cards, you’d better find a good ATM debit card with no international ATM fees and head to the nearest 7/11 convenience store upon landing to withdraw plenty of yen.
A couple years ago, I looked at the reasons behind the disappearance of rewards-earning debit cards. Thanks to legislation passed as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act named the Durbin Amendment, interchange fees were capped on debit card purchases. Banks no longer had a reason to incentivize consumers with rewards to use their debit cards as often as possible. That meant no more miles or points for swiping your debit card, and increased fees on every other aspect of your banking experience so the bank could make up that lost revenue.
Interchange fees in the US could be lowered in the future due to new legislation or due to new point-of-sale and payment technology. Once these fees drop, we’ll go the way of Europe where there is no incentive for credit card issuers to lure us with huge rewards bonuses and earning capabilities.
Credit card issuers want profitable customers who carry balances and pay obscene interest rates, rather than those who earn the welcome bonus and don’t use the card. Chase felt a $300 million drop in quarterly profits thanks to the Chase Sapphire Reserve new customer acquisition costs. CEO Jamie Dimon says he wishes it’d cost more because he knows the majority of those customers will carry balances and be profitable in the long run.
In order to try and avoid unprofitable customers, major card issuers are making their own restrictions. Citi has put a 24-month window from opening or closing a card within the same rewards type before you’re eligible for a bonus again. Chase has instituted the 5/24 rule, and American Express has placed once-in-a-lifetime bonus restrictions on certain cards. I don’t foresee these restrictions becoming lax anytime soon.
If you haven’t realized how good we have it in the US, I hope you’ll take notice — while also keeping an eye open for future changes to our points-rich society. While there’s no indication that welcome offers and earning rates will drop in the immediate future, the current system of ever-increasing bonuses and access to almost as many cards as you want will certainly change over time — and not necessarily in the favor of the consumer.
How are you planning for the future of card bonuses?