Last year, credit cards generated an impressive $163 billion in interest and fees, a number that is only expected to grow in 2017. Yet despite the enormous windfall, JP Morgan Chase & Co. managed to shave close to $300 million off of profits in the fourth quarter after shelling out enormous perks for its new Chase Sapphire Reserve card. The card was so popular that Chase reportedly ran out of the metal used to make the card, and had to ship temporary plastic versions instead.
But the company was unfazed – in fact, just the opposite. CEO Jamie Dimon made clear that he wished the card had cost his company even more money.
How can that be? Consider Dimon’s perspective:
“One of the fictions here is that the marketing cost … gets booked over 12 months. The benefit of the card gets booked over 7 years. The card was so successful it cost us $200 million, but we expect that to have a good return on it. I wish it was a $400 million loss.”
Dimon is betting that customers will hold onto the card even after they’ve received the sign up perks. Other banks have shied away from such a strategy because of the prevalence of ‘churners,’ or people who repeatedly open credit cards to collect initial perks, and then close the cards soon afterward without paying interest or incurring annual fees. Dimon however is betting that he fundamentally understands customer perceptions and behavior better than the competition, which of course piqued our interest at Alpha.
Leveraging our on-demand user insights platform, we tested a variety of credit card concepts in order to determine a reward structure that encourages sign ups without enticing churning. The Chase Sapphire Reserve definitely strikes a healthy balance and may indeed prove to be the closest thing yet to the perfect credit card.
We started by surveying 1,000+ respondents and segmenting by self-identified churners for premium credit cards. Regarding the last credit card they signed up for, 13% of respondents said that they intended to close their accounts within two years.
We then funneled these respondents into one of three prototypes for an unbranded credit card. The offerings had identical perks except for a unique bonus point reward structure. Variant A was a typical card with a 50,000 point signup bonus; Variant B offered annual bonuses of 20,000 points; while Variant C offered 3,000 points every three months. From a purely mathematical standpoint, and ignoring other factors, the cash layouts neutralize as such:
1 year of Variant A = 2.5 years of Variant B = 4.16 years of Variant C
Despite offering a fraction of the upfront bonus points reward, the variant offering ongoing quarterly rewards resonated strongest with respondents. Twice as many said they would be “very likely” to sign up for such a quarterly rewards card as opposed to a card offering more than 15x in upfront bonus points. That’s despite the fact that it would take more than four years to receive the same sum of rewards.
Not only did a card offering recurring rewards outperform massive upfront rewards, but it may also be the key to mitigating the risk of churners. Remember, 100% of the respondents at this point intend to close their most recent premium credit card within the first two years, but now that number drops by at least a third for each of our offerings.
The quarterly rewards card performed best, with only 58% of respondents intending to churn within two years. That’s not to even mention the fact that banks would lay out far less during that two year period when compared to the upfront bonus card.
Although churners are primarily interested in chasing initial rewards, our data suggests that a significant portion of them may change their behavior for cards that offer ongoing rewards, even if those rewards are smaller and take significant time to accumulate. The Chase Sapphire Reserve’s annual perk of $300 toward travel is a prime example of how a bank can mitigate the risk of heavy churning.
There are of course many other factors that should influence a bank’s offerings. Continued research iterations that take other business concerns and ideas into account would prove fruitful for business and product leaders in the industry.