A Perfect Storm for Crypto Rewards Cards

Given the way the Covid-19 pandemic halted most travel and dining over the past year, many consumers have seen the value of their credit card points plummet. 

Banks, however, have found ways to maintain the appeal of their card programs, and dining and travel are sure to come back strong anyway (though when they will is unclear). At the same time, cryptocurrency rewards cards are coming onto the market just as cryptocurrencies are becoming more mainstream, thanks in part to trillions of dollars in government stimulus and looming concerns from both consumers and corporates about dollar debasement.

Gemini and BlockFi are both planning to launch credit cards this year that let cardholders earn 3% and 1.5% back in cryptocurrencies, respectively, on their purchases. Fold, Celsius and Crypto.com, also offer versions of crypto rewards cards.

“There is somewhat of a perfect storm for crypto rewards for multiple populations of people who aren’t being served by traditional travel rewards,” said Brian Kelly, aka The Points Guy, told Blockworks. “Even cashback is nice, but it’s nothing exciting” compared to the notion of rewards that actually increase in value. 

Many in crypto and fintech have said banks with card programs that don’t offer bitcoin rewards could be left behind and give companies like Gemini and BlockFi the gift of growth over the next 10 to 12 years. 

Gemini believes crypto will take a large portion of market share from other rewards programs in the foreseeable future as consumer demand for digital assets exposure increases, Thomas Harrison, the company’s group product manager, told Blockworks.

“While cash back and travel rewards will still be prevalent in five to 10 years, we strongly believe that every competitive issuer will offer the option for cardholders to earn crypto as a reward and many will use Gemini’s platform to make that possible,” he said.

Gemini has yet to disclose which bank will issue its card.

“For the many people who have not embraced bitcoin, [crypto rewards]  is an option that lets them feel the market,” said Brian Riley, director of the credit advisory service at Mercator Advisory Group. “We do not think that bitcoin rewards will be an immediate disruption, but credit card issuers should keep a keen eye on the market. You probably won’t see Citi or Chase doing bitcoin rewards for quite a while, though.”

Risky business

Payments experts say that no matter how mainstream digital assets become, bitcoin rewards cards will always be a niche offering due to many challenges, including compliance, risk management, customer education and maintaining brand value and loyalty. 

James Wester, research director for worldwide blockchain strategies at IDC, noted that financial institutions are in the business of risk services and if they can derive some revenue from dabbling in cryptocurrencies, they will. 

Banks probably won’t be holding cryptocurrencies anytime soon, they’d sooner partner with a digital asset brokerage to custody those assets, which would present more of a vendor management issue than issues around holding cryptocurrencies. 

What really matters is what will drive their card portfolio, Wester said. “Is having a card that allows you to earn crypto back going to get [the bank] top of wallet?” — or in other words, become customers’ go-to card of choice that they reach for first to pay for just about everything. 

Banks charge interest on outstanding card balances but also get a large percentage of the interchange fees — the fees merchant banks pay card issuing banks whenever a customer uses a card to make a purchase.

“That’s really what all financial institutions that are doing credit card issuing really care about,” Wester said.

Another major concern for major banks is the importance and value of their brand, according to Wester. “There’s going to be something about brand value that’s going to go in, like ‘we need a card that has a bitcoin rewards program on it’ or ‘that’s something we want to stay away from,’’’ he said.

Most risk averse brands will probably steer clear from cryptocurrencies, he added, simply because the digital assets industry doesn’t necessarily have the best reputation today — however unearned and even though it’s not necessarily a risk aversion question when it comes to running the program.

Specifically, bitcoin is at the center of a heated debate about whether its energy consumption costs are an environmental catastrophe — one that banks probably want to keep a safe distance from. However, many have existing affinity programs with companies including American Airlines, United, Delta — all of which have much bigger environmental footprints. 

At the end of the day though, even without brand risk, cryptocurrencies still haven’t proved their place in banks’ card portfolios.

”If you try to tie your brand to an affinity program that’s necessarily for cryptocurrencies, they would probably say ‘no, it’s not something that’s gonna help us enough in terms of performance,’” Wester said.

A matter of time?

Kelly, a cryptocurrency enthusiast himself, said traditional banks should be exploring crypto rewards as an option where they can approve different currencies that customers might want in their rewards program. 

Earning a currency that has the ability to appreciate dramatically in value doesn’t exist for any current rewards program today. And for the crypto curious, it’s still not easy to buy digital assets, despite the big improvements companies have made in user experience over the years.

“Gemini and BlockFi are doing the same exact thing” as the banks, he said, “but instead of just giving you a cent in point per value, they’re putting a cent into a different currency, a cryptocurrency.”

Kelly said that The Points Guy teaches people how to maximize their points by transferring them and booking first class tickets to get more than normal value among other hacks. But the average person is “pretty much capped at what those rewards are going to be within a certain range,” he said.

Most cards on the market are really designed for prime users. Gemini’s Harrison said there will eventually be a market for super prime crypto rewards cards, but “regardless of the card, we believe all of these consumers will want to earn crypto on purchases.” 

Alex Adelman, CEO of bitcoin rewards startup Lolli, which just raised $5 million, noted that when customers earn points or cash back on card spending, those rewards are typically geographically constrained, whereas bitcoin and other cryptocurrencies are global.

“Most banks are going to realize that crypto is way more scalable, and crypto rewards are the way that they’re going to realize that,” Adelman said. “It’s inevitable” that banks will dip their toes into crypto rewards. “It’s just a matter of time.”