Daybreak - Why banks love to shower you with reward points

Episode Date: May 27, 2024

Indians have really been warming up to credit cards lately. More than a 100 million credit cards are in circulation in India as of now. And this rise has a lot to do with the benefits customers get: cash back deals and reward points that you can collect and redeem for anything from flight tickets to stays at fancy resorts.But between the two, cashbacks are a more straightforward method of making the most of your credit card. Availing reward points, on the other hand, requires a combination of skill and patience. And between the two, there’s one that banks actually don’t like.Tune in to find out.Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too? It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production. Sita and I are still reeling from the intensity of our first studio recording.

Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. Nearly 100 million credit cards are in circulation in India as of now, which, by the way, is a 12% year-on-year-rise. And of course, this rise has a lot to do with a bent,

that you get. Super tempting cashback deals and reward points that you can collect and redeem to get anything from flight tickets to staycations at luxury resorts. It sure is one way to live the five-star life. And when you think about it, credit cards are quite intriguing. The way that banks use so many tactics to make you spend more, like by hanging the credit card rewards carrot, or of course the good old cashback deals. The idea is to get people to spend more than they afford in a month, so they have no option left but to take a loan from the bank. And that is how these banks make money out of these pieces of plastic. If you use a credit card, you'll know that cashbacks and reward points work quite differently. Cashbacks are pretty straightforward,

whereas reward points are designed in a way that requires special skills to unlock. Basically, a whaling reward points requires a lot more effort compared to cashbacks. Now, as it turns out, between the two, there is one that banks actually do not like, and it's not the one that you're thinking. Welcome to Debray, a business podcast from the Ken. I'm your host, Nick Dha Sharma, and I don't chase the news cycle. Instead, every day of the week, my colleague Rahal Philippos and I will come to you with one business story that is worth understanding and worth your time. Today is Monday, the 27th of May. Before we get into which one is the bank's favorite, Let us try and understand the basics about these two things, cashbacks and reward points.

Cashback credit cards are pretty simple. They essentially give you back a certain fixed percentage of the amount that you spend every time you swipe the card. For example, the HGFC Bank Business Platinum Credit Card gives you 0.5% cashback on all retail spending on a minimum statement balance of $10,000. The Citibank credit card, meanwhile, gives 5% percent. 5% cashback on movie tickets, telephone and utility bills, and 0.5% for all other transactions. Now, obviously, most of these banks have a minimum transaction amount that you have to spend

to get back these cashback benefits. And they also have a cap on the cash that they return to the customer. Usually, most banks balance the cashbacks that you accumulate against your monthly credit card bill. Some require you to collect a minimum amount while the others don't. So with cashback credit cards, it is guaranteed that you will earn a certain percentage of the amount that you spend when you swipe the card. Also, cashback offers are tax-free and it is a low effort savings tool, which is why they're one of the biggest reasons why credit cards are on the rise in India.

Reward points are slightly more complex. The general idea of how it works is you, you get one reward point for every X amount of money that you spend with your credit card. For example, the ICICI platinum chip credit card gives you two reward points for every hundred rupees that you spend on retail shopping. Fuel is an exception. Each point earned is valued anything between 25 pise to one rupees. It depends on which bank and what card. So you spend and collect these reward points and then you can redeem them for different types of products and services, not cash. Plus, they have an expiry date. And among all the

reward points offered by different banks, American Express or Amex is known for some of the most rewarding credit cards. For example, right now, it is running a limited period offer that allows its cardholders to turn Amex membership points into Marriott-Bonvoy points, which is the luxury hotel chain's loyalty program for a third. This basically means that 100,000 Amex membership points can be converted into 130,000 Marriott Bonvoy points and they can be used on anything from hotel rooms and car rentals to concerts and golfing. My colleague, the Ken reporter Gaurav Narona, who covers FinTech, spoke to Ankosh Satya, the co-founder

of credit card recommendation platform called Multiply. Satya told him that he knows people who've managed to. accumulate about 6 lakh points through the scheme. But it is not as easy as it appears. One bank executive told Gorov that making the most out of the luxury benefits from your credit card is a matter of skill. Just about 5% of cardholders are able to crack it. Imagine all the planning and coordinating that you have to do to make the most of these limited period offers. You have to make sure that you use your points before expiry, and last but not the least, you also have to plan your leaves and travel based on these programs. And this is just the tip of the iceberg in

terms of what you have to do if you actually want to max out your credit card benefits. And it is very consciously designed that way by the banks. They do not want to make luxury so easily accessible. Now, you might think all of this access to fancy resorts and flights and whatnot, means that the banks spend a lot more on offering these kind of reward points to their premium credit card holders, right? I mean, if you compare it to entry-level cash-back credit cards. Turns out, it is actually the opposite. It is the cash-back credit card that is the most expensive for banks.

Stay tuned to find out why. Gorov gave a great example of this in an addition of our newsletter, Kaching. He pointed to how most of us who are. use UPI apps like phone pay, Google pay, etc, have a whole bunch of unscratched reward points just lying there unused. I know I have a bunch of them on G-Pay and most of them just expire. Just to give you an example, I went to the reward section on G-Pay and the first card I scratched was this brand called Aqualogica offering me a free sunscreen and 100-rupes cashback if I buy its products worth at least $849.49.

Now, I have no use of it because I already have a particular brand of sunscreen that I use, and I don't want to spend $849 to get $100 back on a skincare brand that I have never used. So, this reward is just going to lie there on my app till it expires. It is the same thing that happens to many benefits that credit cards offer you. and this is called breakage and there is a lot of it happening with premium credit cards. On the other hand, cashback credit cards, like I explained earlier, are quite straightforward and easy to understand for customers. Usually, the cashback amount gets automatically redeemed in your credit card bill at a fixed reward rate. Plus, you don't need to keep track of expiry dates

or transfer points to maximize their value. But banks do not like cashbacks. The bank executive who spoke to the Ken told us, and I'm quoting, cashbacks immediately hit the profit and loss account of the bank, whereas reward points have a deferred impact. End quote. Also, let us not forget that banks get commissions for flights and hotel bookings made through their rewards program. Because for airlines and resorts or hotels,

this means they are filling out seats or rooms that would have otherwise gone vacant. Plus, banks also charge you higher joining and annual fee for premium credit cards with top rewards. But the cost of cashbacks is more immediate and much bigger. And this, dear listener, is why your bank would rather give you reward points than cashbacks. That's all for today. Thank you for tuning in and catch you on Monday. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news

platform. What you're listening to is just a small sample of our subscriber-only offering. A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. To subscribe, head to the ken.com and click on the red subscribe button on top of the Ken website. Today's episode was hosted by Snigda Sharma and edited by Rajiv Sien.