The appeal and challenge of offering premium credit cards
Prestige usually comes with a price tag, but that hasn’t always been the case with premium credit cards. Twenty years ago, obtaining a gold credit card was relatively easy for many consumers – even those lacking a steady income or credit history. Card issuers’ eagerness to attract and retain customers coupled with consumers’ desire for additional purchasing power resulted in 1.2 billion solicitations for gold credit cards in 1995– far surpassing the number of standard-card offers up to that point. But the downside of high gold card issuance rates was fewer cardholder perks, which resulted in heightened consumer card-hopping.
Fast forward to 2016, and it’s a different story. Gold cards have evolved into “luxury” or “premium” cards targeting the mass-affluent segment of the market. Considering the fact that premium cardholders have a 15 percent higher transactional volume, and on average, generate 10 percent higher net margin per account, issuers are seeking these more lucrative and loyal customers. With their eyes on these enticing prospects, premium card issuers today have redoubled their efforts to acquire these types of cardholders and increase card spending.
The mass-affluent market
Mass-affluent consumers are the typical target for premium credit cards, defined by household investable assets and household income. According to Mercator Advisory Group, “mass affluent” are households with $500,000 to $1 million in investable assets, and “high net worth” define households with at least $1 million in investable assets.
The U.S. affluent market is narrow. Mercator reports that in 2014, there were estimated to be 12.8 million households with $500,000 or more in investable assets. While credit card spend is increasing with the lower tier of high-income earners, and high-asset segments average at least $50,000 in annual credit card spending, not all of this spending is necessarily on one card.
Premium card perks
Premium cards offer perks that give issuers a chance to drive loyalty, capturing more transactional volume and increasing their interchange income on their portfolio. These perks typically include discounted travel and accommodations, purchase protection, and no-fee foreign transactions.
Cardholders are not unanimous in their desired perks. Mercator’s research indicates that cash back and airline reward miles programs are appealing to affluent consumers, but preference for cash back wanes and preference for miles waxes as consumers’ annual income increases. Since mass-affluent consumers vary in their preferences and have so many cards to choose from today, enhanced offerings are necessary to attract and retain these consumers.
Travel and customer service are considered key differentiators. Vantiv’s World MasterCard and Visa Signature premium card programs, for example, offer $1,000,000 common carrier travel accident insurance, $300 baggage delay insurance, 24/7 concierge services, identity theft restoration services, and other benefits designed to enrich cardholders’ lifestyles.
While some affluent consumers look for the card with the most lucrative travel discounts, others are attracted to cards with rewards programs featuring particular brands. Since flexibility is very important to today’s cardholders, most premium reward programs are limited in or completely void of redemption caps, expirations, and blackout dates. Other differentiators include the ability to transfer points to other rewards programs, and to redeem points on a variety of products and services from luxury brands.
Hitting a small target
The premium card market is definitely not a one-size-fits-all target. Instead, it is comprised of a range of customers with varying asset and income levels who value different products and services.
Mercator notes that three primary segments make up the premium credit card market: the mass affluent, who tend to value rewards; elite travelers who look for high-end travel benefits; and high-net-worth consumers who value luxury service. A good rule of thumb is to focus on just one of these customer segments and differentiate your premium card offering for this segment specifically.
Although small and challenging, the premium credit card market holds significant profit potential for financial institutions. To find out more about offering premium credit cards to your customers, contact us.