Last week, it was revealed that Chase had a $330 million charge as a result of stronger-than-anticipated redemptions. This was something that Chase probably didn’t foresee when they first developed the awesome Chase Sapphire Reserve (that card had more applicants than Chase imagined as well).
Dustin wrote a post about this this morning as well – we both had worked on them independent of each other and without knowing the other was doing it! I thought about skipping mine but I thought it was interesting in how we shared similar thoughts so I let both posts go out as scheduled. Thanks for reading!
Savvy Travelers Cost Chase $330 Million – What Will This Mean For the Future?
This huge hit to Chase is part of a couple of things with their lineup – customers are utilizing the cards for the right categories to get bonuses and then spending those points at a quicker rate than had been imagined.
Here is a bit from the CNBC article:
“There’s a subset of savvy credit-card users who are diligent about maximizing their usage to capture the biggest benefit they can,” McBride said.
These consumers, he said, only use the cards in categories that pay the richest points. For instance, they would whip out a Sapphire card for dining and travel but switch to Chase’s Freedom card to pay for purchases in the rotating category that’s rewarded most, such as gas stations and drug stores.
J.P. Morgan’s Lake said that the recent charge, coming from Sapphire and other cards, is a good thing because it shows how engaged users are.
So, Chase likes this because they see that customers are engaged. But, it is also costing them. What is likely the big hit on these redemptions and what might that change in the future?
What Are the Most Expensive Redemptions for Chase?
Starting from the least to the most – for Chase
Bottom – Amazon Redemptions
At the very bottom is when you redeem your Chase Ultimate Reward points on Amazon. This is basically like giving Chase a big gift when you do this as it is below even their customer-side value.
Statement Credits and Gift Cards
Climbing up the ladder, we get things like statement credits (which put points at a value of 1 cent per point) and gift cards (which occasionally have sales but still not great).
Travel Rewards
Then we get to the things that we care about – travel rewards! I do not know exactly what Chase pays for the transfers to the various mileage programs but I would imagine that (if they are not all the same) the programs that Chase has a co-branded relationship with are better transfer rates for Chase. From past contracts between other card issuers and partners, I believe the rate was around .5 cent per mile that the bank would purchase them at from the airline.
I think the chief cost to Chase would be the 1.5 cents redemption with the Chase Sapphire Reserve on travel. For me, this has been huge! And, judging by the number of comments, conversations, articles, and e-mails over the years, I think that this has been huge for many others as well. This is especially true with the advent of cheap international business class tickets.
This is something that costs Chase real money, especially when paired with something like the earnings on the Chase Freedom Unlimited (at 1.5 %/points on everything) and then the redemptions are done from the Chase Sapphire Reserve side (1.5 cents per point). This means that every dollar you spend with that combo is giving a 2.25% redemption on travel.
But, that is on the simplistic side! You also have things like the 5X earning on some categories with certain Chase business cards that would elevate that cost to Chase at a redemption cost of 7.5% on travel!
What Could Chase Cut?
For Chase, I think this little tidbit is their way of getting the word out that they think these travel redemptions are too expensive for them. I have thought for a while that the 1.5 cent per point travel redemption with the CSR was too rich and would likely be on the chopping block from them.
But, because this is only available on a premium card that they charge $450 for, I don’t think they are going to be able to easily chop that feature. They could cut it for new cardmembers but I think we are a little while from that.
Instead, I (and many others) think that they will eventually sever the transferring of points from things like their Chase Freedom cards and Chase Ink Cash card to the Chase Sapphire Reserve. That would cut a lot of savvy travelers off from getting huge value from the Chase portfolio.
On the other hand, maybe Chase enjoys the fact that they have an engaged and informed customer base and just liked to push that out there for other issuers – and future cardmembers! 🙂
What do you think Chase may change to save money in the future?
I think we will see weaker new card bonuses and a long term cut in transfer values. They already have been cutting some of the card benefits on the Sapphire line. In addition the points will likely devalue for paid travel through the portal. They will also cut the bottom end stuff as well. For example if you are dumb enough to trade a ton of UR’s for a blender or whatever then you won’t know that the $45 blender they “give” you for 100k in UR’s now cost 110k in UR’s.
A big chunk out of Chase earnings? THEY EARNED $8.32 BILLIONS PROFIT just in 3 months. Approx $33 BILLIONS in profit in a year.
Taking a bite out of their earnings? If they were to stand up and do the right thing and pay each hourly employee a one time bonus … say $100,000 per person per year. That would take a bite out of their earnings. They still get to keep over $24Billions. But
“Big” was probably the incorrect word in the context but I meant it to be bigger than they had estimated. Yeah, they made a ton so this is not a huge amount but still bigger than they had thought – and they really game these things out when putting out a product and deciding which benefits would be necessary to cut.