Credit Cards of the Future: Will New Technology Create New Overspenders?


(photo: author)

The Best of Innovations display at this year’s Consumer Electronics Show in Las Vegas could make anyone drool: nerds, geeks, even the technologically challenged. There is, for example, a dishwasher from Kenmore boasting a full-color LCD screen where you can get instant advice and maintenance tips.

There are the world’s first alpine goggles, “Transcend” from Recon Instruments, equipped with a display system offering real-time GPS data, including speed, latitude and longitude, vertical distance travelled, temperature, and time.

And then there’s Card 2.0: a credit card bearing the Citi logo with a built-in battery and microprocessor that will change completely how you use your rewards. The technology, developed by Pittsburgh, Penn.-based Dynamics, is so advanced that it earned an Innovations in Design and Engineering award – the first time in CES history that this type of award goes out to a credit card.

We’ve told you about Card 2.0 before. (Citi has actually dubbed it “2G” – as in Citi PremierPass 2G or Citi Dividend 2G.)

Officially launched in beta mode to a limited number of Citi card users In November 2010, it looks just like any other piece of plastic with a magnetic stripe. Except for one revolutionary new feature: two buttons that enable you to choose whether to pay for a purchase with dollars (credit) — or with ThankYou points (rewards).

By the end of the second quarter of this year, the cards will be available to all new, as well as a larger number of existing Citi customers.

But while the technology is, without a doubt, groundbreaking and seriously cool-looking (the card has two little lights, a blue one that activates when you choose to pay with credit and an orange one when you choose to pay with points), the question is, is it really that much better than the good old boring piece of plastic in our wallets?

At CES, we spent some time with Terry O’Neil, executive vice president at Citi Cards, to learn more of the nitty-gritty details – the fine print, if you will — and we’re not entirely convinced that once we get our swanky new Citi PremierPass 2G card later this year we’ll be in a rush use its cool new feature.

Here’s what any savvy consumer should know about this award-winning technology:

1. It makes it easy – perhaps too easy – to spend your rewards

One of Citi’s main goals with this new capability is to make it more convenient for card members to spend ThankYou points, and O’Neil says the new feature is the result of extensive consumer research in which Citibank’s card members actually asked for the ability to redeem points at the register.

Yes, redeeming points the traditional way is a bit of a pain: you have to click through an online catalog with hundreds of options before you choose your reward. If you choose a gift card or a piece of merchandise, you’d have to wait for weeks on end to receive it.

With the 2G cards, meanwhile, all you have to do is press the card’s “Request Rewards” button before you swipe or hand it to the sales clerk. Voila: you’re shopping with points instead of credit.

At a penny per point, the redemption rate is actually quite fair. You would spend 10,000 points instead of $100; 2,500 points instead of $25. (Meanwhile, you would need 3,500 points in most cases if you’d like to redeem them for a $25 gift card from Citi’s ThankYou rewards catalog.)

Conceivably, this could help your finances – after all, you’re spending points instead of your hard-earned cash – but it could also make you an impulsive shopper. “I’m not actually spending money,” the thinking goes. “So why not splurge on a $200 pair of shoes.”  If you have a hard time controlling yourself in a department store – beware.

2. It’s good for you – and even better for Citi

Let’s assume, though, that you — the epitome of budget consciousness — will treat your ThankYou points the same way you do now. You’ll carefully collect them until you have enough to sponsor your holiday gift shopping or to buy yourself a birthday present, or you’ll spend it at the grocery store on necessities. It will be like nothing has changed, only easier.

That’s great for you, but guess what: it’s even better for Citibank. Because the technology that enables you to shop with rewards also enables Citibank to collect interchange fees on the value of its own rewards program.

Think of it this way: when you redeem rewards the traditional way, for gift cards or cash, Citibank purchases those gift cards or cuts you a check, and that’s the end of it. How, where and when you spend that money – Citibank never knows. But when you use ThankYou points at the register (so-called Point of Sale, or POS), it is processed like any other credit card transaction. Citi collects its interchange fee (that could be anywhere between 1% and 4%, and part of it will also go to Visa or MasterCard), and then processes the payment as a rewards redemption on the back end. You: spent points. Citi: collects a fee. Innovative? You bet.

3. Dinky-dory credit line details

What would happen if you don’t have enough ThankYou points to make the purchase you desire? Glad you asked because this brings up the potentially dicey issue of dipping into your credit line.

All POS reward redemptions are processed as a regular credit transaction on the front end – and adjusted to reward transaction at the back end. In layman’s terms: the cashier will ring you up, a request will go out to Citi and it will at first treat it as if you’ve used your credit card. Purchasing a $3,000 3DTV with points? That’ll be $3,000 deducted from your credit line right there. By the end of the day, the transaction will be processed properly, your ThankYou point balance updated (you’ll be 300,000 points poorer) and $3,000 will be added back to your available credit.

O’Neil says the process was set up this way so people aren’t turned back at the register if they don’t have enough points for a specific purchase. But you see where this is going? If you don’t really have enough points, the transaction won’t be declined. Instead, you will use up however many points there are and the rest will be deducted from your credit limit, so you’ll pay part points and part cash. Oops. And you planned to not spend money.

Another possible issue: what if that original credit adjustment brings you over your credit limit? Will you be charged an over-limit fee even if you’re not using any of your actual credit? O’Neal says that the cards that currently have this functionality – Citi PremierPass and Citi Dividend – do not have credit limits to begin with, so this is kind of a non-issue. But as the bank expands its menu of 2G cards, it is definitely something to keep in mind.

If you think redeeming your points is a pain now, remember: keeping on top of your available credit limits and your ThankYou points balance can be doubly demanding.

4. Creating loyal customers – or frequent spenders?

Finally, a word of caution: banks are, as you well know, for-profit institutions. They do not innovate and introduce new products out of the goodness of their hearts. They do so because they see an opportunity to generate profits.

Citi’s 2G cards may make it more convenient for you to spend your rewards and will definitely give you some bragging rights in front of your friends. But the benefits will be way more tangible for Citi: it will get you to spend your points faster, and may even steer you towards using the card more often, so you accrue more points to spend… and so forth.

“Banks have an interest in getting people to redeem their rewards,” O’Neil says.  “It speaks to engagement and creates a more loyal customer.”

If your loyalty can be bought with cool technology and convenience – great. But we suggest you remember the basics: choose a card that offers you the biggest bang for your buck. When given the choice, we’d take the one with the richest rewards structure and lowest APR and fees – any day.

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