If US Bank is trimming the fat, is Flexperks Travel Rewards next?

Plenty of digital ink has been spilled about the May 28/31 Club Carlson devaluation, including here, and there's not too much left to be said. However, one thing has been bugging me about the way Club Carlson has been talking about the change: they refer to it on Twitter as the "Visa announcement."

To explain why this has been nagging at me, it helps to think about how these co-branded credit card partnerships work. There are three independent corporate actors in any co-branded partnership. In the case of Club Carlson:

• Visa processes transactions. Visa owns and operates a worldwide network of point-of-sale terminals, for the use of which it charges merchants every time a Visa credit or debit card is used as a form of payment. It rebates part of those fees to US Bank in exchange for Club Carlson cards being issued on the Visa payment network.
• US Bank extends credit. US Bank timely pays merchants for the services rendered, and keeps track of customers' charges. If the customer fails to pay their balance in full and on time, they also get to charge the customer interest on those purchases.
• Club Carlson sells Gold Points to US Bank, and operates a hotel loyalty program.

With respect to the last-night-free benefit, the question is, who was paying the cost of those bonus nights?

One possibility is that Club Carlson was paying for those nights. They could have been reimbursing their participating hotels the full negotiated rate for Gold Point redemptions, and simply been eating the cost of the last-night-free benefit, in exchange for selling more Gold Points to US Bank and their customers.

The other possibility is that US Bank was paying. They may have agreed to buy additional Gold Points at whatever fixed rate they negotiated with Club Carlson, such that Club Carlson was made whole for however many last-nights-free we redeemed.

The way that the changes have been communicated, and Club Carlson's framing of the change as a "Visa announcement" leads me to believe the latter option is more plausible. And that feels like bad news.

US Bank is terrible at predicting the costs of their rewards programs

There are two ways for a bank to predict how much a rewards program will cost before launch.

One method is to look at a static picture of how your current customers spend their money. A certain amount on gas, a certain amount on groceries, a certain amount on clothes, a certain amount on tuition. You can then design a rewards structure that will be competitive with your rivals, while turning a healthy profit for yourself.

Another option is to look at the dynamic effects of the rewards program itself. It may be that offering 5% cash back in a certain category will make your customers divert more of their spending to that category than they were before the rewards program was introduced. This is much more difficult, since every bank treats information about customer spending behavior as a closely guarded, proprietary secret.

To date, US Bank appears to have exclusively used the former method. When they first introduced the Cash+ card, it had no limits on 5% cash back earnings, and no limits on the $25 bonus for redeeming more than $100 in cash back. What were they thinking? Well, they were calculating their costs based on the existing spending pattern of their customers, without taking into account the dynamic effects of 6.25% cash back in super-exploitable categories like department stores, home improvement stores, and others.

This is the best explanation of the Club Carlson devaluation

It's become a cliche that the last-night-free benefit at Club Carlson properties was "too good to last." But to a travel hacker, it's obvious that it was too good to ever get started! And yet it did. Why? Because US Bank looked at a static picture of the distribution of the length of award stays and decided they could afford to pay for the last night, without considering how that distribution would shift once the last-night-free benefit was introduced.

Once they came to terms with the fact that the number of 2-night stays shot up ten or one hundred times, they had to make a decision, and the decision was to end the benefit.

This may spell trouble for Flexperks Travel Rewards cards

I write about the US Bank Flexperks Travel Rewards card a lot because I love it: 2 Flexpoints per dollar spent at gas stations or grocery stores each month and 3 Flexpoints per dollar spent on charity, each worth up to 2 cents for paid airfare.

The trouble is that, for redemptions on airfare, it is almost mathematically impossible for US Bank to be turning a profit on this product.

Technically the worst redemption in the program would be redeeming 20,000 Flexpoints for a $201 ticket (since for cheaper tickets a 1-cent-per-point cash back redemption would be better); that would generate a hair over 1 cent per point, or a hair over 2% cash back at gas stations or grocery stores.

At 2% cash back, it's possible for the Flexperks Travel Rewards card to be turning a profit.

But besides those marginal airfare redemptions of $201 to $266, the second-worst airfare redemption in the program would be redeeming 30,000 Flexpoints for a $401 ticket, which would yield 2.67 cents per dollar spent at gas stations or grocery stores, or 4.02 cents per dollar spent on charity. And remember: that's the second-worst airfare redemption in the program. Every other airfare redemption (of points earned in bonus categories) is costing US Bank more than that.

And, as unbelievable as it sounds, if you spend at least $24,000 on the card per cardmember year, you also don't have to pay an annual fee! You'll earn 3,500 bonus Flexpoints you can redeem against your annual fee. You can even make the redemption online.

Keep your expectations low and your balances lower

I do my best to redeem my miles and points as fast as I earn them, and that's as true for US Bank Flexpoints as it is for any other rewards currency. As long as a currency is in the hands of the bank, airline, or hotel, I have no control over its value. Once I've redeemed it and, even better, once I've traveled, it's not something that can be revoked or devalued.