The New Number One

The New Number One

The New Number One
An interesting thing has happened in recent years with regard to frequent flyer programs — their partners have become the star of the show.

More to the point, the credit cards have walked to center stage, demanded the attention of the spotlight, and belted out a rousing rendition of “A Star is Born.”

While demand for travel has remained sluggish over the past 33 months (though there are indications it is picking up again, and flights are returning to full capacity), and the low-cost carriers have experienced unprecedented success in luring “frequent flyers” away from the majors, affinity credit card spending has continued to grow. And with the introduction and increased popularity of mileage-earning debit cards, frequent buying has replaced frequent flying as the number one way to earn miles.

That’s right. More miles are now earned through credit and debit card purchases than through actual butt-in-seat flying (this doesn’t include double and triple bonus offers, only actual miles flown).

Today, mile for mile, nothing beats affinity cards.

While this dynamic is likely temporary, and miles earned through card transactions will once again fall to the number two position as travel again booms in the coming years, it’s an event worth noting nonetheless.

There are several factors that have contributed to a surge in credit and debit card mileage earning. Not the least of which, but perhaps the oddest, is the aggressive marketing strategy adopted by many of the card companies to align themselves with airlines facing, or fully embroiled in, bankruptcy.

Strange as it may seem, the financially troubled airlines are often those offering the best card deals. BankOne and United Mileage Plus have been known to offer double miles on all purchases, Air Canada continues to announce new credit card partners, and even US Airways Dividend Miles and Bank of America have partnered to create a new value enrichment offer. Hardly what you might surmise would be “business as usual” for airlines in bankruptcy.

The truth is, this represents good income for the airlines, and banks are only too happy to tap into the ever-spending pool of frequent flyers.

And why wouldn’t they be? Statistics show that Americans are using their credit cards more than ever. In fact, last year Americans paid $50.6 billion in household bills, including cable TV, home and cell phone, insurance and rent just with Visa branded cards. This is a 27 percent jump from the prior year and more than double the volume in 2000.

You better believe Americans aren’t flying twice as much as they were in 2000.

Remarkably, nearly 60 percent of all credit card spending in the U.S. is related to some sort of co-branded relationship, and frequent flyer cards lead that group. That is big, big business, for all parties involved.

To further attract frequent flyers, the banks are pulling out all the stops. Over the past two years, you can bet money that almost every member who has signed up for an affinity credit card has been enticed by, and has received, a lucrative enrollment bonus. These bonuses typically range between 5,000 and 10,000 miles, with some reaching as high as 30,000 miles — all for just acquiring the credit card.

To put this in perspective, remember most elite-level programs for actual frequent flyers begin at 25,000 miles.

It is estimated that, even among the elite group of frequent flyers, greater than half earn more miles as a result of credit card spend than they do by flying. And these are the people who fly all the time. Among the infrequent flyer, more and more are signing up for the Capital One type “travel cards.”

Only time will tell whether mileage earned through the use of credit/debit cards will remain the number one way to earn miles, but one thing is certain, this form of mileage accumulation is changing the industry in exciting and unexpected ways.

Diners Club and MasterCard Pursue Alliance
Recently, the loyalty industry witnessed the birth of a different type of alliance — a credit card alliance.

Diners Club and MasterCard announced they would join forces, allowing Diners Club cards issued in the United States and Canada to be reissued with the MasterCard brand in order to function as MasterCard cards. The proposed alliance would immediately and drastically enhance merchant acceptance for Diners Club cardholders.

While Diners Club has traditionally been perceived as a Travel & Entertainment card, it has worked very hard in recent years to dispel that image and bring the card into the mainstream. Despite these efforts though, Diners Club still runs a distant fourth in merchant acceptance, behind Visa, MasterCard and American Express. But, with Diners Club recently taking home its seventh consecutive Freddie Award for Best Affinity Credit Card, it would appear merchants are the only group of North Americans who have failed to become infatuated with this card.

Clearly, the Diners Club Club Rewards program is recognized as a top-of-the-line loyalty program. Key to that success has been its friendly relationships with virtually every airline and hotel loyalty program, which allows members unparalleled conversion opportunities. And, Diners Club has mastered the art of promotion. With deals like its annual conversion bonus that effectively doubles the rate at which Club Rewards points can be transferred into British Airways Executive Club miles, Diners Club has gained countless converts.

If this alliance goes through (and we’re guessing it would not have been announced unless it was a nearly done deal), Diners Club, along with its Club Rewards program, could easily become the ultimate credit card for members of all loyalty programs. With one fell swoop, Diners Club cards (branded with the MasterCard logo, of course) would be accepted at the more than 22 million merchant locations worldwide where MasterCard credit cards are accepted.

The question is: Will this alliance turn out to be everything it appears? Will frequent flyers be able to use their Diners Club cards with a MasterCard logo at any merchant location that accepts MasterCard, bank Club Rewards points, and move those points to virtually any airline or hotel currency at the current exchange rates?

The answer remains up in the air. Many credit cards maintain proprietary position as the primary card associated with various frequent flyer programs, and while Diners Club exists as a partner (grandfathered in from the mid-80s when it was the first to become involved with frequent flyer programs), the inclusion of a MasterCard logo on the card will almost certainly give rise to some back room discussions. Namely, we would expect other MasterCard branded partners to lobby for a better per mile rate, and perhaps even propose that Diners Club no longer be allowed to continue as a partner, as it is arguably not the same ‘brand’ anymore.

