No ideal credit card is found, and here's the explanation.
In pursuit of the ideal credit card, many consumers dream of a card that offers unlimited airport lounge access, generous travel rewards, hefty travel credits, and no annual fee. However, industry insiders suggest that such a card may never become a reality due to the financial constraints and market realities facing credit card companies.
At the recent CardCon conference for credit card experts, several industry insiders shed light on the reasons why the perfect card may remain elusive. First and foremost, credit card rewards programs often function as loss-leaders for issuers, with the enticing incentives serving to draw customers in and foster loyalty.
During a panel on building a profitable rewards program, executives from LoanPro and Arro discussed how some card companies lose money on rewards card users who don't carry a balance. To generate revenue, these companies rely on fees such as annual fees, balance transfer fees, and transaction fees.
However, rewards cards can eat into revenue streams like interchange fees, which are major revenue sources for card issuers. These fees are paid to the card issuer by merchants when consumers make purchases. In 2024, swipe fees on all credit cards are expected to total $148.5 billion. By working with third-parties or partners to manage their rewards systems, card companies may forfeit a significant portion of their interchange fees.
"A lot of reward programs are actually loss-leaders for a lot of businesses," explained Ryan Duitch, CEO of Arro. "For anyone that doesn't know, you give all your interchange away." This means that in order to make up for the lost interchange revenue, card issuers must rely more heavily on fees like interest charges. However, many rewards card users don't carry balances, which can lead to financial losses for the issuers.
Given the expense and potential lack of revenue associated with rewards cards, issuers must carefully balance the costs of designing their rewards credit card products. The risk-averse corporate banking environment also doesn't always foster innovation, as there are regulatory concerns and a lack of disruptors in the industry.
Rather than creating entirely new rewards structures, card issuers often lean towards proven models to avoid the monetary risk of introducing a new product that may fail. This cautious approach contributes to the slow pace of innovation in the credit card industry.
From a consumer perspective, the perfect card would find the right balance between value, fees, brand affiliation, and partnerships. However, this ideal balance might not be practical, according to industry experts. The definition of the perfect card shifts depending on whether one is looking from the perspective of the credit card company or the consumer.
For consumers, it's about maximizing rewards, benefits, and value, while credit card companies aim to make a profit and avoid giving away too much value. When the cards' benefits become too generous, the cards can devalue, making them less attractive to consumers.
To find the best card for their lifestyle, consumers should consider their priorities, whether they prefer travel rewards or cash back, and decide whether they are willing to pay an annual fee. They should also evaluate the potential value of welcome offers and avoid overly complicated cards with complicated redemption processes.
Ultimately, the search for the perfect credit card is a delicate balancing act between the desires of consumers and the need for issuers to generate profits. The combination of unlimited airport lounge access, a flat 5% travel rewards rate on all purchases, a substantial travel credit, and no annual fee is a difficult feat to achieve due to the high costs of benefits and the need for issuers to maintain profitability. Instead, consumers should consider cards with moderate annual fees that offer a strong suite of travel perks or supplement their card purchases with separate lounge memberships or as-needed day passes.
In the realm of credit card products, the balance between offering generous rewards and maintaining profitability poses a challenge for issuers. As the CEO of Arro, Ryan Duitch, pointed out, some reward programs can lead to significant financial losses if they result in reduced interchange revenue.
From a consumer standpoint, the pursuit of the ideal card lies in maximizing rewards, benefits, and value while being mindful of fees. Given the industry's careful approach to innovation and the high costs associated with certain benefits, the combination of unlimited airport lounge access, a flat 5% travel rewards rate, substantial travel credit, and no annual fee may remain elusive. Instead, consumers should explore cards with moderate annual fees that provide a strong suite of travel perks or consider separate lounge memberships or day passes as needed.
