The Consumer Financial Protection Bureau has launched a broadside against credit card rewards programs. I spoke with CFPB’s Director, Rohit Chopra about the effort.
The agency warns that several aspects of credit card rewards programs – like devaluations – may violate the law, that retail (store) cards are often poor value, and that consumers can be misled by tools that purport to suggest the best product for them.
How CFPB Says Card Rewards Mistreat Consumers
The agency outlines three areas where card rewards programs may be breaking the law.
- Devaluation: They consider devaluing reward points that have been earned to potentially be a bait and switch, and therefore unfair and deceptive practice.
I asked Director Chopra, though, to share at a top level what the legal guidance is on what practices are actually illegal? And it’s quite clear that devaluations themselves aren’t – it’s “creating an impression about value that the[ program] can’t live up to” for instance, a claim that a card’s initial bonus is worth “two free roundtrip airfares but if almost nobody is able to get that, then it runs afoul of long-standing law.”
When airline loyalty programs drop award charts, to the detriment of consumers, that helps protect them against criticism that they’re not delivering on promises. Promise nothing!
- Hiding terms and conditions: Some consumers find rewards programs confusing. Their complexity often is the source of opportunities for outsized value. But I’m aware of very few ‘hidden terms’ of programs. This appears to refer mostly to a program’s ability to revoke rewards or cancel accounts, which is something generally done only (1) when an account is closed in order to comply with Know Your Customer and Anti-money laundering rules foist on them by the government, or (2) fraudulent behavior.
Generally speaking, as long as a bank pays out the value of earned rewards when cancelling an account except in clear cases of fraud, though, it’s hard to suggest there’s anything deceptive going on here though.
- Failure to deliver promised benefits: CFPB says that “[i]f system failures result in consumers losing points when attempting to redeem, this may be considered an unfair or deceptive practice.” This is a pretty edge case, and programs generally make good here.
More common is transferring points to an airline to book an award that turns out not to be available. The Department of Transportation already has pressed airlines to return points that were transferred back to their source in similar cases.
Are We Talking About Bank Programs Or Co-Brand Rewards, Though?
There’s a lot of conflating going on here. CFPB generally regulates bank interactions with consumers. Banks operate their own rewards programs. The premier bank programs aren’t generally known for devaluation (other than, perhaps, Citibank’s earlier iterations of ThankYou Rewards – those used to be much more valuable).
The real interest and bad behavior stems from airline (and hotel) program devaluations. And banks issue co-brand cards. They buy points from airlines and give them to consumers. And that probably creates some joint liability for CFPB rule compliance. Director Chopra tells me that “credit card companies are responsible for representation made by marketing partners.”
At the same time, airline pricing – including frequent flyer program pricing, the Supreme Court says these rewards are a rebate on airfare in Northwest v. Ginsberg – really isn’t the purview of the CFPB. Under the Airline Deregulation Act, that’s the exclusive province of the Department of Transportation. And though DOT itself says they’ve improperly ignored consumer complaints about frequent flyer programs in the past, they’ve recently undertaken an investigation.
When I pressed for CFPB’s jurisdiction here, the Director noted that banks operate their own rewards programs (Citi ThankYou Rewards, Chase Ultimate Rewards, American Express Membership Rewards, et al). And CFPB jurisdiction there is clear.
This Probably Doesn’t Change Anything For Card Rewards Programs
CFPB is not enacting any new rules. They’re also not announcing any enforcement of existing rules. Instead, they’re highlighting what they believe current rules are.
Judging by the lack of enforcement actions, it’s safe to say that card issuers are in little danger here. And that’s even before a change in administration – a 2020 Supreme Court decision made the agency’s director subject to removal by the President for reasons other than cause.
The Director suggested that my take that ‘this is current law and CFPB hasn’t paid attention to it over the past dozen years is fair but off, since “a lot of [their] focus over the past two years has been trying to understand what are the roadblocks or hurdles that consumers are facing when it comes to redemption” – this is a multi-year effort just coming to fruition – and they’re “going to be much more closely scrutinizing when points or miles are suddenly devalued.”
One way to read this is as a last minute publicity tour by the CFPB prior to the end of the Biden administration. I actually wish that the rules had some force, but they aren’t likely to. Director Chopra pushed back to suggest that “people in every state, of every partisan affiliation, are using credit cards and credit card rewards” and they’re “no longer just offered to higher income consumers” so there should be interest and support for continuing this effort.
