Hidden cost of loyalty schemes

For consumers, rewards may come at a price.

Credit card firms are finding customer loyalty schemes expensive to run and are passing these costs on to consumers, according to a new report.

They will eventually wake up to the loyalty scheme rip-off of higher rates for rewards that many don't want

Edward Ripley, report author

High set-up and running costs are cited by market research company Datamonitor as a key weakness of traditional loyalty card schemes, which reward customers with points which can be exchanged for goods and services.

As a result, traditional loyalty schemes are being superseded by cheaper cash-back schemes from cost conscious providers.

In addition, the research concludes that the annual percentage rate (APR) is higher when a card has a loyalty scheme attached than when it does not.

Afraid

According to Datamonitor, traditional schemes are not particularly cost effective as they appeal to the least profitable customers - those that pay their balances off in full every month.

However, credit card firms are afraid to close schemes down altogether as this can mean losing customers.

Loyalty schemes are the third most important consideration when customers choose a new card behind convenience and cheap rates.

It is wrong to single out cards with loyalty schemes in this way many have APRs far lower than the figures quoted by Datamonitor

Ian Barber Barclaycard spokesman

Claw back

The report suggests that the high cost of running such schemes is forcing credit card providers to claw the money back from customers by means of higher APRs.

In the UK, according to Datamonitor, the average APR for outstanding credit card balances on purchases is currently 16.5%.

The average APR for cards that offer no loyalty scheme is just 15.9%.

This rises to an average of 17.4% when a card has a traditional loyalty scheme.

New entrants into the credit card market have tended to operate simple and cheap to run cash back loyalty schemes.

However, the average APR on such cards is still more expensive than the norm at 17.1%.

Edward Ripley, author of the report, said that consumers are getting more financially savvy, with many preferring lower prices to rewards.

"They will eventually wake up to the loyalty scheme rip-off of higher rates for rewards that many don't want," he said.

Singled out

Ian Barber, a spokesman for Barclaycard, dismissed the reports findings.

"It is wrong to single out cards with loyalty schemes in this way many have APRs far lower than the figures quoted by Datamonitor," he said.