The 2 credit card companies with the most loyal customers

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For the first time in its six year history, credit ranked as the overall preferred method of payment in Total Systems Services' 2016 U.S. Consumer Payment Study. The survey results reinforce what we seemingly observe every day. Consumers choose credit cards for a variety of reasons: reward points, credit score improvement, and superior protection against fraud.

As credit card usage increases, it might be worthwhile, as both consumers and investors, to see which credit card companies command the most loyalty from their account holders. Fortunately, we have the Brand Keys' annual Customer Loyalty Engagement Index to help us with this task.

Stack of credit cards fanned out.

Image source: Pixabay.

While it is a little unclear how the index, which looks at customer relationships with 740 brands across 83 industries, calculates its loyalty rankings, the marketing consulting group did have this to say about its study:

The Brand Keys data paints a detailed picture of the category drivers that engage customers, engender loyalty and drive real profits.

These drivers not only define how the consumer will view the category, compare offerings, and, ultimately, buy, but also identify the expectations the consumer holds for each driver. The brand whose drivers come closest to meeting (or even exceeding) those of the category Ideal is always the one whose customers will demonstrate the highest levels of engagement and loyalty over the next 12 to 18 months.

Credit card rankings

In the credit cards category, the payment networks Mastercard and Visa finished sixth and fifth (tied) respectively. This might not be too surprising since the networks only facilitate transactions for the card-issuing banks and consumers and do not issue cards themselves.

The big card-issuing banks finished higher on the list: Citigroup Inc(NYSE: C) placed fifth (tie), Bank of America Corp(NYSE: BAC) fourth, JPMorgan Chase & Co.(NYSE: JPM) third, and Capital One Financial Corp. (NYSE: COF) second.

So, if the duopoly payment networks and the giant card-issuing banks didn't finish atop the rankings, who did? It was actually a tie between the American Express Company(NYSE: AXP) and Discover Financial Services(NYSE: DFS).

RELATED: Check out the most valuable banks in America:

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The most valuable banks in America

1. JPMorganChase

Current worth: $2.47 Trillion  

Photo credit: Reuters

5. U.S. Bancorp 

Current worth: $438.5 Billion 

Photo credit: Reuters 

6. PNC Financial 

Current worth: $361.3 Billion 

Photo credit: Reuters 

7. Capital One

Current worth: $339.1 Billion 

Photo credit: Getty

8. BB&T 

Current worth: $221.9 Billion 

Photo credit: Getty

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Why American Express?

I must admit, I was probably most surprised by the inclusion of American Express at the top spot. I thought too many angry customers being forced to exit American Express's fold when the company lost out on the Costco co-brand deal would have soured their ranking performance for a good while longer.

But give the company credit. Its increase in marketing and focus on offering rewards that customers cannot get anywhere else seem to be paying off. In 2016's fourth quarter, American Express spent more than $1.2 billion on marketing and promotion expenses; a whopping 30% sequential increase over the third quarter!

Bar graph from American Express earnings presentation showing rising market costs for the company

IMAGE SOURCE: AMERICAN EXPRESS COMPANY, EARNINGS CONFERENCE CALL Q4'16 SLIDE PRESENTATION

In the most recently reported quarter's conference call, CFO Jeffrey Campbell commented on the rewards that he believes set American Express apart from other credit card rivals:

We are seeing higher levels of engagement in many of our premium services, such as airport lounge access, and cobrand benefits such as First Bag Free on Delta. As we look ahead to 2017, we will continue to invest through this line as we expand the differentiated features and benefits we offer to our Card Members. We view this as another important component of our initiatives to drive revenue growth.

Why Discover?

For those keeping score, this is Discover's at least second consecutive year finishing on top of the rankings. It should also be noted that this isn't the only survey finding Discover on top of customer satisfaction ratings. Last year, Discover finished first in the J.P. Power credit card customer satisfaction ratings for the third year in a row.

Discover's business growth seems to reflect these high marks in customer satisfaction. Last quarter, every one of Discover's loan portfolios saw growth including its credit card, personal, and student loan portfolios. In last quarter's press release, CEO David Nelms stated, "We are proud of all we accomplished in 2016, including record originations in personal and student loans as well as strong new card account growth, all of which helped us to achieve nearly 7% loan growth."

Bar graph showing student and personal loan portfolio growth for Discover

Image source: Discover Financial Services 2016 Q4 Earnings Presentation

So what is consistently setting Discover apart from its peers? In last quarter's conference call, Nelms explained that the 5% cash back the company offers is a great headline number that grabs new customers' attention. Nelms also believes the revolving broad categories increased customer engagement with their Discover cards. But the secret sauce might be more than just the percentage the company offers back as rewards. In the company's 2016 fourth quarter conference call, CFO R. Mark Graf explained:

...we're very focused on an overall value proposition as opposed to competing on the basis of headline earn rate, right? So it's also about ease of redemption, dollar thresholds to redeem. We removed all those things. So it's not just about what's the headline earn. It's can you actually use it, right?

Discover deserves extra credit for creativity in this category. In its recent deal with PayPal, Discover was the first credit card company to work into the deal that its card holders could redeem points through using PayPal's payment platform.

Offering differentiating rewards and giving customers option regarding how to redeem their rewards appear to be a winning combination for increasing customer loyalty. Investors should take note: There are worse investing metrics to follow than a company's customer-base satisfaction when considering potential investments.

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