Reward points on credit cards

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Programmes offered by most card-issuing banks do not even give that bare Card issuers should be extremely wary of the benefits offered by banks unless they do the maths and are comfortable with the final net gain figure

AS THE festival season grinds to a close in the next couple of months, the prudent shopper would find some relief from relentless offers of ostensible discounts on purchase of various consumer items using their credit cards or debt cards, although the consummate shopper would miss them.

The one thing, however, which is perpetual is the reward points programme, which almost all card-issuing banks offer to their credit card customers and some banks offer to their debit card customers.

But how rewarding these reward points programs really are? Do they offer any real benefit or is the word 'reward' just meant to mislead? Are banks truly desirous of paying back something to you in return for the purchases you makes on the cards they issue? "The only reason why banks provide incentives like reward points is to lure people to consume more," said the head of retail banking of a foreign bank operating in India. Not wanting to be named, he further said that for banks it is a matter of how best they can showcase their card products to retail customers through the medium of incentives such as reward points and others.

Banks give reward points to card users on their offline and online purchases using their cards. But there are exclusions as well. Almost all banks do not provide any reward points on card withdrawals made through ATMs and some banks also exclude certain other types of transactions, which are specified in advance.

You can be sure that banks and merchant sites benefit from your online or offline purchases. While merchant establishments and merchant sites obviously get more business, banks earn through transaction fees levied on the merchants (even though they have share this with Visa, Mastercard or American Express depending on which card was used).

But what about you, the card user? The guiding principle is that you stand to gain from the points earned only if the points you earn, when converted into the rupee value, is a worthwhile proportion of the amount you spend.

Anything below 1 per cent is considered too low and card users should be doing their card spends without any exectation of any gain from the reward points programme. For the programme to be truly rewarding, the end gain should be over 2 per cent.

The reality, however, is that the reward points programmes of most card-issuing banks are not just not truly rewarding, but several of them do not even give that bare minimum benefit of 1 per cent.

As an example, look at HDFC Bank's offering.

The bank's website states for a 'premium platinum plus' credit card that the card user gets two reward points on every Rs 150 spent.

While this amounts to 1.33 per cent, and other cards of this and other banks, would have varying percentages, the actual net gain is not these percentages.

This is because in a vast majority of cards you do not get to encash reward points in equal monetary rupee value. In other words, in the above example, you do not get paid back Rs 2 for every Rs 150 of card transaction. Usually, the card user is given the option to redeem the reward points in her credit in the form of purchase of specific consumer items covering items, such as lifestyle products, dining, travel and leisure, and personal care products.

Every item is assigned a specific reward points total.

For instance, in HDFC Bank's product catalogue for reward point redemption, the platinum credit card user would need to redeem 750 reward points to get a Pizza Hut Gift Voucher.

Working out the maths, the 750 reward points are accrued for an cumulative spend of Rs 56,250.

Thus, you get a net gain of only Rs 200 against card purchases aggregating to Rs 56,250. As a percentage, it amounts to just 0.35 per cent. Clearly, a 0.35 per cent net gain is as good as nothing for a serious card user. In this and all other similar cases, the reward points programme of card-issuing banks end up offering negligible value to the card users.

Card issuers should be extremely wary of most claims of benefits of all banks unless they do the maths and are comfortable with the final net gain figure.

Another set of offers made by card-issuing banks are periodical and fluctuating. They pertain to various kind of spends on the card such as a flat percentage off on purchases made through a specified online shopping portal or a travel portal or others.

But even here the maths should ultimately work out giving a real benefit to the card user. For instance, a bank gives, say, a flat 8 per cent off on purchases made on a shopping portal. This may seem attractive at first hand, but card users should check competing shopping portals to compare the rates of items they would like to purchase. If the competitor portals are offering rates that are themselves 10-20 per cent lower than the portal where you are getting the 8 per cent discount, then you are better off doing your spends on those competitor portals.

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