Two years ago this month, JPMorgan Chase unleashed an industry-rattling new product: the Sapphire Reserve, a premium travel reward credit card with an eye-popping 100,000-point sign-up offer and innovative travel perks.
Chase quickly amassed hordes of excited customers, despite forgoing traditional marketing and relying on word of mouth. It eclipsed its one-year sales target in the first two weeks, despite a hefty $450 annual fee. It temporarily ran out of the card’s signature metal core.
The viral reaction to the Sapphire Reserve’s launch caught the attention of rival card companies competing for a slice of the industry’s $183 billion in fees and interest. Copycat efforts were launched over the following year to keep pace with Chase’s juggernaut, taking to new heights an already expensive and years-long battle to attract credit-card customers by hurling juicy rewards perks at them.
“In the aftermath of the Chase Sapphire Reserve, I think that signaled a kind of arms race in the rewards space,” said Brian Kelly, the founder and CEO of the ThePointsGuy.com, one of the most popular and long-running sites for travel-rewards enthusiasts.
Chase, thanks to the Reserve and a number of other new cards that it’s launched in the past year, has succeeded in luring millions of new customers. Yet the rewards arms race and the new clientele the bank has attracted have taken a toll. JPMorgan’s card income has fallen by 25% in the past two years amid soaring rewards expenses.
Top JPMorgan executives maintain that the significant investments in attracting all these new customers — especially the Sapphire Reserve cardholders, who skew young and wealthy — will pay off in the long run.
Chase hasn’t sat idle, though, taking measures to trim costs. It cut the sign-up bonus of the Sapphire Reserve in half, to 50,000 points in January 2017, less than six months after the card launched.
And over the past year, some credit-card super users have grown anxious that Chase might be targeting them for cuts too.
The ranks of these super users, who try to maximize card perks while minimizing the interest and fees they pay card issuers, have swelled in recent years, fed by a cottage industry of sites, services, and online communities that have popped up to help them stay on top of the smartest ways to earn and redeem points.
Alarming stories started appearing online in forums and blogs frequented by the users. Customers with no obvious credit black marks or rules violations were suddenly having their card accounts shut down by Chase.
Chase declined to comment specifically on the shutdown incidents cited by customers or whether it had targeted certain types of behavior to root out, but said the company gears its products toward long-term customers.
“We want to build lifelong relationships with our customers. We know our engaged, long-term customers are more satisfied and we design our products with this in mind,” a company spokeswoman said in a statement.
On Reddit, FlyerTalk, Doctor of Credit, and other venues for rewards junkies, stories of account shutdowns started to pile up over the past year, as did warnings to apply for new Chase cards with caution.
Even on The Points Guy, a community for more mainstream credit-card users, readers were cautioned in a post from May that “recent reader reports indicate that applying for too many Chase cards too quickly can lead to account scrutiny and complete Chase shutdowns.”
“Looks like Chase is seriously cracking down,” Reddit user Morphogencc also wrote in May. “I recently tried to use my Sapphire reserve card and it didn’t work. I was a bit surprised and checked my online account — and all my accounts were closed.”
Morphogencc, who said in the post that they hadn’t applied for any cards in months, was fortunate. They called Chase to appeal and the shutdown was reversed, though they told Business Insider that Chase never gave them a formal reason for why they were reinstated.
Others haven’t been as lucky. On a blog called Travel In Points, another Chase super user, who goes by the Reddit handle SJ0, gave a detailed blow-by-blow of having his accounts shut down in December after a nearly 10-year relationship with the bank. His shutdown was final.
“It’s really weird. There is no set rule,” SJ0, who declined to use his full name, told Business Insider.
Was the game up?
‘This is terrifying’
Doctor of Credit, a popular site for credit-card enthusiasts founded six years ago, started to notice something different around May 2017. The site’s senior contributor and editor, who goes only by his first name, Chuck, saw an uptick in Chase cardholders discussing account shutdowns, usually in connection to having several recent credit inquiries or card openings.
“The bottom line is that there’s a new animal in the room,” he wrote.
One the most prominent gathering places for super users to report and discuss the issue is on the Reddit forum r/churning, a subreddit with 135,000 subscribers dedicated to maximizing credit-card points, especially through sign-up bonuses.
Churning, or opening a card and collecting the bonus before ditching it, is frowned upon by credit-card issuers because it costs them money in loyalty rewards given to people who don’t demonstrate loyalty. The churning community on Reddit is a particularly ardent and sophisticated subset of credit-card super users.
