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Making a sanity check on payment card loyalty

The amazing array of reward options available to consumers, together with a range of confusing card features and benefits, have led to a situation where consumers are unable to easily make a logical choice about which card is best for them. Consumers have been led to believe that when it comes to loyalty/reward schemes, they are a little stupid not to take advantage of a “something for nothing” offer. Take the supermarket loyalty schemes. In the main, they do appear to offer something for nothing, so why not? If you are shopping at Tesco regularly, because that’s your most convenient and preferred store, why wouldn’t you join the Clubcard scheme that can deliver significant rewards for your regular purchases?

And so the banks, eager to encourage use of credit cards as they are more profitable for the bank than debit cards or indeed cash payments provided for by free ATM withdrawals, jumped on the loyalty bandwagon by offering cash rewards for the use of credit cards. Today, you can even earn cash rewards by using a debit card from one of the banks. Faced with the possibility of something for nothing, the consumer has many options to choose from.

Credit cards generally offer the issuer a significant source of income/profit, more so if the consumer does not pay the bill in full within the interest-free period, usually up to 56 days from the date they made a purchase. Another major source of revenue for the card issuer comes from the fees charged to retailers for processing the payments, although in recent years, regulators have significantly limited the amount the banks and payment processors can charge for these services. The only other significant revenue available to card issuers is fee income, usually an annual fee charged to the consumer for the pleasure of having the card. So the answer to the question “why do card issuers offer rewards?” is simple, to make more money.

But do card issuers offer something for nothing? The answer is not so simple; maybe they do, maybe not. They use loyalty schemes to tempt new customers into applying for a card and to encourage greater levels of spending by their customers – to make their card the customer’s “front of wallet” payment card. Credit cards are a very useful payment instrument that when used efficiently are a very convenient and effective way to budget and manage finances. But, when it comes to the loyalty scheme, the customer must follow the rules to benefit with any significant reward.

There are many reward schemes offered by card issuers that can deliver significant rewards and can deliver on the possibility of something for nothing. Playing the card issuers at their own game can be quite effective for the canny consumer. So what are the rules? In general, most card reward schemes have three basic rules that should be observed by the consumer.

Rule number one: understand your needs; why do you need a credit card? There are a number of answers to this question, but in general, if you are going to use the credit facility, that is not pay the bill in full, then avoid the temptation of reward schemes as they are generally not going to deliver any net significant value, if any at all, because cards with a good loyalty scheme rarely have the most competitive interest rate. If you want a card in order to use the credit to tide you over, go for the card with the lowest interest rate and ignore loyalty/reward schemes.

Rule number two: if the card has an annual fee, make sure the benefits outweigh the cost of the fee. If you are influenced by the attractiveness of a reward scheme, do the maths; are you likely to benefit enough to exceed the cost of the fees?

Rule number three: do the rules of the loyalty/rewards scheme invalidate the potential benefit based on how you intend to use the card? Simply put, are you really likely to qualify for significant reward value based on how you might use the card?

There is much evidence to suggest that payment card reward schemes are important to the card issuers, retailers and consumers. Card issuers are trying to tempt the consumer to use payment methods that help improve their bottom line, retailers are getting in on the act by teaming up with card issuers to offer their customers a store-branded credit card that gives them a share of the spoils and, last but not least, there are savvy consumers who are able to navigate the rules to achieve something for nothing.

From the consumer’s point of view, card issuers broadly fall into two camps: either they are extending their existing banking relationship to offer you more products/services or they are commercial organisations, such as retailers, airlines or hotel chains, attempting to extend their relationship and generate additional fee income. Either way, neither is focused on offering the consumer something for nothing.

If the consumer takes note of the terms and conditions all is well, the individual consumer can benefit significantly from some of the rewards on offer. For example, with one particular card, it is possible to achieve a 27 per cent rewards value return on purchases by spending £1,000 per month over twelve months on a credit card if you play by the rules. That equates to a reward value of more than £3,000 for spending £12,000 over 12 months. Equally interesting is the fact that, if you are solely tempted by the reward on offer, one card could offer you as little as 0 per cent in return for spending £1,000 per month over twelve months. That’s nothing for spending £12,000 over 12 months.

There are more than 50 different credit cards offering loyalty rewards available in the UK market. With such a diverse range of products available to the consumer, how are they supposed to make an informed choice? There are a number of price comparison websites and newspaper columns to help, but none focus sufficiently on the reward/loyalty benefits to be able to give an understanding of which one may be “best” for an individual consumer. Some of these websites are focused on selling for the card issuer and as such could potentially give biased results simply because they do not look at all options available in the market.

In order to address the lack of independent commentary about credit card rewards, Loyalty Consulting UK is providing an assessment of UK credit card rewards, focusing specifically and exclusively on the reward value that can be achieved by the consumer if they follow the rules. Updated every six months, the latest market assessment was launched on November 30 and can be viewed at

In summary, consumers can get something for nothing as long as they study the rules of the scheme and play the game. But be warned, there are cards that appear attractive which disappoint – all that shines is not gold.

Mark Bergdahl is the founder of Loyalty Consulting UK (LCUK), a boutique consulting practice concentrating on loyalty strategy and services for customers across the globe. From Brazil to the United States, from London to Kazakhstan, LCUK have led the design and implementation of loyalty strategy, operations and systems in finance, telecommunications and retail.

Produced by Loyalty Consulting UK
November 2012