Thank you all for joining us today. I would especially like to thank Secretary Pete Buttigieg for joining me in today’s forum. The CFPB and the Department of Transportation share responsibility for enforcing a number of laws. The actions taken by the Minister will benefit many families, including the latest automatic refund rules and efforts to combat unwanted charges. Our agencies will now work more closely together regarding credit cards.
Credit cards are the most popular lending product in the United States, with more than 550 million cards in circulation and more than $1 trillion in outstanding debt. Unlike a mortgage or car loan, where you typically know how much you’re borrowing and what your monthly payments will be, credit cards are different. When you sign up for a credit card, you may not have any debt at all. In fact, you can use it primarily as a payment tool, with the goal of paying off your balance each month.
That’s why credit card companies are keen to use features other than interest rates and fees to attract people. For example, before Congress banned the practice, credit card companies used to bombard college campuses with free T-shirts and merchandise branded with college student orientations.
We’ve recently seen credit card rewards become a focal point in industry marketing activity, especially in the form of frequent flyer miles and other special points programs. The largest and most dominant airlines play a large role in this market. Most of us have seen airline-branded credit card ads proliferate online, in our mailboxes, on television, and even while sitting on planes promising sign-up bonuses for frequent flyer miles, free round-trip airfare, and other travel perks. For many families looking to finance a trip or vacation, these benefits are of great value.
However, frequent flyer programs have evolved from being beneficial to the most loyal airline customers into a multi-billion dollar cash market, with credit card companies and airlines buying, selling, transferring and issuing miles and points in every sector of the economy. Miles and points can be purchased, earned for cash, or exchanged for non-flying related goods. These points programs are a major asset and competitive weapon for major airlines and major credit card companies.
The CFPB has carefully studied this market, and we have a number of goals for this market.
Protecting people’s points from depreciation: When Americans sign up for rewards credit cards, they instinctively assign a cash value to those points that make signing up and spending money worthwhile. However, our preliminary review of the fine print indicates that credit card companies and airlines have the potential to quickly and significantly reduce the value of those points by making it more difficult to redeem or limiting the inventory that can be purchased with points. We also observed that airlines sell points to consumers at high prices, while selling the same points to credit card issuers at much lower prices. This not only creates confusion about the true value of points, but also raises questions about fairness.
Stop Scams and Scams: As travel resumes post-pandemic, credit card companies have ramped up their rewards marketing efforts to meet pent-up demand for family trips. However, some consumers have fallen prey to bait-and-switch scams, where credit card companies promise rewards but fail to deliver. Consumers may also pay higher annual fees, but may find that some benefits may be withdrawn without clear refund options. While credit card companies are required to provide notice of changes to many key terms and conditions, consumers are concerned that the fine print could be used to gain valuable benefits and rewards.
Examining Exclusive Deals: The CFPB recently found that small banks and credit unions offer lower interest rates than the largest credit card giants. Many smaller players want to offer a range of points and rewards options, as we see in other industries, such as car rentals. However, the largest credit card companies will pay huge fees to airlines for refusing to sell points and miles to competing credit card companies. This prevents smaller credit card companies from offering competing rewards within the same frequent flyer miles program.
Enhancing price competition: Americans paid a record $130 billion in interest and fees on credit cards in 2022. Our preliminary assessment found that many major credit card issuers charge significantly higher interest rates on rewards cards than on non-rewards cards. For cardholders with a balance, this can negate any benefit from rewards. These large credit card companies often offer alternative credit card products with lower interest rates, but they usually don’t proactively inform cardholders of opportunities to save money by switching to a lower rate. High balance transfer fees can also be a major disincentive for consumers to take their business elsewhere, hindering competition.
I look forward to hearing witness testimony today to better understand credit card rewards and airline frequent flyer programs. This will help inform actions the CFPB and DOT take to protect people’s points, stop bait and scams, and promote a fair and competitive marketplace. Thank you.
The Consumer Financial Protection Bureau is a 21st century agency charged with implementing and enforcing federal consumer financial laws and ensuring that the market for consumer financial products is fair, transparent, and competitive. For more information, visit www.consumerfinance.gov .
