Published by Doug Miller on 12 Dec 2008 at 03:55 pm
Fidelity and Schwab Introduce Credit Cards Linked to Brokerage Accounts
In quick succession, both Fidelity and Schwab recently introduced new credit cards on their respective public sites. While new card product offerings are not normally a thing to write home about, especially considering the current environment of increasing charge-off rates, these new cards each offer an interesting twist on rewards.
Instead of offering clients points towards merchandise or a percentage return as “cash back,” the Fidelity Retirement Rewards and Schwab Bank Invest First cards each reward clients with 2% back on all spending – money which is then deposited directly into an investment account at the firm.
In terms of rewards, which is the main lure of any new card offering outside of the ultra high-end market, the two card products are virtually the same. Each offers a full 2% cash back on purchases, which is designed to be deposited into an investment account at the firm; traditional rewards programs, in contrast, are currently offering around 1% earnings, with dramatically lower effective rates of return for some cash back-based programs. With the current emphasis on saving money and living within one’s means in the United States, these rewards programs should certainly appeal to existing clients of both firms, and may well draw new account holders to the firms.
Though Fidelity calls its card Retirement Rewards, earned cash can actually be deposited into a number of different investment accounts, including IRAs, 529s and “all non-retirement Fidelity accounts.” In addition, Fidelity also offers card holders access to the World Points rewards program, increasing the flexibility of the card (though reducing its uniqueness). The fine print for the Schwab Invest First card merely states that clients must have a brokerage account with the firm in order to redeem accrued rewards.
Neither of the cards currently offers accelerated rewards for a specific class of purchases, a common feature of many co-branded credit cards, but they also do not carry any limits on earnings or other “hidden” clauses that decrease the value of earnings. As with many card rewards programs, earnings can only be redeemed in pre-determined chunks, in this case $50 for the Fidelity card. The Schwab program eschews this constraint, however, instead automatically sweeping earnings into the designated brokerage account on the last business day of each month – a more compelling and more quickly visible mechanism.
On the technical “credit” side of the products, the two cards are also very similar, though there are some differences. Aside from the obvious lure of one over another – namely that people who already have an investment account at the firm are more likely to get the card from that firm – the Fidelity card is on the traditionally more upscale American Express network, while the Schwab card is provided in conjunction with Visa. In addition, the Fidelity card carries a 16.99% fixed APR while Schwab instead offers their card with a variable APR of Prime + 9.99% (currently 14.99% total). Interestingly, both companies seemed to have turned to the same company – FIA Card Services – to review applications, approve or decline applicants and manage client relationship for these new card programs. Overall, this new take on rewards is a nice addition to the card product landscape, and one that we anticipate will be quickly copied by other brokerage firms as a way to keep clients interested in using credit to pay for purchases, and as a way to keep earned rewards inside the firm and on the balance sheet.
Jeffry Pilcher on 16 Dec 2008 at 3:27 pm #
Regarding this paragraph: “Instead of offering clients points towards merchandise or a percentage return as “cash back,” the Fidelity Retirement Rewards and Schwab Bank Invest First cards each reward clients with 2% back on all spending – money which is then deposited directly into an investment account at the firm.”
How is 2% cash back (deposited into an investment account” any different than a “return as ‘cash back’?”
Doug Miller on 16 Dec 2008 at 7:22 pm #
Regarding Jeffry’s question: “How is 2% cash back (deposited into an investment account” any different than a “return as ‘cash back’?”
The basic differentiator between many different rewards cards is simply the vector through which rewards are provided or redeemed. For more traditional “cash back” cards, such as the AmEx Blue card, rewards are supplied either as a statement credit or as a check mailed to the card holder, which can then be literally exchanged for cash. These two types of redemptions are what we tend to consider a “cash back return.” Unlike the AmEx Blue card, the two new cards from Fidelity and Schwab funnel rewards directly into brokerage accounts set-up with the sponsoring firm and linked directly to the card. We consider that to be a different style of reward than cash back, as converting the reward to a cash equivalent is not automatic (i.e., statement credit) or easy (i.e., check). While these different types of programs might functionally deliver similar rewards value, the psychology of the rewards programs linked to a different account — and possibly the back side administrative costs — are different than traditional cash back cards. At least to our minds.
Mike on 17 Jan 2009 at 2:11 am #
Granted these are new programs, but do you anticipate a tax implication of the “free money” deposited into a brokerage account? In other words, are they going to report the reward to the IRS?
this could be controversial on 18 Feb 2009 at 6:04 pm #
Technically, this is a money back which falls into category of income.
However in reality this is quite just a discount on what people spent, not an additional earning.
i hope cashback cc companies could clarify this issue.