It’s Time To Rethink Credit Card Rewards

Credit card rewards programs are more popular than ever. According to a recent Ipsos Consumer Tracker survey, nearly three in four Americans have a credit card that offers rewards and two-thirds of those cardholders prefer to use their rewards-earning cards, primarily due to the points they accumulate, the May report found. Furthermore, 35% of cardholders believe they spend more because of the rewards, and 37% say they would reduce their credit card spending if these benefits disappeared.

The effect of rewards programs on spending is clear, but credit unions have some room to blaze their own trail when it comes to achieving — and sustaining — program success.

Easy To Use = Deeper Engagement

With more than 800,000 members and $20 billion in assets, Alliant Credit Union ($20.1B, Chicago, IL) is one of the largest credit unions in the United States. Its flagship product, the Visa Signature Cashback card, offers one of the higher cash-back rates in the industry — up to 2.5% on all purchases. Unlike many of its competitors, Alliant doesn’t require members to navigate complex categories or spending tiers to earn that payback.

“Our mission is to wow our members by offering higher rewards, no annual fees, and lower rates,” says Sumeet Grover, a 25-year financial services veteran who joined the Chicago-based cooperative as its chief digital and marketing officer in May 2021.

By eliminating category management and providing top-tier rewards without annual fees, Alliant makes it easy for members to maximize their cash-back earnings. The credit union’s digital-first model also enables Alliant to keep costs low to sustain generous reward levels.

And for members not interested in rewards, Alliant’s Visa Platinum card provides a 0% introductory APR for the first 12 months on both purchases and balance transfers and a competitive balance transfer fee of just 2%. Factors like choice and ease of use help build a self-reinforcing cycle of deeper engagement.

“As members become acquainted with our competitive rates and user-friendly products, they often open additional accounts and services,” Grover says. “This boosts our profitability and enables us to pass more savings on to our members.”

Alliant’s branchless operations also help the credit union boost profitability.

“By being one of the only fully digital financial institutions in the nation, we have no costly overhead to operate branches, which allows us to save members money,” Grover says. “In 2023, we saved our members $442 million — more than $830 per member — through low loan rates, high savings rates, and lower fees.”

Member-Centric Rewards

The flagship product at Affinity Federal Credit Union ($4.2B, Basking Ridge, NJ) is a Cash Back Visa Signature card that provides up to 5% cashback on purchases from Amazon and bookstores; 2% on gas, groceries, and streaming services; and 1% on all other purchases. This tiered reward structure offers substantial benefits for everyday spending, positioning it as the preferred choice among members, according to the credit union.

Affinity’s strategy is rooted in delivering products that align with members’ needs and financial wellbeing, even if that means less for the credit union’s bottom line. For example, in response to member feedback, Affinity removed all annual fees from its credit card products.

“Even though Affinity might earn less revenue, our members are happier and more engaged and use our cards many times each month,” says Ted Anders, Affinity’s head of payments who brought more than 30 years of banking experience when he joined the credit union team in December 2021. “A highly satisfied member will remain loyal for years to come, and that is what it means to be a credit union.”

The cooperative’s card lineup reflects its commitment to the broad range of individual member needs and preferences throughout their financial journey. These include the Secured card, designed to help members build or repair their credit, as well as the Pure Rewards card, which allows members to earn points redeemable for merchandise, gift cards, and experiences.

“Talk with your current and prospective members and tailor your credit cards to meet those expectations,” Anders advises.

Anders also says it’s important to consider what members need not only today but also throughout their lives. For example, a consumer that needs a $500 secured credit card to build or repair their credit today might buy a home in a few years and need more credit to buy furniture. In that case, a cash-back card might help make their dollar go further.

Also, don’t chase the success of other providers. Know the credit union’s members and serve their needs.

“Never try to replicate a competitor’s credit card for your own members just because it appears to be successful,” the Affinity executive says. “What works for one might not work for everyone — try selling a high-quality meat subscription service to vegetarians.”

Rewards Programs Shape Member Behavior

As the Ipsos survey highlights, rewards programs can strongly influence consumer behavior. Indeed, both Alliant and Affinity have observed significant changes in their members’ spending habits.

For Alliant, straightforward, attractive rewards has led to high member engagement and retention. The credit union recently enhanced its program with the introduction of automatic Tier One rewards for the first 100 days for new Visa Signature Cashback cardholders. The move makes it easier for members to start earning the maximum cashback from day one and has been well received by members.

“We’ve seen a great response from members,” Grover says. “By simplifying the process, we’ve made it easier for them to earn rewards quickly, which enhances their overall experience.”

Anders at Affinity, meanwhile, points to the appeal of the credit union’s enhanced mobile app that allows members to manage their finances from anywhere, offering features such as instant digital card issuance in the event of a lost or stolen card.

“Our approach is about continuously adapting to meet our members’ needs,” Anders says.

Such innovation and ease of use, along with card offerings that address members’ evolving individual needs, has resulted in steady improvement in credit card penetration — more than 25% of members now carry an Affinity credit card.

Strategies And Challenges

Operating as a not-for-profit underlies how credit unions like Alliant and Affinity can sustain cash paybacks on fee-free cards.

“Affinity returns more of the income generated by interchange to our members than other financial institutions,” Anders says. “We don’t have to deliver profits to shareholders and we are, of course, tax exempt.”

He says without those constraints, Affinity has the ability to provide more robust rewards in the same way the credit union invests in its communities through, for example, financial education programs. Anders also says members made it clear that an annual fee, no matter how valuable the card, was not desirable.

“Ultimately, Affinity determined the reward cards we offer were going to be less profitable than non-reward cards or our competition’s cards,” he says. “We’re satisfied delivering products that our members love more than the additional income generated by an annual fee.”

Like any issuers, Alliant and Affinity still face challenges in maintaining their generous reward levels, especially in a competitive and regulated market. For Alliant, the digital model is key to sustaining rewards without charging annual fees. By minimizing overhead and maximizing online engagement, Alliant can continue to offer high cashback rates while keeping costs in check, Grover says.

Affinity’s Anders also points to a complex regulatory landscape whose shifts and changes could impact its rewards programs.

“There will definitely be challenges in maintaining existing reward levels with regulatory pressure to reduce fees,” Anders says. “But Affinity is looking to any number of potential solutions to mitigate lost revenue, including new revenue opportunities not related to credit cards or expense reductions that don’t impact our members.”

Both credit unions are focused on enhancing their product offerings and finding new ways to engage with members. Alliant plans to introduce more features and benefits tailored to its members’ needs, whereas Affinity is developing new products aimed at Millennials and Generation Z with a goal of achieving a 50% credit card penetration rate.

“We’re always striving to make our application and approval processes as easy as possible,” Anders says.

This forward-looking approach ensures both institutions remain competitive while continuing to offer valuable rewards to their members.