But toward the end of last year, enough of these stories were cropping up in the forum’s daily discussion threads that the subreddit’s moderators created a “megathread” in December dedicated to collating and analyzing the “rash of shutdown reports” in granular detail. (Reddit threads are archived after six months, so a second megathread on Chase shutdowns was started in June.)
To suss out what was happening, moderators asked Redditers posting shutdown reports to include personal info like how many credit cards they’d opened and when, their FICO scores, credit use, spending behavior, any derogatory credit history, and stated explanation for their account closures.
Among the users in this group, Chase commonly cited too many recent credit inquiries, too much extended credit, or too many open accounts as reasons for closing their accounts. Most cardholders said they called Chase to appeal; some said they succeeded in getting Chase to reinstate their accounts, while for others the decision was final.
The vagueness of “too many” and “too much” was perplexing and foreboding to the community. Many credit-card enthusiasts could meet those definitions — and could have for years — depending on where the line was drawn.
It wasn’t clear what precisely was triggering the shutdowns, nor the rationale behind who got reinstated. One user with 40 new credit cards opened in the past two years — 10 with Chase — said they got their shutdown reversed; another user with 10 credit cards total — none opened in the past year and a half — and a more than decade-long Chase credit-card relationship said Chase refused to reinstate the two cards it shut down.
According to Chase’s rewards program user agreement, cardholders can lose points or immediately have their points revoked if Chase closes the account because it suspects misuse of the rewards program “by repeatedly opening or otherwise maintaining credit-card accounts for the purpose of generating rewards.” It doesn’t lay out the criteria for determining such misuse.
But in general, these cardholders were told they had 30 days to use their points after being shut down, and misusing the rewards program wasn’t cited as a reason for the shutdown. Was there another reason at play? A sign that Chase was finally targeting the savviest users as they eat away at profitability?
Some churners weren’t convinced Chase had them in their sights, but to many, the implication of the growing number of shutdowns was clear: If Chase was targeting churners, the rewards party could be coming to an end.
The rewards arms race and the rise of super users
While loyalty rewards programs for travelers have existed for decades — the first was started by American Airlines in 1981— the ranks of super users have grown massively, and the notion of treating credit cards like hobby has proliferated amid a golden age for travel perks.
After post-financial crisis legislation capped fee opportunities for debit cards in 2010, banks shifted their efforts and resources toward credit cards. Rewards for debit cards vanished, while credit-card rewards exploded.
Samantha Lee/Business Insider
A study by personal-finance website Magnify Money estimated that rewards spending jumped from $10.6 billion in 2010 to $22.6 billion in 2016 among the six largest credit-card issuers: American Express, Bank of America, Capital One, Chase, Citigroup, and Discover.
A study released in March by payments-processing firm TSYS found that rewards were the most important credit-card feature to 68% of Americans, up from 52% in 2014.
“It’s a secular shift in terms of the value proposition of credit cards being about the rewards. Customers are just much more aware of the rewards that are available to them,” Jennifer Piepszak, the CEO of Chase’s card business, recently told Business Insider in a video interview.
Kelly, who has grown ThePointsGuy.com into a multimillion-dollar business with 6.6 million monthly readers, up from 4 million a year ago, told The New Yorker last summer that we’re living through a “golden age” for travel, especially if you know how to “get the right cards.”
The average introductory bonus offer for travel rewards cards from the top five US issuers was more than 40,000 this year, up from about 34,000 in 2013, and more than double the average offer of 16,000 in 2008, according to a study from Magnify Money.
The arrival of the Sapphire Reserve in 2016 was like dumping a drum of accelerant on the already growing fire of credit-card-rewards fervor.
It was a eureka moment for many consumers, especially travel-thirsty millennials: 100,000 points amounted to $1,500 in travel with Chase, or a few round-trip tickets to Europe if you played your cards right.
For the shrewdest operators, it can amount to a lot, lot more. Inefficiencies between certain airline loyalty programs mean you can sometimes transfer points from your credit card to an airline for substantially more value. Kelly, for instance, has used 92,000 miles — transferable from several credit-card-points programs at a 1:1 ratio — to book a one-way first-class ticket from Hong Kong to San Francisco on Singapore Airlines, a ticket that can easily eclipse $12,000 when paid in cash.
“Chase is the godfather of rewards right now,” Kelly said.
While this has been a boon to the growing community of credit-card super users, it’s very expensive for credit-card issuers.
