These days, it seems like 1.5 is the magic number. In the past year, Barclaycard, Discover, Chase, Wells Fargo and U.S. bank have all launched cards that give a flat 1.5 percent back (when redeeming for cash). And, of course, Capital One has been offering 1.5 percent back with its Quicksilver card for some time now.
“There definitely is a trend,” says Ben MacKinnon, CEO and founder of rewards-maximization app Kard. “There are several large issuers coming out with these flat-rate cards.”
So what’s pushing this trend—and is it good for consumers?
Why the flat-rate trend?
Younger generations, MacKinnon says, are likely motivating issuers to move away from bonus-category cards (especially rotating-category cards), as research has shown that Millennials tend to have fewer cards in their wallets than their parents.
“We’re moving away from people having four or five credit cards and having a card for each spending category – travel, groceries, etc. — toward consumers just wanting to have one or two cards they use for all of their purchases,” MacKinnon says.
In other words, banks who want to attract new young customers need to lure them in with simplicity – and offer them a low-maintenance card that gives an attractive, steady return on all purchases.
“A bank can’t really say they’re going to offer 5 percent back in a category anymore to drive new cardholders to their brand,” MacKinnon says.
Why 1.5 percent?
For the slew of new flat-rate cash-back cards, 1.5 percent seems to be the magic number. And that’s likely due to interchange fees – the cut a bank takes whenever a consumer uses its card. These fees are what enables issuers to offer rewards in the first place.
There’s been a lot of push-back from merchants regarding these fees, and issuers are constantly experimenting with exactly how much they can give in rewards and still keep enough of the interchange fee for themselves. In general, the amount a bank can expect (and this varies, based on the type of purchase) is about 2 percent, MacKinnon says.
“So with 1.5 percent back they’re able to offer a high return while also covering their margins,” MacKinnon says.
Cards that offer higher cash back in certain categories might make up their losses via an annual fee – or hope that customers will still use their card for non-category purchases (which often earn just 1 percent cash back).
But what about the few no-annual-fee cards that offer 2 percent back on all purchases? And why haven’t all issuers followed their lead? MacKinnon says that these cards find other ways to make up for that bigger cut out of their interchange fees. For example, the Citi Double Cash is often called a “2 percent back” card. But, as MacKinnon notes, it offers 1 percent back at the time of purchase – and withholds the second 1 percent until you pay the purchase off.
“So they’re able to afford to give a little higher rate,” MacKinnon says. “Frankly, they know that some people are going to carry a balance pay interest charges.”
What the trend means for consumers
Flat-rate, no-annual-fee cash-back cards have a lot to offer consumers, MacKinnon says, especially those who aren’t drawn to the category-maximization game.
“I don’t have to worry if I’m getting 1 percent back or 3 percent back, or if I’ve activated my rotating rewards for the quarter,” he says. “It’s just a much easier way for me to make sure I’m getting a nice return on my spending. The predictability for the consumer can be a really nice thing.”
Consumers may also notice another rewards trend fueled by increased pressure on interchange fees: The growth of merchant-funded rewards, including card-linked-offers programs like Amex Offers, Discover Deals and BankAmeriDeals. Customers who want to earn more than 1.5 percent back, or who want additional discounts, can register for deals with specific merchants or shop via the issuer’s portal. What’s appealing to issuers about these programs, MacKinnon says, is that the merchants often share some of the load in paying for the deals (in exchange for inclusion in the issuer’s program and the new customers that brings).
“Those offers are really valuable because the bank isn’t having to front these higher costs entirely,” MacKinnon says. “They’re able to share with the merchant. And so they can offer a much higher return to the consumer.”
List of 1.5 percent cash-back cards on the market
Thinking of getting a 1.5 percent cash-back card? Check out your (growing) options below:
Capital One Quicksilver: The “original” 1.5 percent cash back card. Redeem at any time in any amount.
Chase Freedom Unlimited: Earn 1.5 Ultimate Rewards points per dollar. It’s advertised as a cash-back card, but it’s tied to the Chase Ultimate Rewards program, giving you many more redemption options.
Discover it Miles: Advertised as a travel card, it still offers cash-back redemptions. Because you earn 1.5 “miles” per dollar and each mile is worth 1 cent each, you can still get 1.5 percent cash back if you redeem for electronic deposits.
Wells Fargo Cash Wise: Get 1.5 percent cash back on all purchases or redeem (value varies) for travel, merchandise and digital downloads. You can even redeem cash back at the ATM.
U.S. Bank 365: The newest addition to the 1.5 percent club (as of July 2016), this co-branded AmEx from U.S. Bank earns you 1.5 percent back on every purchase, plain and simple.
Barclaycard CashForward: In addition to offering 1.5 percent back on all purchases, you get a 5 percent bonus when you redeem.