customers to visit a separate third-party site where they have to figure out for
themselves the best value among a limited menu of pre-approved merchants.
Typically, third-party reward programs aggregate a collection of the most
high-profile brands in each category, leaving out popular local favorites and the
hottest new merchants.
Finally, once a reward has been selected, the customer may face a significant
delay in delivery, such as waiting for a physical gift card to arrive in the mail.
The combination of slow accrual, an underwhelming selection, and lackluster
fulfillment tends to reduce the excitement associated with a rewards purchase,
and these challenges increase the risk of customer attrition.
In other words, reward points aren’t worth much to someone who has to
struggle to spend them. While the current system for reward points may work
well for motivated points collectors who avidly comparison shop for the best
deals on card offers and redemptions, a consistently high level of engagement
and interest is simply not practical or desirable for most people.
The current system also has serious drawbacks for the card-issuing banks.
Each issuer has to maintain expensive systems to track reward points, fulfill
reward redemptions, and reconcile customer accounts across an extended
settlement period. Furthermore, banks have to carry unused reward points as
liabilities on their balance sheets, which can complicate financial results given
changes in redemption rates or accounting rules.
It’s axiomatic that reward points are a form of currency.
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The core problem is that it’s a highly illiquid currency that’s only exchangeable
into airline miles, other reward points, merchant-specific gift cards, or (at a
significant discount) cash.
It’s also a highly fragmented currency, with each bank issuing its own reward
points that cannot be pooled with points from other issuers.
Moreover, each issuer is responsible for the expense of recordkeeping,
accounting, and reconciliation of reward points. All but the largest banks
outsource their points management to third-party vendors, who in turn offer
largely undifferentiated services.