Discover (NYSE:DFS) is the number one credit card issuer in America in terms of customer satisfaction, according to J.D. Power's latest Credit Card Satisfaction Study, overtaking long-reigning champion American Express (NYSE:AXP). At a time when most credit card issuers are aggressively recruiting new customers by offering better perks and more lucrative rewards, how did Discover manage to overtake the top spot? And more importantly, should Discover's competitors be concerned?
About the study
The J.D. Power Credit Card Satisfaction Study is conducted annually, and is based on six categories of information:
- Billing and payment
- Benefits and services
- Problem resolution
Results are reported on a 1,000 point scale, and competition was particularly intense this year. The industry average score was a 790, up from last year's 778 and the highest it's been in the nine years the study has taken place. In other words, the credit card industry as a whole is doing a better job of satisfying its customers -- which makes sense considering the unprecedented sign-up bonuses, rewards programs, and perks that have come to market in recent years. In fact, every single credit card issuer rated in the study improved their overall satisfaction score this year.
American Express has been on top since 2007, and shared the lead in 2014 with Discover, when both companies earned 819 points. However, Discover pulled away in this year's study, with its score of 828 points beating Amex's 820. Even more impressive was the fact that Discover ranked highest in satisfaction in all six categories mentioned earlier. So, what has changed since last year?
In short, Discover's advantage was the ease with which its customers can redeem rewards. According to the study, Discover has stepped up its focus on its customers, and has improved its reward redemption process. "Reward redemption and benefit use have a tremendous impact on the customer experience," according to Jim Miller, senior director of banking services at J.D. Power. "The fact that Discover ranks highest in satisfaction among all credit card issuers in each of the six factors measured in the study is a testament of the relentless focus and importance the company has placed on the ease of redemption and use of benefits."
Why the other card issuers should be worried
Basically, the other issuers -- particular the banks that landed in the bottom half of the list -- should be concerned because they're losing to Discover and American Express in areas that really matter to customers.
For example, more than half (52%) of the study participants said they select new credit cards for a better rewards program, which means quality of rewards, not just quantity. And, customers who perceive their rewards program as "attractive" spend nearly $400 more per month on their cards. In other words, if a bank creates a rewards program that is more appealing to one million of its existing customers, it could mean $400 million in additional business per month – not to mention the new cardholders such a program would attract.
The takeway: When card issuers compete, consumers win
The bottom line is that these study results will only serve to intensify the competition between card issuers that has grown tremendously in recent years. Reward programs have become more generous and other perks have increased, with sign-up bonuses worth hundreds of dollars and previously unheard-of reward rates now commonplace. Now the trend may shift to ease of redemption, thanks to Discover's victory in this year's study.
Competition for new credit card customers is intense, and it should be. After all, credit card lending can be extremely profitable for banks, with high interest rates and relatively low delinquency rates when the economy is strong. This competition could lead to even more new and innovative credit card products that smart consumers can take advantage of. Regardless of which issuers ultimately win the credit card wars, one winner is clear -- consumers. In fact, I would be surprised if we didn't see another round of record high satisfaction ratings next year.