Our Quick Take on the New Amazon Prime Rewards Visa Signature Card
Navigator Edition: January / February 2017
By: John Grund, David Woynerowski, and Matt Dunn
With the start of 2017, Amazon fired a shot that was heard around the card world. The company launched, in partnership with Chase and Visa, the Amazon Prime Rewards Visa Signature card with a headline-grabbing 5% reward for Prime members on Amazon purchases. The questions and speculation soon followed – how could they afford it? Will this product cannibalize the 5% Rewards store card (private label) launched in 2015 with Synchrony for Prime members? Why did Amazon go a different route than Costco and Sam’s Club with its richer “on-us” rewards? The profitability of Amazon’s retail business has been debated since its inception leaving many to point to the 5% Rewards as the latest aggressive move by the retailer. Granted, it has only been a few weeks since its launch, but we wanted to offer our perspective by covering off on a few points.
Figure 1: Competitive Market Analysis – Cardholder Earn Rates, APR and Sign-Up Bonus
1 Cash back for PLCC issued as statement credit; cannot be combined with special financing offers. 2 5% associated with higher annual membership fee (Perks Elite); cards also offer annual membership renewal savings. 3 Earns $0.10 off per gallon on BJ’s gas. 4 Up to $7,000 in spend annually. 5 Applied as a discount to purchases made on the card. 6 3% only include purchases made on walmart.com. 7 On fuel purchases at Walmart or Murphy USA gas stations. 8 Up to $6,000 in spend annually. 9 Online approvals only; gift card is an eGift Card. 10 When making a $100 purchase same day of opening the account.
Source: Company websites, First Annapolis Consulting research and analysis.
- It is important to look at the 5% Rewards card product through the lens of Amazon. The product construct is consistent with its strategy and its business model. With the Prime Rewards Visa, Amazon is offering richer rewards for Amazon (“on us”) spend. This construct differs from most of the big-box warehouse clubs, but so do elements of its business model in terms of member/non-member mix, merchandise assortment, services, and overall platform.
- Contextually, Amazon launched 5% rewards on its Amazon Prime Store Card in 2015 without nearly as much fanfare as this recent co-brand announcement. Looking back, having the 5% feature on the Store Card was probably a strong indicator that co-brand would eventually follow. The Store Card is managed in partnership with Synchrony and coupled with the Chase co-brand program. Amazon is arguably the largest and most successful case of a retailer having two issuers of branded credit products. The decision to offer Prime members a Visa card with 5% rewards is quite logical and likely eliminates customer confusion and improves the card options for Amazon’s most treasured customer segment.
- Of course, the launch begs the question of whether the new co-brand product will cannibalize the Store Card on the basis of equal rewards value on Amazon purchases with the added rewards and utility of a Visa card. On that note, many factors are at play, but recall that the Store Card and Visa card have co-existed for the better part of a decade. The fact that Amazon is a $100+ billion retailer with a diverse merchandise mix is a key factor in being able to support and need multiple credit card products. Given Amazon’s reach into U.S. households and its wide merchandise mix, customer needs and preferences differ and having strong financing plans is fundamental especially in the larger-ticket categories. Managing multiple products is arguably easier for an e-commerce-only player as digital placements and positioning can be dynamic with data driving real-time marketing decisions. The parity of 5% Rewards across credit product types could actually harmonize customer behaviors as we discuss below.
- We are of the strong view that making 5% rewards available to Prime members on both the Store Card and co-brand is a win for Synchrony, Chase and of course, Amazon and its Prime members. Synchrony wins by attracting more creditworthy, frequent users of the Store Card, which will result in low-risk portfolio growth, favorable optics and capital efficiencies. In spite of the increased costs of the 5% tier, Chase should benefit from the uniform availability of 5% on both the co-brand and Store Card. The availability of 5% on the Store Card should, over time, improve the mix of Amazon Visa spend inside and outside Amazon by reducing the percentage of cardholders who primarily use the Chase card in-store (the most expensive transactions for Chase). Those individuals, should on balance, be more inclined to take the Store Card, leaving Chase with customers who use the co-brand heavily both at Amazon and elsewhere, where Chase typically enjoys a more favorable interchange / rewards cost spread. Amazon wins by continuing to offer the best value to its Prime members, deepening member loyalty, and likely increasing the average lifetime (and resulting value) of Prime members.
- The new 5% Prime tier on the Amazon Visa could also be an effective defensive strategy for Chase and Amazon. With only 3% available on the base Visa product and 5% available on the Store Card, savvy Visa cardholders who are Prime members could segment their spend between the Store Card (at Amazon) and the Visa (elsewhere). However, without the usage at Amazon, what would stop Amazon Visa cardholders from further segmenting their spend outside Amazon to other (cashback) cards? With the 5% tier there is less incentive to segment spend in the first place, likely minimizing off-Amazon spend attrition as well.
For more information, please contact John Grund, Partner, email@example.com; David Woynerowski, Partner, firstname.lastname@example.org; or Matt Dunn, Analyst, email@example.com. They specialize in Credit Card Issuing.
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