Credit-Card Rewards Programs Examined by U.S. Consumer BureauCarter Dougherty
The U.S. Consumer Financial Protection Bureau is examining whether customers are being misled when they sign up for complex credit-card reward programs and will mull new rules in this area.
Consumers can face “detailed and confusing rules” about using rewards, CFPB Director Richard Cordray said in an e-mail yesterday. “We will be reviewing whether rewards disclosures are being made in a clear and transparent manner, and we will consider whether additional protections are needed.”
Restrictions on card rewards programs could crimp the ability of banks to use the enticements to sign up customers. Top issuers such as JPMorgan Chase & Co., Bank of America Corp. and American Express Co. rely on rewards to attract and keep cardholders.
“Rewards are the No. 1 reason why customers select the card, and there’s almost a battle to provide the highest rewards,” Jim Miller, senior director of banking services at J.D. Power & Associates, a market research firm, said in an interview.
The consumer bureau’s inquiry involves the marketing of rewards programs, particularly the marquee promise of a given card, such as cash back, or redeemable airline miles, and what a customer needs to do to get it, said a person involved in the work who asked not to be identified because the effort is in an early stage.
Card issuers’ main challenge with rewards is making them alluring and straightforward, while still profitable for the company, said Discover Financial Services Chief Operating Officer Roger Hochschild.
“As we think about the rewards space, it really comes down to two things: making them easy to earn and easy to redeem, and trying to do all of that at an affordable cost,” Hochschild said during a Nov. 13. investor conference in New York.
Oliver Ireland, an attorney for card issuers at Morrison & Foerster LLP, said that rewards could prove a “tempting issue” for regulators. In contrast to interest rates and fees, there’s no existing federal regulation on the disclosure of rewards.
Regulating rewards isn’t justified, said Nessa Feddis, a senior vice president at the American Bankers Association.
“Rewards are incredibly popular, and the market is very competitive,” Feddis said in an interview.
Pamela Banks, senior policy counsel at Consumers Union, the nonprofit publisher of Consumer Reports, lauded the CFPB for examining rewards programs even in the absence of evidence of widespread abuse.
“To what degree does something have to be a problem before we take a look at it?” Banks said in an interview. “We should identify trends early.”
The bureau mentioned its interest in rewards programs in an Oct. 1 report on card regulation. Discover said in a Nov. 1 regulatory filing that it couldn’t predict the effects of any CFPB action over the question of “whether disclosures about credit-card rewards and grace periods are clear and transparent.”
Rewards programs have become a major tool for card issuers seeking to boost revenue since the financial crisis. Card balances peaked in December 2007 at about $1 trillion, according to data compiled by the Federal Reserve.
Since then, balances have leveled off at about $800 billion, limiting the interest income banks can earn from cards. The 2009 Credit Card Accountability, Responsibility and Disclosure Act, passed in response to industry abuses, crimped banks’ profits by banning or limiting some fees, especially on consumers with bad credit.
“What you’ve seen in the industry has been a focus turning away from lower credit-score customers,” said Bill Carcache, an analyst at Nomura Holdings Inc. “You’re going after the higher spending customers, and those customers love rewards.”
Rewards tend to attract customers who spend more on their credit cards, which generates “swipe” fees paid by merchants to banks, and interest if the card holders carry a balance, according to research by Moshe Orenbuch, an analyst at Credit Suisse Group AG in New York. The result is intense competition for this “lucrative segment,” according to the research.
“What we’ve learned over time is, our best customers value rewards,” Edward Gilligan, the president of American Express, said during a Nov. 12 investor conference. “Their spend behavior changes based on rewards, and when they actually cash them in, and get value, they’re even more loyal to American Express.”
In August, the six biggest U.S. credit-card issuers included rewards programs of some type in at least 71 percent of their solicitations, according to Orenbuch. Two of them -- New York-based AmEx and Discover -- included rewards in all of their mailings.
An increasing number of those customers don’t understand their rewards programs, according to J.D. Power, a unit of McGraw Hill Financial Inc. In its 2013 survey of cardholders, 59 percent said they “completely” understood their rewards, compared with 66 percent in 2012.
About a third of customers said they’re unaware of the benefits of their card, according to the survey.
“Consumers frequently don’t understand what rewards they have currently, but they’ll switch because they think they can do better elsewhere,” said J.D. Power’s Miller.
Credit-card rewards can take different forms. Many allow customers to accrue miles on airline loyalty programs, such as a Chase Visa card from JPMorgan that’s co-branded with United Continental Holdings Inc. The Quicksilver card, offered by Capital One Financial Corp., offers to rebate a percentage of all purchases with cash.
The CFPB inquiry isn’t motivated by a sudden rise in complaints by consumers, according to the person involved in the work. The bureau’s consumer response database, which has taken complaints on credit cards since July 2011, shows 677 on rewards, or 2.5 percent of the total. What the CFPB discovers through its supervision of banks isn’t public.
Still, the agency wants to review rewards programs because they are the No. 1 reason why consumers get a particular card, according to the person. In the jargon of the industry, rewards are at the “decision point” for or against a card, the person said.
The CFPB report cites a 2011 study by Mercator Advisory Group Inc., which found that 26 percent of customers chose a card because of the rewards program. An additional 21 percent chose cards because they had no annual fees, according to the research firm based in Maynard, Massachusetts.
The consumer bureau isn’t basing its work on the premise that the disclosures are unfair or deceptive, according to the person doing the work. That’s the legal standard that could prompt a supervisory or enforcement crackdown.
Getting the main rewards -- cash or airline miles -- may require a few months of participation or a certain level of spending, the person said. The conditions may also be obscure, even to consumers who read the disclosures, or be subject to “inflation,” in which the amount of spending needed to redeem an award rises over time, according to the person.
Another issue is forfeiture and reinstatement, the person said. The consumer might lose the rewards if a bill is paid late, and may also have the chance to get them back by paying a certain amount of the overdue balance.
Ireland, the card industry lawyer, said the complexity of rewards would make the impact of regulation unknown. Federal rules already govern the disclosure of interest rates and fees, he said.
“We have no experience with somebody trying to impose a regulatory model on rewards,” Ireland said. “We have no idea what would happen.”