For selfish reasons, we’d like to see this alliance work because it’s sure to give rise to a new round of credit card enhancements. You can be sure that, if this alliance does proceed as planned, another former Travel & Entertainment card, namely American Express, is not going to sit idly by and watch its market share erode — especially in the loyalty credit card arena. In fact, American Express has won a few legal battles in recent times that may lead to the development of a MasterCard- or Visa-branded AmEx card.

Just as has happened among the airlines, the tangled web of alliances is now apparently spinning its way through credit cards.

Diners Club International, Diners Club North America and MasterCard are currently working with all the necessary parties to reach a final agreement, which includes determining project timing, logistics, and other details of implementation. We’ll keep you updated on this monumental process.

Debit Cards
Over the past two years, nearly every frequent flyer program has introduced a debit card that earns miles. Though most of these types of cards earn miles at a rate 50-percent less than their credit card siblings, and most members are still unaware of the existence of mileage-earning debit cards, this area is growing rapidly.

Truth is, with bank consolidation and alliances becoming the norm in the banking industry, these institutions have found that debit cards linked to frequent flyer programs are an expensive yet affordable cost of business.

Ann Ardizzone, managing director of the Alaska Airlines Mileage Plan program, sees even more reasons behind the growth of debit cards, “… for the bank (debit cards) offer a perfect audience to move over to the credit card at some point in the future. Also, the lure of miles is a large carrot to get customer to transact online — both the airline and the bank have used miles to this advantage. From the bank perspective, miles help lock in customer loyalty.”

While the focus remains primarily on the competitive nature of credit card programs, debit cards are becoming an increasingly important player. The banks have plenty of uses for money sitting in checking accounts, and most airline programs see the value in offering a companion debit product as just one more loyalty enhancement.

And these cards seem to carry a high value with members. In this year’s Freddie Awards, two of the top 11 affinity credit cards were debit cards, with the Citi/AAdvantage MasterCard debit card actually receiving a higher rating from voters than the Citi/AAdvantage credit card product. And some even offer the same 1:1 earning ability of a mileage-earning credit card — Citi/AAdvantage and Chase/OnePass both fit this description (both require a small annual fee for the privilege of earning miles, but this hasn’t detracted from their popularity).

If you’re still not convinced that this debit card phenomenon is for real, consider this: according to Visa, global transaction volume for Visa debit cards edged out credit card volume in 2003. Debit card transaction volume reached $1.48 trillion, up 17 percent from the previous year, while Visa credit card transaction volume worldwide increased five percent to $1.45 trillion. Even when confined to the U.S., debit card transactions exceed those of credit cards, though credit cards still edge out debit cards in terms of sales volume. Just barely though. Forty one percent of all sales volume was attributed to debit cards.

Only two things stand in the way of debit cards surpassing credit cards in the hearts and wallets of mileage earners. One is that most programs now offer low or no annual fees for their cards, and the margin may not be there in the long term if airlines raise the price of miles they sell to the banks.

Two is the PIN vs. signature debate. When making a transaction with a debit card, the owner has the option of signing for the transaction, as they would with a credit card, or providing a PIN. While this might not seem like a big deal, it’s a very big deal to the bank and the merchant. A signed transaction costs the merchant the same as a credit card transaction (and, consequently, provides a large profit to the credit card issuer), whereas the PIN transaction costs merchants significantly less. If merchants get their way, and are able to turn the vast majority of debit card transactions into PIN transactions, these cards might merely become a short-term extension of the current credit card partners.

If there is one credit card partner that hopes this trend does not take off, it is probably American Express. Without physical locations for banking services, it more than any other financial institution, is at a disadvantage in this product offering.

Among the hotel programs, there’s less attention paid to debit cards with rewards. A spokesperson for Marriott Rewards commented, “Debit cards do not provide enough value to the customer. It is harder for them to earn substantial amounts of points because of lower spending on them.”

What’s Ahead
So what’s ahead for credit cards?

Well, first of all, we don’t expect banks to get a big head and opt out of frequent flyer programs. The fact of the matter is, the banks simply can’t supply travel awards at a lower cost, and the travel awards are what the public wants. No, these partners are here for the long run.

What you will see are more regional banking/credit card partners. A good example of this is the KeyBank/Continental OnePass credit card relationship. While Chase has been Continental’s long-time credit card partner, there were holes in the coverage where OnePass has members, and Chase did not have a presence.

You can also expect to see a new round of innovations, including increased value propositions and targeted bonuses. Some of this will expand on the concept of earning double miles at select merchants, and some will more than likely function much like recent elite program bonuses offered by the airlines — spend more than last year during a defined period of time and you will earn a bonus.

In addition, you’ll see more international airlines introduce credit cards to the American audience. In the last year, both Air Canada and Lufthansa’s frequent flyer program added credit card offers for members of those programs living here in the U.S.

And last but not least, keep your eye out for perhaps one of the most exciting ideas we’ve seen related to frequent flyer miles and credit cards:

This recent startup is gaining customers and good buzz by helping companies turn their accounts payables into rewards. Never before has there been a working business model like this one, and given the fact that credit card companies are constantly trying to turn every transaction that can be paid by check into a transaction that can be paid with a credit card, there’s a lot to be said about this concept.

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