Credit card rewards to become less rewarding

NEW YORK (Reuters) - Even as credit card companies rush to raise rates and fees before a reform law takes effect in February, they are moving to reduce one thing -- rewards.

Card issuers struggling with huge credit losses are making it more expensive and less attractive to redeem rewards. And it could get worse ahead of possible legislation to reduce so-called interchange rates, the fees banks charge to merchants.

Issuers use the proceeds from the fees to finance their rewards, so any haircut in those charges would trim loyalty programs, analysts said. For customers, that means having to use their cards more often to earn the points they need to fly somewhere, or get cash back.

"To the extent that interchange is cut, you will see a pretty lineal impact on rewards," said Scott Valentin, an analyst at FBR Capital Markets. "You could see rewards being 10 or 15 percent more expensive for consumers."

The discussion in Congress promises to be long and slow as retailers fight to cut costs, while card companies try to boost revenue as loan losses soar.

Last year, interchange fees rose 14 percent to about $48 billion, ranging from 1.6 percent to more than 2 percent of total purchases.

"You either cut rewards or raise fees, because you have to have a credit card industry that is viable and generates a reasonable return," said Morningstar Inc analyst Michael Kon.

Credit card companies -- from American Express Co (AXP.N) to JPMorgan Chase & Co (JPM.N) and to Citigroup Inc (C.N) -- enjoyed hefty profits in recent years due to an explosion in credit, but they are now losing billions as debt-burdened Americans lose jobs and default on loan payments.

Analysts even estimate the industry will not make money until 2011.

Earlier this year, Citigroup modified its "Thank You" rewards program to require many more points to be redeemed for domestic flights.

JPMorgan, meanwhile, has limited the spending categories from which customers receive cash back on Chase Freedom cards.

Such steps could intensify in coming months.

"If you have a 25,000 reward points for an airline ticket, it might go to 35,000 or 40,000," Valentin said.

Bill Hardekopf, chief executive of Lowcards.com, a credit- card comparison website, also said that, even if reward targets do not change, customers might have problems redeeming points.

"Even though you may be getting the rewards, it may be harder to redeem the rewards," he said.

FEE-SETTING

Legislation could give merchants and retailers more power to negotiate the charges, following complaints from store owners that banks have colluded to set fee structures and block them from negotiating with payments networks Visa Inc (V.N) and MasterCard Inc (MA.N), who set the fees.

One bill sponsored by Democratic Senator Dick Durbin would also allow retailers to negotiate fees with American Express, the largest U.S. credit card company by sales and the third largest card network.

American Express could be the card issuer most affected by legislation, given that it generates a greater percentage of its revenue from retailer fees. Barclays Capital analyst Bruce Harting estimated the amount for 2008 at 53 percent.

In addition, American Express' flagship Membership Rewards program is a magnet for costumers, so any cut in the program could dull interest in the company's cards and hurt revenue.

"This could have a disproportionately large impact on American Express, as it has more spending than the typical bank card," Moshe Orenbuch, an analyst at Credit Suisse, said in a recent report.

"We would expect reductions in rewards volume ... and higher incidence of annual fees to make up for most of the lowered interchange."

Ralph Andretta, general manager of card member services at American Express, said the company's network was profitable for merchants.

"Any effort to regulate interchange rates in the U.S. would be unwise," he added. "We believe Congress will ultimately agree with that."

(Reporting by Juan Lagorio; editing by Andre Grenon)