For Chase, profitability from its card business has fallen as rewards spending has climbed.
Card income dropped 25% in the past two years, from $5.9 billion in 2015 to $4.4 billion in 2017, while spending by Chase’s credit-card customers increased 26%, from $496 billion to $622 billion.
And credit card net charge-offs— delinquent debts the company deems unlikely to be collected — at Chase increased from $3.1 billion to $4.1 billion between 2015 and 2017, a 32% uptick.
Meanwhile, Chase’s rewards liability — which represents the bank’s estimated cost of reward points earned and expected to be redeemed — increased from $3.8 billion at the end of 2016 to $5.5 billion midway through 2018, the most current tally. The bank did not start reporting or breaking out costs associated with its rewards liability in regulatory filings before this year.
The bank isn’t alone in feeling the rewards burden. American Express, Chase’s top competition in premium credit cards, saw its rewards costs increase 9%, from $7 billion in 2015 to $7.6 billion in 2017.
Samantha Lee/Business Insider
Robert Hammer, CEO of payments consulting firm R.K. Hammer, said rewards customers are traditionally a great clientele to have in many respects, though you won’t make as much money out of them from the traditional revenue streams.
“They’re not deadbeats. They will often pay off every month,” Hammer said, but credit-card issuers are “never going to get a dollar of interest out of them.”
Chase, American Express, and others are in the long game, and they’re betting that the young, wealthy clientele who sign up for these type of cards laden with expensive perks will eventually be worth more than they cost to lure in.
“One of the key weapons in banks’ arsenal as they fight for new customers is a robust reward-card offering,” Kevin Morrison, a senior analyst covering retail banking and payments at Aite Group, a consulting firm, said in a report published in February. “The key challenge is how to provide compelling offers that will attract and retain consumers in a profitable manner.”
‘Back when I started, Chase was really easy’
How many credit cards and sign-up bonuses are too many?
Credit-card issuers of all stripes have been grappling with ways to curb their costs from sign-up bonus abusers, even as they wage a fierce battle to attract customers with those very same bonuses.
There’s no bright-red line distinguishing a gamer or a churner, both of whom may share the same characteristics as the high-end consumer companies covet so much. Both tend to have strong credit scores that enable them to take out a bevy of credit cards, as well as the income and prudence to never carry a balance. Sapphire Reserve cardholders have, on average, a FICO score of 785 and an income of $180,000, according to Chase.
There are no precise demographic figures on churners, given the lack of a clear definition, but the ranks of churners appear to have increased substantially. In the Reddit community, self-described churners have more than doubled in the past two years, from about 50,000 to nearly 135,000, according to internet archives.
SJ0, the cardholder who was shut down in December, said he started churning in 2015. He details his journey as a low-income grad student collecting credit-card points on his Travel In Points blog. In his first year, he took out 34 cards and amassed more than 2 million credit-card points.
The value of points varies across loyalty programs, but even at a rate of $0.015 cents per point that amounts to $30,000.
“Back when I started, Chase was really easy,” he told Business Insider. “I actually got three Chase cards in a single month.”
The Points Guy’s Brian Kelly distinguishes himself and TPG from churners. Kelly, who has 24 cards, is wholly in favor of taking advantage of sign-on bonuses, but he advocates that points enthusiasts keep cards open and spend on them past the introductory period.
“Credit-card bonuses are really juicy — trust me, I love them, too — but be a good customer to the banks. Don’t be a jerk and just close an account right away,” he said, adding that gamers can cost banks significant money. “You really don’t want to get in the habit of opening and closing cards. The credit-card companies are becoming very savvy about weeding you out as a bad customer.”
Most card issuers have instituted policies to curb gaming activity, but typically they’re proactive, limiting how many cards you can sign up for or the bonuses you can earn over a given period rather than cancelling accounts later. Gone are the days of opening and closing the same card repeatedly to snag its bonus.
Amex, for instance, restricts access to its welcome offers based on past offers you’ve earned or the number of cards you’ve opened and closed, debuting a new alert tool in June to warn customers if they’re applying for a card but aren’t eligible for the bonus.
Chase instituted its “5/24” rule a couple of years back, which prohibits customers from opening certain cards if they’ve opened up five credit cards across any issuer within two years. It’s not used to retroactively shut down customer accounts.
Wholesale account shutdowns weren’t previously part of churners’ calculus, so long as you weren’t committing flagrantly suspicious behavior, like buying or selling points or buying loads of gift cards to “manufacture” artificial spending and thus earn extra points.
