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This Rewards Card Is a Huge Success for JPMorgan Chase

Even though JPMorgan Chase's (NYSE: JPM) shares have dropped since the bank reported earnings at the end of last week, investors shouldn't interpret this as a sign that something was wrong with the bank's second-quarter performance. In fact, aside from a sharp decline in trading revenue, everything else looked pretty good.

There was one area in particular where JPMorgan Chase shined last quarter. Credit card sales volume was up 15% in the quarter compared to the year-ago period, meaning that people used their cards more in the three-month stretch this year. While higher consumer spending helps to explain this, the success of JPMorgan's Chase Sapphire Reserve card shouldn't be overlooked.

Image source: JPMorgan Chase.

"One of the biggest drivers . . . in card revenues has been the extraordinary success we've had in capturing new Chase Sapphire Reserve accounts," said chief financial officer Marianne Lake on the bank's second-quarter conference call. Lake went on to note that "both the fourth quarter and the first quarter were extraordinary in terms of the number of accounts we acquired," as well.

Few credit cards have attracted as much attention among consumers as the Chase Sapphire Reserve card did when it came out last year. The reason it has been so popular is because of its generous rewards program.

The original sign-up bonus gave cardholders 100,000 points after they spent $4,000 in the first three months after opening an account. That equated to $1,500 worth of actual value that could be redeemed for travel-related purchases.

JPMorgan Chase has since reduced the original sign-on bonus to 50,000 points, though that still equates to $750 worth of value. On top of this, cardholders receive up to $300 in statement credits as reimbursement for travel purchases charged to the card each year.

The one downside to the card is its $450 annual fee. However, for people who frequently travel, the card is still very much worth it, given the size of the sign-on bonus combined with the annual travel redemptions.

Jamie Dimon, the chairman and CEO of JPMorgan Chase. Image source: JPMorgan Chase.

The benefits to JPMorgan Chase have been twofold. In the first case, the Chase Sapphire Reserve card has helped the bank grow its core loan portfolio, as the loans underlying credit card balances are held by banks. On top of this, as Lake noted on the call, the customers that are attracted to the card "are extraordinarily good customers. Their characteristic, their engagement, their spend, these are the customers that everybody wants to acquire. We now have them and we intend to deepen relationships with them."

There is, however, one thing to keep in mind. The tangible impact from these cards won't be fully felt on the bottom line by JPMorgan Chase until later. Because of the high cost of acquiring these customers, it takes years before the relationships fully season from a financial perspective. As CEO Jamie Dimon shared on the bank's conference call, the acquisition costs are expensed over 12 months, but the benefits come over seven years.

In this light, the Chase Sapphire Rewards card isn't just about boosting JPMorgan Chase's performance today, it also layers in a multi-year annuity that the bank will earn for years into the future. This buttresses the thesis that investors can feel comfortable holding shares of the New York-based bank for the long term.

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John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.