Credit cards are becoming an arms race between banks and their best customers

Look at what people are doing with 5% cash-back cards.

They aren’t asking which bank they like.

They are looking for the spending category that pays the most, moving their purchases there, collecting the reward and paying the balance off.

Then the bank notices.

Citi stopped taking new applications for Custom Cash in May. That card automatically gives 5% back on your highest eligible spending category, up to $500 a billing cycle.

Now people are hunting for whatever is left.

That tells you something about the business.

The banks created rewards to change customer behavior.

Customers figured out how to change the bank’s economics instead.

A person who puts $500 of groceries on a 5% card generates $25 in rewards.

Do that every month and the customer gets $300 a year from one spending category.

If the customer pays the balance in full, the bank isn’t getting the interest income it gets from a revolver either.

So the customer has effectively turned the credit card into a little rebate machine.

And once enough people figure out how to do that, the bank has a problem.

It can’t simply advertise the reward forever.

It has to watch how people use it, figure out where the money is going and eventually change the rules.

That’s why the reward itself may be less interesting than what happens after customers figure it out.

Every lucrative credit-card perk creates an incentive for customers to optimize around it.

Then the bank has to optimize around the customers.

That’s an arms race.

And the people who got into the good cards early may end up with something the next customer can’t buy anymore.