Avinash Luthria
Over the past few years, India has been embracing digital payment options as an alternative to cash, slowly progressing to a less-cash one. As part of this evolution, there has been high credit card adoption, contrary to the belief that India is purely a debit-driven economy. Whenever a bank offers credit cards to potential customers, a typical sales pitch focuses on the loyalty programmes offered with the card. However, most customers might find it difficult to understand the mechanism and utility of these programmes unless they are financially savvy. Let us try to unfold how the reward points system works and its relevance to the cardholder.
How and what does the bank/issuer earn on a credit card?
The bank that issues the card (issuer) earns an annual fee on the cards issued and interchange fee (derived from the merchant service fee) on every transaction. In case of non-payment/partial payment by the cardholder by the due date, interest and late payment fee would be charged by the issuer bank on the outstanding amount.
A small portion of the bank’s revenue goes to the cardholder in the form of reward points. This incentivises the cardholder to spend more, which in turn helps the bank to earn more. As more and more reward points get accumulated into the card account, the cardholder can redeem them for a host of benefits like cash, gift cards, gift vouchers, air miles, merchandise, dining, etc.
What benefits do credit cards provide?
The interchange fee charged by a card issuer depends on the type of card: Gold, Titanium, Platinum, World, Signature, Infinite, etc. Therefore, the reward points offered by banks would also vary on the type of card. Typically, a high-end card like Infinite, Signature or World enjoys maximum benefits compared to a Platinum or Gold card.
These include higher reward points, cash-back offers by the bank, preferable interest rates on equated monthly instalments (EMI)-based purchases and an extended grace period to pay the dues. The benefits are proportionate to the revenue estimated by the issuing bank for that particular type of card.
How to earn reward/loyalty points?
Reward points are offered in various ways. Banks could add a certain number of points to the card as a welcome offer or sign-up bonus. Then, on every transaction, points are added to the card. The bank could also offer additional/accelerated points when a customer spends at a preferred merchant who has tied up with the bank to provide cardholders with lucrative offers. The issuer could also run seasonal or promotional offers for particular card types during different time periods like season sales, weekends, on particular shopping categories, et al.
How to redeem reward points?
1. Online redemption/conversion: Cardholders can redeem points through gifts or merchandise bought online. Points can also be used to book movie and airline tickets and hotel bookings online.
2. Phone banking and post: The cardholder can call the bank’s customer care and redeem points or download the redemption form, fill it and send it to the bank’s postal address.
3. In-store: Credit card issuers /banks have also tied up with Large Format Retail stores to offer in-store redemption on purchases.
Different issuers offer different type of loyalty programs suited to the various consumer segments they target. From small spenders who retain a credit card only for emergencies to those who use their cards for most purchases across dining, travel, shopping etc, programs are tailored to benefit both the cardholder and issuer. By using credit cards wisely, any consumer can maximize the benefits he or she can derive from an affiliated loyalty program.
(The writer is Business Head, Financial Processing & Licensing, at Worldline South Asia and Middle East)
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