What would you say the best cash back credit cards all have in common?

My opinion is that consumers are drawn to tangibility, and ‘cash’ currency is a pretty basic universal key customer requirement. So, if we’re talking about a set of alternatives that all have the common benefit of delivering cash back, the levers credit card companies can then use to differentiate their offerings are:

How much cash is returned?
How long consumers are required to wait to get their cash?
How frequently the paybacks are applied?

Personally, our family wouldn’t make it into the best customer segment for credit card companies since we use our cards only for transactional convenience. However, we do have a cash back card for that use, and one of the biggest selling features to us was the fact we received a decent percent cash back, and it was applied to each purchase. Furthermore, we get an almost immediate electronic notification verifying how much cash we earned from that purchase. It results in immediate, consistent, and frequent reminders to us as consumers, which works as a great reminder/reinforcement platform to continuously sell the card’s benefits.

What limitations do even the best cash back credit cards tend to have?

Well, I’m looking out my front window right now here in Franklin, TN, and roughly one mile away, I can see the brand new headquarters for Ramsey Solutions which opened in its new location just this month (the entire facility was built and paid for with cash, by the way). Ramsey Solutions is the brainchild of zero-debt advocate and internationally-known consumer finance expert Dave Ramsey. Dave’s universal message is that consumers don’t need credit to live their best lives and can achieve their greatest long-term financial health if they avoid credit cards and pay in cash. His message to consumers has become very popular over the last few years, especially following the last big recession here in the U.S. My belief is that tough times build tougher and better disciplined consumers, primarily out of necessity. So, starting in 2008, many consumers found themselves fighting through lower incomes, higher expenses and certainly less consumer confidence over what their financial futures looked like. And an increasing number of those consumers found their way forward by weaning themselves off of credit cards – cash back versions or otherwise. Will this trend last? Hard to say, but in the U.S., the longer we go forward with near full employment and increasing wages without a recession, history and basic psychology would tell us that many consumers, with no apparent end to the good times on the horizon, will slip back into their old habits and will begin relying more heavily, at least to some extent, on credit card usage as part of their lifestyle. The next recession will begin another cycle, i.e., lather-rinse-repeat.

So, what limitations are there for even the best cash back credit cards? No matter how one slices it, all cash back credit cards, in spite of how wonderful the offers appear, are still credit cards that typically include high annual APRs. So even if a consumer was enjoying a 1.5% cash back reward, they would typically still be paying double-digit interest rates for every month they carry a balance on their card. And since most consumers do not pay off their balance at the end of the month, credit card companies should be enjoying healthy financial returns at this point.

Which cash back credit card(s) would you recommend to consumers?

I don’t have a specific vendor or card to recommend per se; however, to I think there are considerable opportunities in the credit market for a product that builds their marketing model around the concept of simplicity. And by simplicity, I mean plain English in terms of how their offer works, period, as small a number of variables as possible, and with as few words as possible. No significant rate hikes after an introductory period, no unrealistic short term benefits that evaporate after the initial honeymoon, and a long-term rate that is easily understood as being below the market average.

In marketing, we have a theory called the “wheel of retailing” that explains how new stores first enter the retail scene and then how the market evolves over time. Some of the first grocery stores began, for example, as a no frills, bare-boned warehouse model with low prices and low services. Consumers were initially drawn to those stores because of the low prices. However, as more competitors entered the grocery market, in an attempt to set themselves apart from the competition, they began looking for any new competitive advantage they could think of (think gimmicks like trading stamps, credit, nicer interior furnishings, etc.). Those things all cost money to offer to consumers, and therefore resulted in correspondingly higher consumer prices in order to deliver. As other competitors continued to enter the marketplace, they, too, offered even more consumer frills and services, and the prices went up even higher. Before too long, everyone in the market was offering wonderful shopping environments filled with consumer extras, and the prices had gone up significantly. This, then left room for yet another brand new innovator to re-enter the market as an “all new” bare bones, no frills warehouse supermarket with very little in the way of consumer services and correspondingly much lower prices than those of the current competitors. And so, the cycle would begin yet again.

I can’t help but wonder if at some point, we are looking at this same evolution in the credit card industry. There are so many competitors out there and a seemingly unlimited set of techniques for differentiating a specific card product with all sorts of ‘unique’ features. At some point, does the market need once again to move back to that lower interest rate model with low costs and an easy-to-understand consumer selling proposition? The wheel of retailing would suggest this is how that process happens, and maybe it’s time for the market to evolve back in that direction again. The real question would be whether that new model could be sustained over time as other competitors followed suit. That’s my two cents (and there’s zero cash back on my opinion).