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Sunday, December 14, 2025
Beyond Points, Miles, and Cashback: How Prize-Linked Rewards Could Save Credit Card Engagement
The proposed Visa-Mastercard settlement has sent shockwaves through the payments industry, threatening to upend the credit card rewards model that has driven consumer loyalty for decades. With interchange fees facing downward pressure and merchants gaining the ability to selectively reject premium rewards cards, card issuers face an existential question: How do you keep cardholders engaged when traditional interchange-funded rewards become economically unsustainable?
The answer may lie in an innovative approach that decouples rewards from interchange entirely: prize-linked rewards programs that turn every swipe into a chance to win.
The Interchange Squeeze
The settlement's impact on card issuers cannot be overstated. Interchange fees—the lifeblood funding cashback, points, and miles—face temporary caps and reduced rates. Meanwhile, merchants can now reject high-fee premium cards altogether or surcharge customers who use them. This creates a perfect storm: lower revenue to fund rewards combined with reduced merchant acceptance that makes premium cards less useful.
Traditional rewards programs operate on simple economics. A card offering 2% cashback on a transaction with 2.5% interchange generates a slim margin. Reduce that interchange to 1.5%, and the model collapses. Card issuers face an uncomfortable choice: slash rewards and watch cardholders defect to competitors, or maintain rewards and bleed money on every transaction.
Enter Prize-Linked Rewards
Prize-linked savings accounts have demonstrated the psychological power of gamification in financial services for years. Credit unions and banks offering these products have seen remarkable engagement, with customers making more frequent deposits and maintaining higher balances—all for the chance to win prizes funded by the interest that would have been paid anyway.
Prize-linked rewards for credit cards apply the same behavioral economics principle but flip the model entirely. Instead of promising guaranteed cashback funded by interchange, issuers offer cardholders:
Game-Based Engagement: Every purchase earns entries into instant-win games or scratch-off style experiences delivered via mobile app. The dopamine hit of potential winning occurs with every transaction.
Sweepstakes Entries: Accumulated spending translates to entries in periodic drawings for substantial prizes—think monthly $10,000 jackpots or quarterly dream vacation giveaways.
Tiered Prize Structures: Small instant wins keep engagement high (free coffee, $5 credits), while mega-prizes generate excitement and word-of-mouth marketing.
The critical innovation? These programs cost a fraction of traditional rewards to operate.
The Economics Make Sense
Consider a portfolio of one million cardholders spending an average of $2,000 monthly. A traditional 1.5% cashback program costs $30 million annually. A prize-linked program offering the same perceived value might allocate:
• $5 million to a prize pool distributed through instant wins and sweepstakes
• $2 million to program administration and technology
• $3 million to marketing the program's winners and generating excitement
Total cost: $10 million, a 67% reduction in rewards expense while potentially driving higher engagement.
The math works because of a fundamental principle: not everyone wins, but everyone feels like they could. Traditional rewards guarantee every cardholder receives something, requiring massive funding. Prize-linked rewards leverage probability, allowing issuers to deliver compelling value propositions at sustainable costs.
Behavioral Advantages Beyond Cost
Prize-linked rewards may actually drive stronger engagement than traditional programs:
Variable Reward Schedules: Behavioral psychology demonstrates that unpredictable rewards create stronger habit formation than guaranteed rewards. Slot machines wouldn't dominate casino floors if predictable returns were more compelling.
Shareability: Winners become organic brand ambassadors. A $10,000 sweepstakes winner generates social media buzz and word-of-mouth marketing that 1.5% cashback never could.
Frequency Over Magnitude: Small instant wins create more frequent positive reinforcement than quarterly statement credits, keeping the card top-of-wallet.
Gamification Hooks: Integrating games, badges, and achievement levels creates sticky engagement that purely transactional rewards cannot match.
Regulatory and Consumer Considerations
Prize-linked rewards aren't without challenges. Sweepstakes regulations vary by state, requiring careful legal structuring. Some jurisdictions might classify certain implementations as gambling, necessitating "no purchase necessary" alternative entry methods.
Consumer advocacy groups may initially resist the shift away from guaranteed rewards, viewing prize-linked programs as less valuable. Transparency becomes paramount—cardholders must understand the odds, prize structures, and expected values.
However, these obstacles are surmountable. Prize-linked savings accounts have navigated similar regulatory terrain successfully. Clear disclosure, generous "no purchase necessary" alternatives, and genuine value delivery can satisfy both regulators and consumers.
The Path Forward
Forward-thinking card issuers should view the settlement not as a crisis but as an opportunity to reimagine cardholder engagement. The issuers who thrive will be those who:
1. Test hybrid models: Combining modest guaranteed rewards with prize-linked components to bridge the transition
2. Invest in experience: Building compelling apps and games that make earning chances to win genuinely entertaining
3. Leverage data: Using transaction data to personalize instant-win opportunities and prize offerings
4. Create community: Building ecosystems where winners are celebrated and engagement becomes social
The payment card industry has reinvented itself before. It survived the shift from charge cards to revolving credit, the transition from paper to plastic, and the migration from magnetic stripe to chip. The interchange-reward model had a good run, but market forces and regulatory pressures are forcing evolution.
Prize-linked rewards represent more than a cost-cutting measure. They offer a path to more engaging, sustainable, and psychologically compelling loyalty programs that don't depend on interchange rates that may never return to their previous levels.
The cards that win the next decade won't necessarily be those with the highest cashback rates. They'll be the ones that make every transaction feel like it could change your day—or your life. That's a value proposition that no settlement can diminish.
Tuesday, August 12, 2025
Looking forward to this EBN webinar: "How an HSA supports employees at every career stage."
How an HSA supports employees at every career stage
In this webinar, we'll explore how to communicate the value of HSAs to employees at every stage of their career: helping early-career professionals build smart financial habits, supporting mid-career employees facing growing healthcare expenses, and showing late-career workers how HSAs can complement their retirement planning.
Go to Employee Benefit News website to learn more.
Tuesday, January 21, 2025
Lots of innovative payment solution at 2025 NRF - look at JPMC
Lots of interesting, innovative payment solutions at the 2025 NRF BIG SHOW. JPMC's merchant services team has full suite of solutions to consider. 2025 will likely be a year of tremendous change at the point of sale with merchants upgrading their devices for systems that provide better features, functionality and support.
#NRF2025