Store Cards And Bad Card Advice
CFPB finds that retail cards offer a poor value relative to other products, which isn’t surprising. They’re often taken by more marginal customers, so higher interest rates make sense.
To help consumers compare products, they’ve launched a tool with more than 500 cards. (N.B. that’s a lot of cards – a highly competitive market.) The agency also notes that card comparison tools that “steer consumers to certain products or lenders because of kickbacks” may be breaking the law. The algorithms and datasets behind recommendation engines that several sites use may be suspect.
Credit card comparison tools matter! Educating consumers matter. People don’t get enough financial education, and it’s not really something in public school curriculums in a meaningful way. If you’re regularly revolving credit card balances, you should focus on cards with the lowest APR not on rewards for spend. That might be a more fruitful strategy than threatening enforcement, probably signaling an exaggeration of the extent to which those cases will be brought.
The Motivation To Undermine Rewards Cards
The Department of Transportation is investigating rewards cards. That’s done at the urging of Senator Dick Durbin, whose attempt to legislate rewards card interchange would undermine rewards but more fundamentally also access to credit.
Airlines push back against efforts to regulate interchange, or merchant swipe fees, because those are a key component of credit card economics that makes it profitable to pay frequent flyer programs for miles to incentivize customers to use a given bank’s product.
People broadly benefit from rewards cards. The CFPB says “more than 90 percent of general-purpose credit card spending occurred on rewards cards” and undermining those rewards programs doesn’t leave consumers better off. (In Australia and in Europe, limiting card interchange did not lower prices.) So Durbin wants to undermine the credibility of those programs. If the programs are unfair, the argument that they’re harmed carries less force.
It’s in this same context that the CFPB is going after rewards cards. There are complaints they have that are true! But the motivation here is very much a political one, and one that leaves consumers worse off, which is an odd place for the Consumer Financial Protection Bureau to find itself.
Coming from the same government (regardless of admin) that causes inflation by bad monetary policy….. no less of a bait and switch.
@ Gary — You nailed it yesterday — Delta (and most other airlines) steals from its customers. ‘Nuf said.
The incoming administration will declaw the agency and hobbyist will just have to suck it up.
It’s zero sum. Any change that makes it harder for travel companies to cheat inattentive customers will end up reducing the value available to attentive customers. So, ironically, the cheating we complain about usually benefits us.
Most airlines have been devaluing their pseudo-currencies for a while now, always at our expense. (Sky Pesos, anyone?) So, why did the CFPB wait to do anything meaningful about this until a literal month before the agency is neutered by the new regime?
Same with the DOT proposing new compensation rules for delayed and canceled flights. Most of us are in favor of such protections (you know, because we all tend to travel frequently, hold thousands of dollars in these points and miles, and face such attempts at corruption by these greedy companies all the time). But we know these won’t pass. Cheap talk.
It would be so nice to have CFPB investigate federal government programs that steal from citizens and provide terrible customer service.
Hours long hold times to reach someone from Medicare/Social Security or IRS.
Medicare agreeing that they didn’t provide an enrollment number until several months after they were issuing bills and cannot issue a credit or waive the charges because it’s against policy and the computer won’t let them.
IRS charging interest and penalties because, instead of applying one year’s overpayment to the next year’s taxes as explicitly checked on the tax return, they issued a check which was not cashed but instead sent back to them, but in the IRS records the credit was only applied to the account when they processed the returned check. Multiple phone calls with IRS employees confirm that IRS records show the exact fact pattern and agree there should not be interest and penalties but all they can do is refer you to someone else and no one ever responds.
Properly preparing a USPS priority mail shipment and printing the label online. Bring it to the post office and the clerk requires you to remove it from the flat rate envelope (in which it fit just fine) and put it into a different envelope. Getting dunned higher fees because it wasn’t in a flat rate envelope. Trying to appeal and only getting automated responses.
There are so many examples where the government abuses you and you have no effective recourse. They can provide terrible service with no consequences or penalties. But no one wants to investigate that.
The problem is that we all earned these points when there were award charts, and flights available at those amounts. You could count on them going up over time, sure. But now it’s close to impossible to find any “saver” availability, and airlines like Delta have gone from 120k miles RT to average of 400k for the same flights. It was a huge jump, which was a bait and switch.
Financial Darwinism would indicate the more they steal the more likely they will alienate their customers. We are incapable of NOT acquiring miles so we are just addicts that complain.
