Rewards Cards: Rewarding for Issuers, but What About Merchants?

Rewards and loyalty cards are now common in the U.S. payments landscape, but new research findings show just how popular such cards have become. A study by Phoenix Marketing International says 93% of all credit card spending is now done on rewards cards, up from 88% in 2013.

A separate study released Wednesday by TMG (formerly The Members Group), a Des Moines, Iowa-based credit-union service organization, found that rewards card holders spend an average of $6,299 per year on their cards, compared with $4,029 for non-rewards card holders.

Both studies conclude that rewards cards are financial winners for issuers. But what about merchants, who pay higher interchange to accept rewards cards? Many merchants, of course, have their own rewards programs and offer cobranded credit cards in partnership with a bank, but merchants in effect subsidize their competitors when they accept cobranded rewards cards from rivals.

Merchants seeking to attract customers basically don’t have much choice but to welcome spending on any and all rewards cards—and be ready with their own programs—because that’s what consumers want. “The demand for loyalty is across all age groups,” says Leon Majors, senior vice president at Phoenix Marketing, a Rhinebeck, N.Y.-based research firm that surveyed a representative sample of about 3,000 credit card holders for its study.

Embracing rewards cards also can help merchants deal with what Majors calls “the Amazon effect,” the loss of sales by brick-and-mortar stores to online rivals such as market leader Amazon.com Inc. “All of these merchants have had their throat cut by Amazon, and they need to compete,” he says.

Rewards cards have been criticized for rewarding upper-income consumers at the expense of lower-income people who don’t have such cards. But Phoenix Marketing says its study found that 73% of consumers in the lowest-income bracket, under $20,000 per year, owned a rewards credit card, and 96% in the group found value in using the card.

No matter what their income, most consumers understand how rewards cards work, according to Greg Weed, director of card performance research at Phoenix Marketing. “In general, without saying any specific type of reward, they’ve got it,” he says.

TMG and IQR Consulting queried 12 months of transaction data from 400,000 card accounts issued by TMG financial-institution clients to come up with their findings. The study found that rewards cards generated an average of $113 per year in interchange revenue compared with $73 for non-rewards cards. The average rewards-card ticket was $73.80 versus $62.30 for non-rewards cards.

TMG also found that cardholders who had redeemed points four or more times spent an average of $3,202 per month on their cards compared with $1,000 for one-time redeemers and $310 for non-redeemers.

As mobile payments take hold, merchants intent on capitalizing on the trend need to tie their rewards programs to smart-phone transactions, according to Majors. Mid-priced department-store chain Kohl’s Corp. recently integrated its loyalty program with Apple Inc.’s Apple Pay service. “That’s incredibly significant,” he says. “Customers want their mobile payments and loyalty programs linked.”