Government authorities are closely examining the points and miles that consumers accumulate on their credit cards, which could potentially benefit cardholders by maximising their value.
During a joint hearing held by the Department of Transportation and the Consumer Financial Protection Bureau on Thursday, officials discussed the potential regulation of the credit-card rewards system and the frequent-flier programmes associated with them.
CFPB Director Rohit Chopra and Transportation Secretary Pete Buttigieg expressed their concerns about the programmes, highlighting their growing complexity, confusion, and lack of transparency for consumers.
It’s evident that these programmes hold significant value. It is crucial that anything of value transacted in our economy is handled fairly,” Buttigieg stated during the hearing. The worth of points is entirely determined by the companies that issue them.
In a report released on Thursday, the CFPB highlighted several issues with credit-card rewards programmes. These issues include restricted redemption options, complicated terms and conditions, and rewards that lose value or are denied despite meeting the requirements.
In its report, the CFPB stated that it assessed numerous consumer complaints pertaining to the programmes.
Richard Hunt, executive chair of the Electronic Payments Coalition, a lobbying group for banks and payment networks, expressed his belief that the hearing was driven by political motives. He suggested that the companies being targeted have been vocal in their opposition to proposed legislation that could potentially regulate credit cards and have an impact on reward programmes.
According to a statement by Hunt, credit-card rewards are relied upon by millions of Americans, particularly those with lower to moderate incomes, to assist with expenses such as groceries, gas, back-to-school supplies, and visits to family and friends. He mentioned that the benefits of co-branded airline cards are utilised by 30 million Americans and have the potential to generate $23 billion in economic activity.
Recently, the CFPB and the DOT have taken strong measures to address questionable practices within the credit-card and airline sectors.
Last week, the DOT unveiled new regulations mandating that airlines provide cash refunds to passengers in the event of flight cancellations or other substantial alterations.
In March, the CFPB implemented a rule that limited credit-card late fees to $8, a significantly lower amount compared to what most issuers usually charge. In the same month, Chopra informed reporters that the agency would be closely examining rewards programmes due to a rise in consumer complaints.
Why are regulators looking at frequent-flier miles?
Credit-card rewards programmes have become a significant component of airlines’ business models, as highlighted by Buttigieg during the hearing.
Flight miles are sold in bulk by airlines to credit-card issuers, who in turn offer them to cardholders as rewards.
According to David Slotnick, a senior aviation business reporter at The Points Guy, the profits generated by these programmes for the big airlines are substantial. “They have been able to generate significant profits from these frequent-flier programmes, surpassing what they earn from actual flights.”
According to Dave Grossman, the founder of the credit-card-rewards website MilesTalk, customers have found those programmes increasingly difficult to navigate in recent years.
According to Grossman, airlines used to release awards charts that provided customers with information on how many miles they could exchange for a specific flight.
He expressed satisfaction with the positive outcome for consumers. “They understand the value of accumulating a certain number of miles and the possibilities it opens up.”
According to Grossman, that practice has been eliminated by almost every airline. Now, the amount of frequent-flier miles required for customers to redeem their desired flight is determined by a sophisticated, behind-the-scenes system.
According to him, this has been instrumental in ensuring that a greater number of customers are able to secure seats on desired flights using their rewards. However, this also implies that frequent fliers may not receive timely updates regarding changes in the pricing system. Consequently, they may be unaware that the value of their reward miles could potentially fluctuate or decrease.
“The consumer is left vulnerable to these devaluations,” Grossman remarked.
A consumer recently contacted the CFPB to express their frustration over the sudden 25% increase in the number of miles required by their credit card issuer to redeem a $100 gift card.
“I have been accumulating these miles for years,” the complaint stated. “I would like to understand the current value of the miles I have accumulated in comparison to the terms and conditions I agreed to when I obtained the card.”
According to the CFPB’s report, customers can also face negative consequences in various other ways. A frustrated customer shared her experience of losing her flight miles due to a technical glitch on an airline website during the points transfer process.
The cardholder initiated a dispute with the bank, but unfortunately, she was unable to recover her points. According to the consumer, customers have no protection whatsoever once they initiate a transfer.
During the hearing, Chopra emphasised the importance of the CFPB’s role in ensuring that consumers can effectively utilise the points and miles they accumulate, as promised or communicated to them.
The airline industry’s lobbying group, Airlines of America, stated that there is intense competition in the airline rewards industry and that these programmes are highly favoured by consumers.
According to a spokesperson for the group, consumers have a variety of options to choose from when selecting an air travel carrier or a credit card, allowing them to find the best fit for their needs.
Rewards programmes are not necessarily detrimental to consumers, according to Morgan Harper, the director of policy and advocacy at the American Economic Liberties Project. According to her, the current airline rewards system functions more like a currency market rather than a simple “buy 10 coffees, get one free” card. As a result, she believes that some regulation will be required to safeguard consumers.
She expressed scepticism about the reliability of rewards programmes, highlighting concerns about their potential to fluctuate in value and the possibility of unfulfilled promises.
What’s next for credit-card rewards?
It’s unlikely that any big changes to frequent-flier or credit-card rewards programs are imminent, experts told MarketWatch.
The CFPB and DOT are still working to understand the issue and “have not reached any conclusions” on regulatory next steps, Buttigieg said in Thursday’s hearing.
“My gut feeling is that this was step one of what will be a lengthy review process,” Grossman said.
It’s also unclear whether either agency even has the authority to regulate the airline rewards industry.
If the agencies do move to regulate the programs, it’s likely that regulators would focus on making the value of rewards points clearer to customers, Harper said, or addressing anticompetitive practices that keep smaller airlines or banks from offering larger rewards programs.
One thing seems clear: Completely eliminating airline rewards is off the table.
“Rewards programs are popular,” Harper said. “But today’s hearing showed a lot of consumers might not even be aware of how much these programs might not be fair, and might be devaluing the points they earn.”
