#43: How Far Can Brand Take You?

In the premium credit card wars, it might be everything

This week, The Points Guy reported that Citi is planning to launch a premium rewards credit card called Strata Elite. It’s expected to rival the likes of American Express’s Platinum and Chase’s Sapphire Reserve. The Points Guy estimates the card will have an annual fee ranging from $400 to $800, solidifying its place in the premium rewards credit card market. For reference, the Platinum and Sapphire Reserve cards will cost you $695 and $795 per year, respectively.

Do consumers really need another premium credit card option? That’s up for debate. Another question worth asking: how does brand help justify the ever-increasing annual fees?

In 2016, Chase launched the Sapphire Reserve credit card, aiming to enter the premium rewards credit card market and steal market share from the incumbent, American Express. They took the approach of building a card for the millennial generation, who at that time were beginning to enter the workforce with disposable income. Chase knew that millennials prefer experiences and travel over things, so they designed a value proposition around travel-related experiences (think travel rewards point accelerators, Uber credits, airline perks, etc.). They offered wildly generous welcome bonuses and plastered their card benefits on every billboard, commercial, and newspaper so that there was no way you could miss it.

Chase nailed it. They convinced millennials, many of whom had grown up wary of credit after the Great Financial Crisis, to sign up for credit cards, let alone premium ones. They made a high annual fee credit card feel… accessible, without devaluing the premium branding that comes with it.

Now, it would be reasonable to think that American Express was furious when Chase successfully launched a credit card that encroached on their turf as the premium rewards credit card brand.

But something else happened. The broader premium rewards credit card market grew dramatically.

Chase’s savvy educational marketing, which highlighted perks consumers already spent on, made the decision to pay a steep annual fee more rational. Oh, that $300 Uber credit for the year? Of course, I’m going to use that perk. By aligning card benefits through credits and rewards points accelerators with the aspirational lifestyle millennials wanted to live, it was an easier sell.

Chase’s combination of relevant perks for millennials, plus education on how to get more value than the card’s cost, helped justify the sign-up. American Express rode the coattails in the years that followed, ultimately refreshing the Platinum perks to center around travel too. I commonly see marketing from American Express about how all the hotel, airline, and transportation perks associated with their Platinum card can lead to more than double in value when compared to its annual fee.

Both companies played off each other to expand the market size and increase the willingness of a consumer to pay a high annual fee. So, Capital One (Venture X) and Citi (Strata Elite) can thank American Express and Chase for creating this market in the first place.

Although if your name is not Chase or American Express, I believe you’ll struggle introducing a premium rewards credit card in today’s market. And that is because of one word: brand.

Unless you are an avid follower of The Points Guy or Nerd Wallet and base all your spending decisions on how you can best maximize rewards points, there’s a part of you that chooses a credit card based on how it makes you feel.

American Express invested for decades behind building a feeling and a persona around their credit card that evoke a flair of sophistication and high status. When you pull out your American Express Platinum card to pay for drinks at a bar, everyone glances at the shiny stainless-steel object you’re handing to the bartender. No flimsy, plastic cards. You’re a person of high status with a card that’s built to last. Because you can afford it.

It’s all about signaling, or at least, that’s how I imagine the American Express marketing team thinks about their Platinum persona. But it’s worth asking yourself, just how much am I willing to spend on an annual card fee to keep up with the persona?

As credit card annual fees continue to increase, a rational cardholder will think strategically about their own spending habits and whether their card still makes financial sense. But the irrational cardholders will stay on at whatever price they are charged with the aim of signaling status through their payment preference.

My bet is that rational Platinum and Sapphire Reserve cardholders, especially with the recent and planned perk and fee refreshes from both brands this year, will begin to balk at the high annual card fee. Paying nearly $1,000 for the ability to pay other people seems silly (given all of the other free or lower-priced options) and will likely cause those rational cardholders to think twice and potentially cancel their card (assuming they don’t find incremental value from the new perks). I expect this next round of credit card refreshes to see lower-than-expected new account growth and higher-than-expected churn rates, driven by the more rational cardholder who has had enough with the steep annual fees. These customers are price sensitive.

But both these cards have irrational cardholders who are obsessed with how the Platinum and Sapphire Reserve signal their own self-worth via brand association. Taking a step back, both brands will be just fine. However, Citi does not have anywhere close to the brand equity that American Express has in the premium credit card rewards market.

Putting together a collection of perks and slapping on a high annual fee can make financial sense if you live a very specific kind of lifestyle. Yet the customers who actually use all the perks aren’t the ones credit card companies profit from. They need irrational customers who are obsessed with brand, more focused on telling others they have the card and flaunting it around than using every credit available. These consumers aren’t likely to keep track of which credits they used and which ones they haven’t yet. Which is one of the ways a credit card company can profit from a cardholder.

You don’t build brand equity overnight. So even if Citi’s Strata Elite has an incredible set of perks, it’s unlikely they will get a huge influx of irrational, brand-obsessed customers.

Even a sharp business idea won’t win in the premium card market unless the brand signals status.