Credit card companies may be forced to cut rewards to once again become profitable.
An article on Reuters.com
said that credit card companies are cutting back on rewards. The changes are a result of falling revenue. One reason for falling revenue is recently passed and currently pending legislation that will put regulations on credit card companies. Last week a reform law passed that will put limits on fees and rates. Now, there is pending legislation that could force down interchange rates. These rates are the fees that banks charge stores, restaurants, etc. that accept the credit cards.
The article said:
"Issuers use the proceeds from the fees to finance their rewards, so any haircut in those charges would trim loyalty programs, analysts said. For customers, that means having to use their cards more often to earn the points they need to fly somewhere, or get cash back."
One expert, Scott Valentin, an analyst at FBR Capital Markets said that rewards could become 10 or 15 percent more expensive as a result of the forced decrease in fees. Just last year credit card companies raised interchange rates 14 percent to try and fight against losses as a result of the large number of people defaulting on loan payments. Now, they might be forced to lower the rates, but keep in mind that legislation might not come for quite some time.
The companies want to be prepared, but they are also currently losing money. Experts say that the industry may not make money till 2011. The sour economy is hurting the industry, because a large number of people are losing jobs and are defaulting on payments as a result.
Some very popular rewards programs have already had rewards cut. Citigroup's "Thank You" rewards program now requires more points for a domestic flight. Also, Chase has limited the amount of spending categories in which consumers in the Chase Freedom cards reward program can earn cash back.
One large credit issuer at the center of all of this is American Express. It generates a larger than normal portion of its revenue from merchant fees. In 2008 merchant fees were estimated at 53% of the company's revenue. Also, the company worries that any cut to its reward program can dull interest in the company's cards. That could result in fewer customers and therefore lower revenue.
Anyway, if you currently use credit cards, you need to keep an eye on them. The rates and fees could be changing in the months ahead. Also, the rewards programs might start to see significant cuts. You just need to evaluate your cards to make sure you aren't getting charged too much and to make sure you are getting all of the benefits that you want.