The cash-back awards credit card is now an established tool in the credit card business and now investment firms are recognizing their value as an effective vehicle to attract new card members and build client loyalty.
While the idea of offering rewards for using credit cards began in the business-to-business sector decades ago, they have evolved with the credit card industry as an individual user perk. Despite this change in demographics, the idea remains the same: “Loyalty programs which seek to bond customers to an organization or its products and services by offering an additional incentive,” according to a 1997 paper, “Centre for Corporate Change Do Customer Loyalty Programs Really Work,” by Grahame R. Dowling and Mark Uncles of the Centre for Corporate Change at the University of New South Wales Australia.
In the case of financial firms, the cash-back feature of an investment company-issued credit card that is directly linked to a brokerage account is easy enough to communicate and build customer loyalty. The reason: its simple message is that customers are essentially depositing 2% of the money they spend money into their own account.
In the mid-1980s, the credit card industry developed rewards programs when Discover offered cash back on every purchase. American Airlines partnered with Visa to offer a frequent-flier mile for every dollar a cardholder spent. Variations of these programs soon followed with the intent of increasing spending and building customer loyalty. Today, a common reward credit card today offers about one cent back for every dollar spent. These rewards come in the form of cash, goods, or services.
While common in the consumer goods and airlines industry, investment firms were late in offering investment credit cards as a means of generating profits and building customer loyalty.
Today, the largest investment firms to offer cash back card programs are Charles Schwab and Fidelity. Of the two firms, Fidelity has been in the business longer when it teamed with American Express in 1999 to issue co-branded cars, all of which offered cash-back features: the Fidelity Investment Rewards American Express; Fidelity Retirement Rewards American Express and the Fidelity Investments 529 College Rewards American Express card.
But in 2016, Fidelity dropped American Express and Bank of America®, which were replaced by a Visa Signature card issued by U.S. Bank with cards that continued to offer 2% cash back.
The new Fidelity® Rewards Visa Signature® Card has proven to be “very popular,” according to Sam McLimans, senior vice president of cash management at Fidelity’s credit card business. Since the new card program began, over $7 billion has been swept back into Fidelity brokerage account, cash management, 529 college savings plans and retirement accounts, he said. Fidelity clients have the option to proportionately allocate cash-back payments into these accounts on a monthly basis. To date, over 90% of Fidelity clients who have the card have chosen the sweep feature, he added.
In terms of customer demographics, McLimans, a banker who has been with Fidelity for eight years, said Fidelity customers with FICO scores “across the spectrum” have used the cash-back feature.
Fidelity chose to partner with Visa and US Bank because of their ability to provide dedicated customer service and their innovation capabilities, McLimans said. For instance, the Fidelity® Rewards Visa Signature® Card is digital wallet-enabled to work with Apple Pay, Samsung Pay and Android pay systems. “Working with these partners has allowed us to innovate and while we cannot announce anything specific today, there are some new things in the works which we may announce in mind-year,” McLimans said.
Not An Easy Business
While the rewards-back credit card business offers some distinct benefits, it also has some business considerations that can be deal-killers. Take the case of the Schwab Bank Invest First Visa card that was launched in late-2008 with Bank America. The card offered an attractive 2% cash back payment that quickly attracted the public’s attention.
Based on earlier on-line posts from 2011, this card was very popular for a number of reasons in addition to the 2% cash back; it also had no annual fee, and the card charged nothing for international transactions. Cash rewards were put into a Schwab brokerage account. When the Schwab card was phased out in August 2011, it was replaced by a Bank of America® travel credit card and a Bank of America® cash back credit card.
As it turned out, this was an expensive mistake for Schwab. At the time, published reports said Schwab was taking a $20 million charge to pay a penalty to Bank of America®’s card unit for exiting the partnership. In addition, Schwab also had to subsidize the 2% rebates from its own revenues, not those that were supposed to be paid by borrowers with large balances.
By 2015, Schwab announced that it was re-entering the reward card business again, this time with American Express. According to Schwab’s web site, the firm is now offering two cards: The Investor Card offers a 1.5% cash back plan deposited in your Schwab account, and a $100 Card statement credit after spending $1,000 in purchases on your Card within the first three months of receiving it.
Schwab also offers a Platinum card that carries an annual fee of $450 and offers 40,000 Membership Rewards points after spending $3,000 in purchases. For good borrowers, the card does not charge interest when you pay your full balance monthly. Another perk for those with accounts over $250,000 is that they will receive a $100 Card statement credit or receive a $200 Card statement credit if your qualifying Schwab holdings are equal to or greater than $1,000,000.
Schwab now manages $2.3 trillion in assets and the average age of its clients is over 50.
How Cash-Back Cards Work
Cash-back cards work because most card borrowers have a hefty balance on their cards and can pay up to 20% per month interest rate. But if the credit borrowing population pays off its balances monthly, not enough people are left in the borrowing pool to pay the high monthly interest rates that allow the cash-back payments to be made. When this happens, the cash-back feature becomes an expensive liability, and the cash-back payment programs are discontinued.