Federal officials are taking a closer look at the points and miles consumers earn on their credit cards — and the scrutiny could help cardholders get a better bang for their buck.
The Department of Transportation and the Consumer Financial Protection Bureau are exploring possible regulation of the credit-card rewards system and the frequent-flier programs linked to them, officials said at a joint hearing held by the two agencies Thursday.
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CFPB Director Rohit Chopra and Transportation Secretary Pete Buttigieg criticized the programs, which they said have become increasingly complex, confusing and opaque for consumers.
“It’s clear that these programs contain a considerable amount of value. Like anything of value that is transacted in our economy, it’s important that it’s handled fairly,” Buttigieg said in the hearing. “The value of points is completely up to the companies issuing them.”
In a report published Thursday morning, the CFPB said it found “numerous problems” with credit-card rewards programs, including limited redemption opportunities, hidden and complex terms, and rewards that are devalued or denied even after those terms are met.
For the report, the CFPB said it evaluated several hundred consumer complaints related to the programs.
Richard Hunt, executive chair of the Electronic Payments Coalition, a lobbying group for banks and payment networks, said the hearing was “political retribution” directed at companies that have opposed proposed legislation that would regulate credit cards and that could impact reward programs.
“Millions of Americans, especially low- to moderate-income Americans, rely on credit-card rewards to help pay for groceries, gas, back-to-school supplies and trips to see loved ones,” Hunt said in a statement. He added that rewards from co-branded airline cards are used by 30 million Americans and can generate $23 billion in economic activity.
Both the CFPB and the DOT have cracked down on business practices in the credit-card and airline industries over the last few months.
Last week, the DOT announced new rules that will require airlines to offer cash refunds to travelers if airlines cancel or make other “significant changes” to flights.
In March, the CFPB finalized a rule that capped credit-card late fees at $8, a fraction of what most issuers typically charge. Chopra told reporters that same month that the agency would be taking a closer look at rewards programs, following an increase in complaints from consumers.
Why are regulators looking at frequent-flier miles?
Credit-card rewards programs have become a major part of the business model for airlines, Buttigieg said at the hearing.
Airlines sell flight miles in bulk to credit-card issuers, which then offer them to cardholders as rewards.
“The big airlines make so much money from these programs,” said David Slotnick, a senior aviation business reporter at The Points Guy. “They can — and have — made more money from these frequent-flier programs than they do from flying.”
Those programs have become more challenging for customers to navigate in recent years, said Dave Grossman, founder of the credit-card-rewards website MilesTalk.
In the past, airlines published awards charts that allowed customers to see how many miles they could trade in for a particular flight, Grossman said.
“That was good for consumers,” he said. “They know that if they can accrue X amount of miles, they can do Y with it.”
But almost every airline has done away with that practice, Grossman said. Now, the number of frequent-flier miles a customer needs to cash in for the flight they want is determined by a more dynamic, behind-the-scenes system.
That has helped ensure that more customers can actually get seats on flights they want to book with rewards, he said. But it also means frequent fliers aren’t informed when the pricing system changes, and unbeknownst to them, their reward miles could fluctuate or fall in value.
“The consumer now has no protection against these devaluations,” Grossman said.
One consumer wrote to the CFPB saying that the miles their issuer required to redeem a $100 gift card had recently increased 25%.
“I have been accruing these miles for years,” the complaint read. “I want the value of the miles that I have accrued in relation to what I agreed to when I got the card.”
Customers can get burned in other ways as well, the CFPB’s report said. Another consumer said she totally lost her flight miles when an airline website had a technical issue while transferring points from the card issuer.
The cardholder initiated a dispute with the bank, but ultimately wasn’t able to get her points back. “Customers literally have no protection at all after they initiate a transfer,” the consumer wrote.
Chopra said at the hearing that the CFPB will look at ways to help consumers be sure that the points and miles they earn can actually be used as advertised or communicated to them.
Airlines of America, the airline industry’s lobbying group, said there is “fierce competition” in the airline rewards industry and that the programs are “widely popular” among consumers.
“Consumers have the power of choice when picking a carrier for air travel or a credit card for spending, with a wide range of options, to pick what best fits their needs,” a spokesperson for the group told MarketWatch in a statement.
Rewards programs aren’t inherently harmful to consumers, said Morgan Harper, the director of policy and advocacy at the American Economic Liberties Project. But the current airline rewards system operates much less like a “buy 10 coffees, get one free” card and more like its own currency market, she said — and that means some regulation will be necessary to protect consumers.
“It’s a little bit of a scam, if the value of the rewards can change overnight and if the promises that were made to you when you signed up for these programs aren’t fulfilled,” she said.
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.”
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Source: finance.yahoo.com