Credit Card Rewards Float

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Walkure
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Credit Card Rewards Float

Post by Walkure »

Inspired by recent threads but not wanting to derail the conversation, I had a related thought. Like many BHs, I have multiple cash back rewards cards that pays various percentages on purchases. Suppose on any given day I log into my account and see that I have a rewards balance of $25. (Many are set to auto redeem at 50 so let’s say 25 is the median outstanding value.). But now consider that there are estimated to be ~1.2 billion credit cards issued in the US. If 20% of those cards are actively in use and give rewards, that’s 240 million cards with an average rewards balance of $25. So at any given time there might be $6 billion in “float” of unredeemed rewards. From an accounting standpoint, do the card issuers have to actually set aside this money in escrow, or do they just leave it as an outstanding liability on their balance sheets and pay redemptions as they occur out of operating cash flow?
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ResearchMed
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Re: Credit Card Rewards Float

Post by ResearchMed »

Walkure wrote: Wed Nov 24, 2021 9:58 am Inspired by recent threads but not wanting to derail the conversation, I had a related thought. Like many BHs, I have multiple cash back rewards cards that pays various percentages on purchases. Suppose on any given day I log into my account and see that I have a rewards balance of $25. (Many are set to auto redeem at 50 so let’s say 25 is the median outstanding value.). But now consider that there are estimated to be ~1.2 billion credit cards issued in the US. If 20% of those cards are actively in use and give rewards, that’s 240 million cards with an average rewards balance of $25. So at any given time there might be $6 billion in “float” of unredeemed rewards. From an accounting standpoint, do the card issuers have to actually set aside this money in escrow, or do they just leave it as an outstanding liability on their balance sheets and pay redemptions as they occur out of operating cash flow?
And the "points"...

Do they have to account for them at 100%?
No doubt at least some of them are never redeemed. That may be quite different from the cash-back balances.

When the airlines sell the points, e.g., to charge card vendors who use them as points for purchases or for sign-up bonuses, that's a nice cash infusion.
Is that handled differently than the points awarded to travelers for the miles they fly?

RM
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Jack FFR1846
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Re: Credit Card Rewards Float

Post by Jack FFR1846 »

I'm sure no cash is set aside, or at the very least, not 100% of points. I've acquired American Airline points from annual trips for work. One trip a year. I get points. Points aren't enough to get anything. Points expire.

From a cash rewards card, because I have lots of cards I only used for low balance forgiveness, and they only pay when you achieve $25 or $50, the 99 cents a month I charge (which they forgive), it's going to take a looooooong time to ever hit the $25 minimum needed to collect. I mean, doing the math, they do give me a 1 cent reward even though they forgive the 99 cents. So in 100 months, I'll rack up $1 in rewards. In 2500 months, I'm at $25. Mental math, divide by 12, that's over 200 years. I don't think that credit card company will ever pay out to me.
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AnnetteLouisan
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Re: Credit Card Rewards Float

Post by AnnetteLouisan »

A particular plastic hating individual who shall remain nameless says that over 70 percent of points go unredeemed. Interesting, if true. I heard gift cards also have a high rate of non-redemptions.

That doesn’t mean there is anything wrong with these offers. This is about adding depth to the study of customer usage patterns.
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Kenkat
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Re: Credit Card Rewards Float

Post by Kenkat »

I believe they would just record it as a liability; any redemptions would be paid out of operating cash flow.

I have been exposed to corporate accounting via my IT job, so I am not an expert, but my experience is that there is a cash management function in companies to ensure that they have sufficient cash to meet coming obligations. “Making payroll” is a common large, repeating event for example. Companies will keep sufficient cash on hand for most foreseeable events plus have short term lines of credit that can be tapped to smooth out any peak demands.