Darwinism is taking too long so it’s up to us to STOP acquiring worthless airline miles- just take the CASH instead. No lobbyist or politician can stop that trend.
Article is informative but clearly not written without an agenda. Card rewards have driven merchant cost up such that merchants regularly charge extra for using cards (or refuse to accept certain cards – in Europe AMEX is often no longer even accepted due to the high cost). And with higher point values, card companies benefit more from expired/rescinded/cancelled points – the “ultimate redemption rate” (for AMEX around 96%) has a material impact on their financial statements.
@Trebron that is simply not true, since depending on the line of business card is less expensive to accept than cash (4% – 9%). Clerks give out incorrect change and steal. Heavy cash businesses often have higher insurance costs. Massachusetts, New Jersey, New York, Virginia and Los Angeles actually REQUIRE businesses who would prefer taking only card to accept cash. And where swipe fees are limited, the consumer does not benefit.
The CFPB is a good candidate for abolishen under DOGE. Consumers or the market can take care of the problems it purports to prevent or fix on their own.
Outgoing agency heads love to talk big about what they would do…if it weren’t for the fact that they’re losing their job in a month.
A good question for these types is why they didn’t do what they’re talking about in the last four years.
The devaluations are indeed a form of bait and switch. Too bad state consumer law in some places doesn’t apply to (nearly all) airlines flying in the US.
@l3
‘Consumers or the market can take care of the problems it purports to prevent or fix on their own.;’
Totally false. Short of going to court (which is also a form of government intervention) or compulsory arbitration, how does one resolve disputes with banks/finance companies?
@Jon F
You are right. We all know you are right. L3 is trolling or willfully ignorant. I enjoy good satire and healthy cynicism, but I doubt he is being sarcastic here. Perhaps, L3 is a ‘true believer,’ and he, like all of us, will soon be at the ‘find out’ phase of FAFO, as is what happens when you trust a notorious con man, yet again.
For the rest of us, you know, we who actually care about our rights and protections, as consumers, there are dark times ahead. We don’t need ‘efficiency’ as much as we need ‘effectiveness’ with these regulators. In the US at least, we recently had a choice to ‘do better,’ but more chose to ‘sit it out’ or to ‘double down’ on stupid, so now we all will pay the price. So, now, we have to watch it all burn.
“Fly, you fools!”
Any semblance of non-partisanship is gone when making such statements during lame duck period. CFPB is unconstitutional, they know it, and they are just trying to be relevant before they are dissolved for political posturing purposes only.
Some observations:
@L3:
1) Free markets are rarely self correcting when there are too few competitors, or some of the competitors have market power. This is why there are consumer protection laws and antitrust laws to even the playing field.
2) DOGE is itself likely currently unlawful.. Musk cannot spend his own money for governmental purposes or donate his services to the government, nor can “DOGE” spend any money or perform any function until Congress authorizes it. Anti-Deficiency Act, 31 U.S.C. Sec. 1341 et. seq.: “…that it shall not be lawful for any department of the government to expend in any one fiscal year any sum in excess of appropriations made by Congress for that fiscal year, or to involve the government in any contract for the future payment of money in excess of such appropriations”.
3) Musk at one point promoted a “DOGE Coin” crypto, which he admitted on Saturday Night Live was a scam.
I leave it to the reader to decide whether DOGE is a scam, or merely another attempt by Musk at really sardonic humor.
Selling miles is a strategy used by airlines to raise capital. This strategy can help airlines survive through lean times. However, every time I see an advertisement for a sale of airline miles, I ask myself why should I buy miles the airline can just devalue the miles anytime they feel like it. As such, I rarely participate in sales of airline miles.
Now, if there was a hard industry rule against miles devaluation, perhaps people would be more willing to participate in buying miles.
How about a rule against devaluation of the currency?
I am finding the bait and switch practices of American Airlines Premium Select Credit Card through Citibank to be not only unjust but demoralizing. When I called to ask when they’d be applying the final 20000 miles for my 50000 rewards card, they said they needed a screen shot or some type of proof that I signed up for that card because their notes claim I signed up for the 30,000 mile card. I actually provided them with a screenshot between my daughter and myself on the day I instantly was approved for the card off the American Airlines website, stating that I just enrolled with this card and suggested she should also since their airport only flies American. But, no, that wasn’t proof enough. Did they want me to videotape myself as I filled out their online application? The runaround via phone and email messages has been frustrating and futile.