Are we witnessing the beginning of the end for cashback on credit cards? I recently received a letter from my credit card provider, advising that in future I will need double the points to obtain the same value of retail vouchers. This changes the cashback
rate from 0.57% to 0.27% - and this on a card where the rate of return when originally launched was 1%.
This is an interesting development, partly because of the timing. At the moment, full balance payers must be, pound for pound, the most profitable they have ever been. The major elements of a full balance payer's economics, from an issuer's point of view,
are the interchange income (around 1.1% of your spend) and the cost of funding that spend - i.e. how much interest it costs them from when your purchases are paid for by them, and when you pay off the balance. There are other costs, for instance the processing
and service costs (though the latter must also be much reduced these days, bearing in mind the move to self-serve over the internet), and costs relating to any ad-hoc activity such as chargebacks. They obviously get no interest income, but on the other side,
the credit risk must be low on a full balance payer - so not much in the way of write-offs, which can play havoc with the profitability of the revolving community. Indeed, it is often the revolving part of a card product's portfolio which tips a card company
into losses, when the going gets tough.
Given that the costs of supporting a full-balance payer must be at an all-time low, bearing in mind the relatively low interest rates that banlks are having to pay to fund their assets (especially the low deposit rates currently on offer), then reducing
the rate of cashback is not a necessary move at this point in the cycle.
For instance, take a full-balance payer who spends £2,000 per month on their card. Over the year, the card company's interchange income is around £250, based on an interchange rate of just over 1%. If their average balance over the year is £1500 (because
of their spending pattern) and the bank's funding rate is 5%, the major cost element (interest funding cost) is £75. This leaves a hefty surplus to fund not only the remaining central costs, but also pay out a cashback reward. With little likelihood of the
customer going bad, it seems to me that a decent cashback rate is not out of the question, so why is the rate being dropped?
I can only assume that the card company is expecting to increase the profitability of their full balance payers - the cause of least trouble - to cover increased write-offs. This is the credit card equivalent of regular banking, where depositors are being
pillaged to service the needs of borrowers. So, once again, it is the financially responsible that are being hit.
If they can't provide a good cashback rate at this point in the cycle, I can only assume that, as funding costs increase (as they inevitably will) then we will see the eventual demise of cashback (and probably other reward schemes, like points mean prizes),
as the profitability of full balance payers reduces. Interestingly, there was an article in the Telegraph over the weekend featuring cashback cards, which mentioned nothing about the future of these types of cards. Maybe they should do another analysis on