SJ0 wrote on his blog after his shutdown: “Previously, if you did not do fishy stuff, like anonymous bill payment, selling points, etc., then you were pretty much on the safe side. But this new reason for shutdown clearly indicates that even if you don’t do those things you may not be on the safe side.”
Card companies have few restrictions on closing accounts
Companies aren’t obligated to serve customers who aren’t profitable to them. Amazon caused a stir earlier this year for axing customers who were returning too many products. Best Buy and several other retailers got blowback for taking similar measures.
Credit-card issuers have even more at risk, given they’re providing unsecured loans. They can’t take your home or other assets if you don’t pay them back, unlike a mortgage or other secured loan.
All banks manage their customer bases, as they’re required by regulators to do. They have wide latitude to exit credit-card relationships to manage risk, root out illegal behavior, or to ensure profitability.
Banks and other credit-card issuers will shut down customer accounts for a variety of reasons, and they don’t even necessarily need a good reason.
But companies are typically loath to cut customers loose, especially those with strong credit who pose little default risk — the types of customers they’re spending billions on rewards to attract in the first place.
Card companies also recognize canceling accounts is a very negative experience for the consumer, whose credit score can take a hit, depending on how much credit they’re losing and how long they’ve had the accounts open.
It’s entirely possible some customers facing shutdowns are getting flagged because of their risk profile. A customer opening up lots of accounts may have run into financial hardship and could run up a tab before veering toward bankruptcy.
But there are innocent explanations as well — healthy customers take out cards to finance a new business, or a wedding, or to get through temporary job loss. They can often sort that out by calling in to explain, which has had mixed results for Chase super users facing shutdowns.
Moreover, there are many ways to mitigate that risk without completely shutting a customer down, like limiting credit and cash advances.
A gamer could also get caught up in a company’s fraud-detection system.
Some in the churning community have theorized that Chase’s shutdowns may be connected to an increase in bust-out fraud, which is when a con artist uses a stolen or synthetic identity and opens an account, lays low and behaves responsibly for a time, and then quickly shells out a string of purchases and maxes out their credit line before disappearing.
This is quite costly for the card companies, who’ve established algorithms and sets of behavior to identify bust-out-fraud candidates and root them out.
Chase could have suffered an increase of bust-out fraud amid the glut of new accounts, which tend to have higher rates of fraud, acquired since the launch of Sapphire Reserve and other new cards, tweaking its fraud monitors in ways that simultaneously flag super users, according to credit-card executives.
Given the string of data breaches from retailers and Equifax, there’s a lot more personal data floating around to engineer fake accounts with, and card issuers have witnessed an uptick in fraud, according an executive at a top credit-card issuer, who requested anonymity since he was not authorized to speak publicly about the matter.
It’s also possible that the customers are flagged by Chase’s fraud or risk algorithms, and then, after review, the issuer decides the relationship isn’t profitable enough to warrant keeping.
Banks are spending millions to advance their capabilities with artificial intelligence and machine learning to flag credit risk, fraud, money laundering, or other criminal behavior. But “those capabilities also exist for portfolio optimization and profitability analysis,” according to Michael Brauneis, the head of the US financial-services practice at consulting firm Protiviti.
Brauneis, who has two decades of experience in regulation risk and compliance, said “there’s nothing in the law that prohibits the bank from closing” accounts that aren’t economically profitable.
In fact, Chase’s card-member agreement warns of this possibility (emphasis added):
“We are not obligated to honor every transaction, and we may close or suspend your account. Sometimes we close accounts based not on your actions or inactions, but on our business needs.”
It’s unclear where the line is drawn for those trying to reap so many sign-up bonuses, but most of Chase’s millions of credit-card customers “have absolutely nothing to worry about,” Kelly said.
“People who take it to the extreme will get shut down, and frankly I think they should because they ruin it for everyone else,” Kelly told Business Insider.
The super users reporting shutdowns bear little resemblance to everyday consumers who pad card issuers’ bottom lines with billions fees and interest — many of whom run up debts or pay only casual attention to collecting and redeeming rewards.
Casinos make their billions on the masses of tourists and novices who play their games without a clue. Card sharks use skill, and sometimes deception, to eat away at their profits. If Chase is the largest credit-card-rewards casino in the country, churners are their card sharks.
For years, even as their numbers grew, churners largely managed to slip by without getting the boot. But has the house finally decided to come down on them?