The ability to tap short term credit lines is a big reason the Federal Reserve and US Government intervened during the financial crisis in 2008 and again in the Covid crunch in 2020. If companies cannot access short term lines of credit due to credit markets being locked up or illiquid, that can set off a cascade of events that can lead to a crash. Company A misses payroll -> Worker X can’t make mortgage payment -> Mortgage holder M misses interest payments on held mortgages, etc.
lazynovice
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Re: Credit Card Rewards Float

Post by lazynovice »

There are two questions in the post- 1) accounting treatment and 2) banking regulations on reserves.

Here is how Capital One describes the accounting:
https://investor.capitalone.com/static- ... f46eda928d

We offer products, primarily credit cards, which include programs that allow members to earn rewards based on account activity that can be redeemed for cash (primarily in the form of statement credits), gift cards, travel, or covering eligible charges. The amount of rewards that a customer earns varies based on the terms and conditions of the rewards program and product. The majority of our rewards do not expire and there is no limit on the amount of rewards an eligible card member can earn. Customer rewards costs, which we generally record as an offset to interchange income, are driven by various factors such as card member purchase volume, the terms and conditions of the rewards program and rewards redemption cost. We establish a customer rewards reserve that reflects management’s judgment regarding rewards earned that are expected to be redeemed and the estimated redemption cost.
We use financial models to estimate ultimate redemption rates of rewards earned to date by current card members based on historical redemption trends, current enrollee redemption behavior, card product type, year of program enrollment, enrollment tenure and card spend levels. Our current assumption is that the vast majority of all rewards earned will eventually be redeemed. We use the weighted-average redemption cost during the previous twelve months, adjusted as appropriate for recent changes in redemption costs, including changes related to the mix of rewards redeemed, to estimate future redemption costs. We continually evaluate our reserve and assumptions based on developments in redemption patterns, changes to the terms and conditions of the rewards program and other factors. We recognized customer rewards expense of $4.9 billion in both 2020 and 2019 and $4.4 billion in 2018. Our customer rewards reserve, which is included in other liabilities on our consolidated balance sheets, totaled $5.4 billion and $4.7 billion as of December 31, 2020 and 2019, respectively.

As far as escrowing the cash they owe you.- They must follow banking regulations on how well capitalized they are related to their deposits. Not sure the cash back award is considered a deposit. I have never seen anything telling me my cash back rewards are FDIC insured but I haven’t read the fine print. Hopefully someone else can answer.
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dukeblue219
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Re: Credit Card Rewards Float

Post by dukeblue219 »

Jack FFR1846 wrote: Wed Nov 24, 2021 10:25 am I'm sure no cash is set aside, or at the very least, not 100% of points. I've acquired American Airline points from annual trips for work. One trip a year. I get points. Points aren't enough to get anything. Points expire.
Your AA points won't ever expire if you travel once every 18 months (or perform any activity at all, like buying flowers or whatever through their online storefront).
lazynovice
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Re: Credit Card Rewards Float

Post by lazynovice »

ResearchMed wrote: Wed Nov 24, 2021 10:18 am
Walkure wrote: Wed Nov 24, 2021 9:58 am Inspired by recent threads but not wanting to derail the conversation, I had a related thought. Like many BHs, I have multiple cash back rewards cards that pays various percentages on purchases. Suppose on any given day I log into my account and see that I have a rewards balance of $25. (Many are set to auto redeem at 50 so let’s say 25 is the median outstanding value.). But now consider that there are estimated to be ~1.2 billion credit cards issued in the US. If 20% of those cards are actively in use and give rewards, that’s 240 million cards with an average rewards balance of $25. So at any given time there might be $6 billion in “float” of unredeemed rewards. From an accounting standpoint, do the card issuers have to actually set aside this money in escrow, or do they just leave it as an outstanding liability on their balance sheets and pay redemptions as they occur out of operating cash flow?
And the "points"...

Do they have to account for them at 100%?
No doubt at least some of them are never redeemed. That may be quite different from the cash-back balances.

