The subsidies will continue until morale improves

Are credit cards the next frontier in the VC subsidy economy?

Welcome to I’m Late to This, a newsletter about things I’ve tried not to forget about.

If someone sent this your way, be sure to sign up so you never miss an issue. We publish every Sunday morning. 

And a quick favor before we get started — If you like this post and this newsletter, please throw a “fav” our way: I’ve been told this helps the post get more visibility on the Substack site.

And now, credit cards. 

Earlier this month, Chase alerted me that the annual fee on my Sapphire Reserve credit card would be rising to $550 from $450.

The benefits cardholders get in exchange for this higher fee are: $60 worth of DoorDash delivery in 2020 and 2021; trial membership in a DoorDash loyalty program; trial membership in a Lyft loyalty program; and 10x points on Lyft rides through March 2022. 

After a brief moment of feeling upset about this and thinking I would downgrade my Reserve or get an AmEx or something, I’ve decided that this tweak is actually fine.

By far the most appealing benefit of the Sapphire Reserve has always been and remains the automatic $300/year travel credit. Spend $300 on any travel — a train ticket, a plane ticket, a cab ride, etc. — and you get it back from Chase in a statement credit. The fee on the card, in other words, was effectively $150/year. Now it is $250/year. 

Again: fine. 

I am sure many readers of this newsletter have done the credit card gaming thing and know a lot more about how to play the points game than I do. Sites like The Points Guy have turned all of us into quasi-experts on how to work the credit card system. I know people who have (literally) dozens of cards and know exactly how the benefits create a flywheel of perks that can be leveraged one on top of the other. 

There are many, many people who don’t spend a single dollar without thinking through how that dollar can be maximized through a rewards program. These people probably don’t even blink when the Sapphire Reserve fee goes up $100. They might even be fired up about this.

For mere amateurs like me, The Points Guy says that if I spend more than $8,425 on travel and dining every year then the card makes sense. I do, and so it does.

I did get a kick out of the comment Chase’s Catherine Hogan gave to The Points Guy in an Q&A earlier this month when asked why the fee is going up. Hogan said: “Sapphire Reserve was built for customers who love to experience life through travel and dining – and it continues to deliver just that. Our cardmembers are savvy and we expect they will continue to find this card rewarding for how they live their lives.”

Translation: we know most of our cardmembers are like Myles. They are lazy. And we have them. So we will charge them more. 

And that Chase is out here making the benefits for Sapphire Reserve customers slightly worse after barnstorming the premium card space back in 2016 isn’t surprising. JP Morgan took a $300 million charge on the business in 2017 and $330 million in 2018. 

On the other hand, American Express said last year that it increased perks following Chase’s foray into the space but has now seen signups for its competing Platinum card jump 60%. [Insert positive comment about capitalism and market competition here.]

The point-all is: I don’t think I really care about credit cards any more now than I did when I decided to take the plunge and pay up for a premium card and so I will move on with my life and absorb yet another marginal slight as a cog in the consumer industrial complex that systematically tries to suck every last unspoken-for dollar out of my accounts. You can also just do the Ramit Sethi thing — can you afford $100 a year? If yes, keep the card, put more in your 401(k), and live your life. 

The reason why Chase ramping up the pressure on their customers really interests me, however, is because of the companies they chose to partner with and where the upselling-millennial-customers-who-know-a-lot-about-their-choices game goes from here. 

Chase’s parent company, JP Morgan, just finished off what Bloomberg called the best year a bank has ever had. In the history of the world. To wit: JPM’s profit in 2019 was $36.4 billion. 

Lyft and DoorDash, on the other hand, do not make money. 

Lyft said in its most recent quarterly report that it expects its adjusted EBITDA loss to be between $708-$718 million in 2019 with revenues coming in just shy of $3.6 billion. We don’t need to do a whole accounting thing about these adjustments but it will suffice to say: there are many. Losses at Lyft, in other words, are far steeper than $720 million or whatever the 2019 adjusted EBITDA loss comes out to. 

DoorDash, meanwhile, is expected to lose $450 million in 2019 on revenue between $900 and $1 billion. The company is estimated to be left with somewhere between $500 million and $1 billion in cash on hand, according to The Information. And, yes, the company is expected to go public to raise money — or maybe SoftBank will come and pump more cash into the business — but the most recent financial outlook for the company is: they have two more years of money left.

JP Morgan has, effectively, unlimited money. Lyft and DoorDash do not. But Lyft and DoorDash, two companies that aren’t particularly close to being profitable, are now partnering with a bank that made $36.4 billion in ONE YEAR. Chase is using its customers and its brand to subsidize the efforts of Lyft and DoorDash. Or: is it the other way around? 

