Credit card customers at JPMorgan Chase are cashing in their reward points on travel, dining and other perks at a faster-than-expected clip.
The bank said Friday that it needed to set aside an additional $330 million from April through June for its customers taking advantage of perks like cash-back on purchases and booking plane flights with accrued points they convert to frequent-flyer miles.
Having to set aside more money isn’t a move banks love to make, but there’s a silver lining here: A rise in JPMorgan’s awards costs shows Americans are confident enough to boost their spending and are more frequently using their JPMorgan cards, such as Chase Sapphire Preferred or Chase Freedom.
Cardholders, of course, can’t earn points unless they spend. And a credit card holder redeeming reward points is an “engaged” customer, Marianne Lake, JPMorgan’s chief financial officer, said Friday during a call discussing the bank’s second-quarter performance. In Lake’s words, this is a “strong story.”
And that showed up in the bank’s latest results. Profits rose 18.3 percent and money set aside for potential credit losses actually declined by $286 million to $1.1 billion.
The combination of credit card customers using their plastic more but still keeping current on their bills is a winning formula for both financial institutions and the economy.
Even with the bank setting aside the $330 million, it’s “not exactly bad news that customers are engaged and redeeming points; this is good,” says James Shanahan, an analyst at nationwide brokerage Edward Jones based in St. Louis.
Despite the hit, the bank still reported revenues of $5 billion in its card, merchant services and auto unit.
The rewards math works like this for banks: as people spend on their cards, they accrue reward points. Once the points are used, the card issuer incurs an expense. Banks generally set aside money to account for these costs. And in JPMorgan’s case this past quarter, “costs are coming in higher than expected,” Shanahan explains.
The U.S. consumer remains in good shape, and their spending and borrowing was a major driver of JPMorgan’s $8.3 billion profit in the three-months ended in June, the bank’s chairman and CEO Jamie Dimon said in a statement.
“The healthy U.S. consumer drove double-digit growth,” he said, adding that consumer “sentiment is high.”
Even though the economy remains strong and the unemployment rate of 4 percent marks a nearly two-decade low, the longer-term risk is if consumers get too overconfident and ramp up their spending with borrowed money too much, then run into problems paying off their debt later when the economy begins to slow, says JJ Kinahan, a market strategist at discount brokerage TD Ameritrade.