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The benefits issuers enjoyed by offering generous card rewards are fading

The trend: Pandemic-era credit card perks could take a toll on issuers as headwinds buffet the economy this year, per the Wall Street Journal.

How we got here: As consumers shifted toward debit at the onset of the pandemic, many issuers revamped their rewards to encourage credit card spending.

This included pivoting rewards from travel toward everyday spending categories like groceries. Many also introduced rewards that catered to pandemic-era consumer trends, like at-home fitness programs and streaming services.

Why it matters: Now, issuers are spending more than ever on card benefits, even as consumer spending growth wobbles.

  • Six of the largest card issuers in the US spent a combined $68 billion for rewards and other related expenses in 2022, increasing about 4% from 2019, per the Journal.
  • Rewards expenses among large banks accounted for about 4.5% of card purchase volume in 2021, up from 3.5% in 2015, per Federal Reserve data.

But even as issuers toss money at rewards, consumers are pumping the breaks on credit card spending: US credit card transaction volume will increase just 2% year over year (YoY) in 2023—slowing from last year’s 9.9% jump and a 21.5% surge in 2021, per Insider Intelligence forecasts.

There are also signs that some consumers are feeling financially strained, compounding issuer risks: Discover, Bank of America, JPMorgan, and other banks reported a slight increase in delinquencies in January relative to last year (though delinquencies generally remain below pre-pandemic levels).

The big takeaway: Rising rewards costs and laggard loan growth could squeeze issuers’ margins. That may encourage more issuers to devalue their card benefits. But issuers will need to tread lightly when devaluing rewards to avoid pushing away high spenders.

  • American Express, for example, benefits from a virtuous cycle in which the bank's premium spenders attract big-name promotional partners, which in turn attracts more customers and spending.
  • But Amex recently removed one of its biggest travel perks: It began charging Platinum cardholders $50 for each guest they bring to Centurion airport lounges instead of letting cardholders bring two guests for free.

These sorts of changes might be needed to help preserve issuers’ bottom lines and avoid a profit squeeze later on.

This article originally appeared in Insider Intelligence's Payments Innovation Briefing—a daily recap of top stories reshaping the payments industry. Subscribe to have more hard-hitting takeaways delivered to your inbox daily.