When the airlines sell the points, e.g., to charge card vendors who use them as points for purchases or for sign-up bonuses, that's a nice cash infusion.
Is that handled differently than the points awarded to travelers for the miles they fly?

RM
I’m feeling generous today. Here is how American describes their accounting policies-

https://www.sec.gov/Archives/edgar/data ... 07FB9C4963

Loyalty Program
We currently operate the loyalty program, AAdvantage. This program awards mileage credits to passengers who fly on American, any oneworld airline or other partner airlines, or by using the services of other program participants, such as the Citi and Barclaycard US co-branded credit cards, hotels and car rental companies. Mileage credits can be redeemed for travel on American or other participating partner airlines.
Through December 31, 2017, we used the incremental cost method to account for the portion of our loyalty program liability incurred when AAdvantage members earn mileage credits by flying on American, any oneworld airline or other partner airlines. We have an obligation to provide future travel when these mileage credits are redeemed and therefore have recorded a liability for mileage credits outstanding.
The incremental cost liability includes all mileage credits, even mileage credits for members whose account balances have not yet reached the minimum level required to redeem an award. Mileage credits are subject to expiration. The liability for outstanding mileage credits is valued based on the estimated incremental cost of carrying one additional passenger. The estimated incremental cost primarily includes unit costs incurred for fuel, food and insurance as well as fees incurred when travel awards are redeemed on partner airlines. In calculating the liability, we estimate how many mileage credits will never be redeemed for travel and exclude those mileage credits from the estimate of the liability. Estimates are also made for the number of miles that will be used per award redemption and the number of travel awards that will be redeemed on partner airlines. These costs and estimates are based on our historical program experience as well as consideration of enacted program changes, as applicable. Changes in the liability resulting from members earning additional mileage credits or changes in estimates are recorded in the consolidated statements of operations as a part of passenger revenue.
As of December 31, 2017 and 2016, the liability for outstanding mileage credits accounted for under the incremental cost method was $677 million and $669 million, respectively, and is included on the consolidated balance sheets within loyalty program liability.
A change to certain estimates used in the calculation of incremental cost could have a material impact on the liability. A one percentage point increase or decrease in the percentage of travel awards redeemed on partner airlines would have an approximate $38 million impact on the liability as of December 31, 2017. A 10% increase or decrease in the assumed price per gallon of fuel would have an approximate $11 million impact on the liability as of December 31, 2017.
We also sell loyalty program mileage credits to participating airline partners and non-airline business partners, such as the Citi and Barclaycard US co-branded credit cards. Sales of mileage credits to non-airline business partners is comprised of two components, transportation and marketing. We account for mileage sales under our agreements with non-airline business partners in accordance with Accounting Standards Update (ASU) 2009-13, “Revenue Recognition (Topic 605) –Multiple-Deliverable Revenue Arrangements.” In accordance with ASU 2009-13, we allocate the consideration received from the sale of mileage credits based on the relative selling price of each product or service delivered.
As a result of our co-branded credit card program agreements with Citi and Barclaycard US that we entered into in 2016, we identified the following revenue elements in these co-branded credit card agreements: the transportation component; and the use of the American brand including access to loyalty program member lists, advertising and other travel related benefits (collectively, the marketing component).
The transportation component represents the estimated selling price of future travel awards and is determined using historical transaction information, including information related to customer redemption patterns. The transportation component is deferred based on its relative selling price and is amortized into passenger revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel. As of December 31, 2017 and 2016, we had $2.1 billion in deferred revenue from the sale of mileage credits recorded within loyalty program liability on our consolidated balance sheets.
A change to certain estimates used in the allocation of consideration received from the sale of mileage credits could have a material impact on the liability. A 10% increase or decrease in the relative selling price of the transportation component would have an approximate $87 million impact on the liability as of December 31, 2017.

I doubt they treat this liability any different than any other from a cash reserves standpoint.
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Flyer24
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Re: Credit Card Rewards Float

Post by Flyer24 »

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