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Finance: Bank of America to offer premium rewards card (BAC)

Credit Card Rewards

The card, which targets high-income, affluent customers, comes at a time when firms are jostling to attract new customers vis-à-vis lucrative rewards programs, as credit appetite is at an all-time high

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Bank of America’s premium rewards credit card is expected to launch this fall, according to the Wall Street Journal.

The card, which targets high-income, affluent customers, comes at a time when firms are jostling to attract new customers vis-à-vis lucrative rewards programs, as credit appetite is at an all-time high.

That’s leading to a crowded space — Amex, Citi, and JPMorgan Chase, to name a few, have already hit the space — which is pushing peers to compete in order to keep up.

BofA’s product is different from other premium offerings in three key ways.

  • Lower annual fee:The card’s annual fee is just $95, compared with $450 for the Chase Sapphire Reserve card, and $550 for Amex Platinum. Such a move could make the card accessible to a wider potential audience.
  • Lower sign-up bonus:Consumers who spend $3,000 in the first three months can gain 50,000 points — a bonus that’s notably lower than peer cards, especially upon launch, but one that might be striking in its affordability to consumers.
  • Rewards structure: At its base, consumers get two rewards points for travel and dining, and 1.5 for everything else — a platform similar to “mass-market” cards, according to the WSJ. But the firm also has a tiered system in place, where consumers with active BofA accounts can get higher rewards based on their account balances, with totals of up to 3.5 and 2.6 points, respectively, available to consumers. This system could help the card attract and incentivize lucrative customers without sacrificing mass appeal, ultimately broadening its user base.

These differentiators could also help the firm avoid financial pitfalls that these cards have brought upon other firms.

  • Premium cards hurt.Chase Sapphire Reserve’s extreme popularity at launch forced the firm to halve the sign-up bonus it offered customers, and is now forcing the bank to cut $200 million in costs in the card’s unit. Likewise, Amex spent $1.9 billion, its highest total in nine years, on rewards in Q2 2017, driving up the firm’s overall costs.
  • Bank of America may have found the formula to avoid these.BofA’s mass-market appeal could help broaden the number of consumers who feel like the card is for them, which in turn could ramp up spending enough to offset some of the costs. At the same time, the firm’s tiered offering could limit the number of customers getting massive rewards to those who already have relationships with the bank and are therefore less likely to attrit while incentivizing consumers to establish other, lucrative relationships with the firm. And the lower sign-up bonus could limit “churners,” who flock to cards for the initial bonus and then leave them behind. We won’t know how the card performs until next month, but the firm’s innovative and new approach could shift the rewards dynamic moving ahead.

Credit card rewards have become so popular in the US that issuers capture headlines just by launching a new rewards card. And with consumers now caring more about the type of rewards being offered than any other card feature, competition to offer the most lucrative and attractive rewards has intensified dramatically.

But it’s also important to note that offering such high-valued rewards comes at a price — Chase’s Sapphire Reserve card ended up reducing the bank’s profits by $200 million to $300 million in Q4 2016, according to Bloomberg. And as costs continue to rise, issuers will have to adjust to this new landscape by leveraging technology and partnerships to keep consumers engaged without sacrificing profits.

Ayoub Aouad, research analyst for BI Intelligence, Business Insider's premium research service, has compiled a detailed credit card rewards explainer that:

  • Identifies the costs associated with offering rewards for issuers and how they have increased over time.
  • Details why credit card issuers continue offering high-valued rewards.
  • Analyzes how the industry has evolved since 2011
  • Explores how credit card issuers will advance in order to continue reaping the benefits of offering rewards without assuming increased costs.

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