What Happened to My Reward Points?

Do you use credit cards for cashbacks, discounts, and rewards points? Many of us do. What if the bank were to suddenly reduce such benefits on your credit card?

Why Would Your Bank Reduce the Benefits?

Yes, the customer may get annoyed and feel cheated. You may use the card less or even stop using the credit card altogether. However, as they say, habits die hard. You may continue to use the card even with reduced benefits.

More importantly, in any business, it all boils down to sustainability.

The card issuers must balance the cost of rewards/benefits to their customers against their earnings.

The banks in their quest for more customers may offer excellent terms initially. However, the reality sinks in after some time. And it may not be because of poor planning. Many things are not known upfront when the banks launch a product. For instance, you can never be sure of the traction a new product will get. What kind of customers would sign up and how they would use it? If your target is premium customers, they may not revolve debt or opt for EMI options.

The customers are smart too. They can optimize benefits through smart usage of the various cards they own. If your reward points allocation and conversion rates are too high, the customers can even use the card to the fullest, even for expenses where they wouldn’t otherwise use a credit card (say house rent).

Hence, it is possible that the bank may be losing money from a particular credit card offering. To balance things out, the bank may decide to reduce card benefits.

Let’s take a step back and see how banks earn from credit cards.

How Do the Banks Earn from Credit Cards?

  • Merchant discount rate. Every time you use a credit card, the bank gets a cut from the transaction amount. The merchant bears the cost
  • Joining fee and Annual/renewal fee
  • Interest income and penal charges from delayed payments
  • Conversion of credit card balance into loans
  • Income through cross-sale of products: Loans, insurance etc.

What Are the Benefits Credit Cards Offer?

  • Interest-free credit
  • Discounts and cashbacks
  • Reward points/airmiles or any other form (these benefits may have monetary value)

A portion of the cost of the benefits offered to customers may also be borne by the merchant/brand.

For a product to be viable, the earnings (value) from the group of customers should be greater than the benefits offered. Perhaps, using the word “earnings” is not a good choice. A credit card also helps the bank build a relationship that may culminate into a home loan or investment services from the bank after 10 years. How do you put a number to such potential value from these relationships?

Still, the bank must, at some point, decide if the product is value accretive or not. If the bank realizes that it is leaking more in the form of discounts/cashbacks/rewards than it is earning, then it must either try to earn more from the customers or offer less to the customers.

The banks have umpteen tricks to earn more from you. The banks always keep encouraging you to spend more on their cards. That’s why they keep bombarding you with all the discount/purchase/reward offers. To get you to spend more. Yes, these offers may (or may not) have some cost to the bank but these offers play a key role in making a particular credit card your preferred credit card. You may own multiple credit cards and the banks are fighting for a share of your wallet. When you have a preferred card, you use it even when you don’t get any offer.

Further, you get offers for personal loans and to convert your purchase into EMIs.

Now onto reducing benefits to the customers. The banks can reduce cashbacks and discounts.

Axis Bank recently reduced the cashback on this Flipkart Axis Bank credit card. Going forward, the cashback for purchases on Myntra and hotel and flight tickets on Flipkart would earn a cashback of only 1.5%. Earlier, the cashback amount was 5% on these spends was 5%. Regular purchases on Flipkart would still earn 5%. The annual expense threshold for annual fee waiver was also increased from 2 lacs to Rs 3.5 lacs.

Or the banks reduce the reward points you earn for every purchase. Earlier, you may be earning 10 reward points for spending Rs 1000 on your credit card. The bank can suddenly revise it to 5 reward points per Rs 1000 of purchase. Or the banks can simply reduce the value of their reward points. Or reduce the conversion rate of reward points to actual money. Axis Bank did this on their Magnus credit cards.

You might ask, how can the banks do this? Well, the terms and conditions of the credit card allow the banks to do all the above.

Where Is the Lesson for Us?

If you belong to the “Make hay while the sun shines” group, you can subscribe to a credit card that is quite appealing for your expense structure. When the benefits are reduced, you can simply stop using or cancel the card.

But that’s one more card to manage.

Personally, I am not keen on too many credit cards. Yes, I might miss out on a few offers but that’s fine with me. With many credit cards, I will only create a mess for myself. For me, the benefits of owning additional credit cards may not be worth the hassles of managing too many cards.

Trust your judgement.

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