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Here's How Banks Can Offer Credit Cards Like the Sapphire Reserve With Enormous Sign-Up Bonuses and Still Turn a Profit

 Chase, an issuer who is now starting to look more like a network than a plain old card issuer with Chase Pay and the MCX acquisition, startled the consumer card market with its Sapphire Reserve Card, a credit card that carries a whopping $495 fee. But, with a promise of up to $1,500 in benefits, the $495 is a loss leader. Chase’s goal is to play a long game and CEO Jamie Dimon views the customer benefit as an opportunity cost.

• It's not often that a CEO will announce a $200 million loss with a hint of pride, much less that they'll claim they wish the loss was twice as large.

• But that's exactly what JPMorgan Chase CEO Jamie Dimon did in January while discussing the impact of the company's insanely popular Chase Sapphire Reserve rewards credit card.

• "The card was so successful it cost us $200 million, but we expect that to have a good return on it," he told CNBC. "I wish it was a $400 million loss."

The card is not for everyone; the sweet spot for income is in the $180,000 range, aiming for the top of the mass affluent market. With it, Chase banks on interchange revenue from high spending from credit lines north of $15,000, a good renewal level on the $495.00 annual fee, and revolving balances from high spenders.
• JPMorgan isn't the only player in the high-rewards credit card game. American Express has long offered generous sign-up bonuses and travel credits to holders of its Platinum card, as has Citigroup with its Prestige card.

• How can these companies afford to offer such lucrative perks to customers and still make money?

    o In short: They're in the long game, and they're betting that the wealthy clientele who sign up for these type of cards will eventually be worth more than they cost to lure in. They're also betting that some of them won't be smart enough to take full advantage of the card.

This article also points out that 20% of rewards will go unused and that some cardholders won’t take full advantage of the reward features, indicating that the top-end of the market might not be any smarter than the mass market.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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