JP Morgan, of course, has already partnered with Lyft: the bank lead Lyft’s IPO. And DoorDash may also soon be looking at an IPO, and just they might need a bank to help them do it. 

On this count, mystery solved: Lyft and DoorDash need money and customers and Chase is willing to use its Sapphire Reserve rewards program to bolster and/or establish an investment banking relationship with companies that will need banks. This is not exactly groundbreaking stuff.  

But consumers don’t care at all about investment banking. Most of them don’t know what investment banking is. They just know that they are now being pulled into the Lyft and DoorDash spheres of influence on behalf of Chase. 

So let’s assume Chase doesn’t only see these partnerships as part of bolstering banking relationships through consumer channels. Is the firm seeing millennials signing up for their credit card en masse and wondering: what do millennials really want?[1] And is Chase then further trying to find ways to give those customers benefits targeted at them? Perhaps.

If the parody of a millennial consumer wants to call cars and get food delivered, then, well, we, Chase, should give them that. The millennial is an optimizer. They have allowed brands to reshape their expectations around convenience because the big things — housing, wage gains, student debt — are too far gone to even contemplate. Instead, millennials get by with the little things: food delivery and not having to drive. 

Under this framework, Lyft and DoorDash are actually connecting the dots for Chase. By offering Chase’s millennial customers subsidized access to the most millennial-friendly services available, Lyft and DoorDash create previously unrealized value for the Sapphire Reserve’s core customer.

This tie-up between an established, old-line brand like Chase and new economy defining brands like Lyft and DoorDash also illustrates a potential and necessary path forward for the entire VC-funded consumer ecosystem.

In a blog post earlier this month, Fred Wilson said:

The 2010s were a decade in which startups mastered marketing and channels like Facebook and Instagram emerged to satisfy their demand.

But what if that game is over? What if that well has gone dry?

Alex suggests we have to go back to virality and customer to customer marketing in his post.

I think we are more likely headed to something new and I am not entirely sure what that is.

And the Google/Facebook/Instagram well has not exactly “gone dry”. But it sure feels like steady-state to me now. It is a must-do but you can’t beat the competition there anymore because everyone is there.

So here we are. At the cusp of something new because we need it. Now we need to figure out what it is.

Maybe that new paradigm is finding ways to further integrate the VC-backed consumer economy with the established gatekeepers of the old consumer economy. Uber has been a big AmEx partner for years now. Lyft and DoorDash are now big Chase partners. The circle of corporate life. 

And if social and search channels are already overstuffed — see Google’s horrid search page redesign — then targeted, explicit partnering with the goal of habit-forming might be the most fertile ground available in the years ahead. 

The upshot of Fred Wilson’s post is that startup marketing over the last decade has 100%, unequivocally worked. In many cases, probably even better than dreamed. Just look at the stock prices of Google and Facebook: their market cap gains are essentially the vig on companies trying to get us to do stuff. And companies wouldn’t keep paying Facebook and Google if it didn’t work so well. 

And so if there’s a chance that the social and search marketing world that has come to dominate is in fact downshifting to a “steady state” that Wilson suggests — think about steady CPG companies and their television ad budgets have been despite the decline in TV viewing — maybe the future is just Chase/Lyft/DoorDash tie-ins all the way down. 

My initial displeasure with the Sapphire Reserve’s new benefits were really based around what seemed to me their overtly promotional nature. Like, these programs are literally trial periods aimed at getting me to either 1: forget I’m about to automatically renew a subscription I didn’t really want or 2: form a habit I didn’t mean to form. 

But the second complaint really just answers the entire question this post works towards: am I in fact susceptible to anything marketers put in front of me? The answer for all of us is basically: yes. It’s just that certain tactics only work for so long. And so all that changes now is how companies acquire customers.

The question that might be harder to answer in the decade ahead than in the decade we just finished is who benefits? The 2010s economy saw venture capital subsidize a huge amount of city-dwelling, upwardly-mobile millennial consumer spending. It would seem unlikely that Chase will be doing the same for me for the next ten years. 

Then again, maybe Chase and other incumbents see this coveted millennial cohort as more flighty than previously assumed. We are, after all, on a long march towards becoming our parents.

And so if this piece began with the assumption that Chase was screwing Sapphire Reserve customers over just because they’d shown themselves to be locked-in and willing to take it, maybe another answer is that Chase is actually worried about how quick these customers might leave.

And what we might take with us. 

Thanks for reading I’m Late to This. If you liked what you read, share it with a friend and make sure to subscribe.

If you agree, disagree, or just want to weigh in on today’s newsletter, reply to this email or hit me up on Twitter @MylesUdland. Feedback is always welcome and highly encouraged.

[1] Perhaps, but also: it’s about the investment banking relationship.