Airline rewards credit cards come under attack at CFPB-DOT hearing | Payment source

Small airline executives complained to regulators Thursday that airline rewards credit cards — issued by big banks on behalf of big airlines — limit competition by making it harder for smaller carriers to appeal to consumers.

Eight panelists, including executives from Allegiant Air, Breeze Airways and Spirit Airlines, testified at a two-hour hearing in Washington held by the Consumer Financial Protection Bureau and the Department of Transportation. The witnesses tackled other thorny issues, such as whether airlines are delivering on promised rewards, why flight attendants need to supplement their income by selling credit cards and whether consumers are taking on more debt just to earn miles and points.

But competition between airlines — and whether the money generated by rewards and loyalty programs has made it harder for small entrants to compete — has drawn widespread attention.

“One of our concerns, of course, is what role these programs might play in hurting the competitiveness of other, smaller or newer players,” said Transportation Secretary Pete Buttigieg, who co-chaired the hearing. He noted that when the Airline Deregulation Act was passed in 1978, “it was confidently predicted that there would be at least 100 large competitive airlines by the turn of the century. Obviously it didn’t work out that way.”

The Department of Transportation regulates airlines and monitors possible unfair and deceptive practices. The CFPB has the authority to take action against credit card issuers that engage in unfair, deceptive, or abusive acts or practices related to rewards programs.

The airline and travel industry and credit card issuers vigorously defend the use of credit card rewards, which are used by about 80% of Americans. According to the American Economic Liberties Project, rewards programs generate nearly $68 billion in annual consumer spending.

CFPB Director Rohit Chopra – who also co-chaired the hearing – said officials from the largest banks and credit card issuers “did not want to appear in public.” The event was attended primarily by smaller players and consumer advocates, but not by representatives of large airlines or credit card issuers. How credit card rewards programs are marketed to consumers is under scrutiny.

“How can consumers be sufficiently confident that what they have earned can actually be used?” Chopra asked. “I’m really worried about some of the marketing claims where someone can say, even if it’s not ‘you will’ but ‘you could’ earn something or get some kind of free round trip, but in reality almost no one understands that . “This really contradicts our truth in advertising laws.”

Matthew Klein, executive vice president and chief commercial officer at Spirit Airlines, said rewards programs hurt competition. Smaller airlines offer their own co-branded cards with perks like priority check-in and free drinks, but they say the larger airlines can afford to fund far more lucrative perks.

“The larger airlines here in America are now making it extremely difficult for low-cost carriers like Spirit to enter new markets, compete long-term to and from the largest airports in this country, and provide better value to customers looking for alternatives. ratio.” “More cost-effective options,” said Klein. “Airline rewards programs certainly play an important role in providing value to customers when not used compulsorily. “Unfortunately, at some larger airlines, there is a veil over the trade-off that consumers make between the rewards programs and the level of cross-subsidization that occurs within those programs.”

Lukas Johnson, chief commercial officer at Breeze Airways, which serves small and medium-sized airports, said rewards programs are “a huge source of revenue for the major airlines.”

Airline executives described how customers are trapped into traveling to cities dominated by the largest airlines because of the lure of points, upgrades, reward status and lounge access.

“That’s really the crux of some of these things, which is these competition issues,” Klein said. “It starts with the airport axis, goes through the loyalty programs and then it becomes very difficult for (smaller) airlines to really gain a foothold there and be sustainable in the long term. I think that’s an important part here that we should take into account.” Competition and the interaction of all things should not be missing.”

Sara Nelson, international president of the Association of Flight Attendants, which represents 100,000 flight attendants, or half of the industry, said during the panel discussion that Delta Air Lines generates over 1% of GDP from its personal Delta SkyMiles credit card from American Express.

“When that much money is invested in the programs that you run, your whole calculation changes, and you actually can’t afford to keep all of those rewards,” Nelson said. “When we combine that with the reduction in seat capacity that we’ve seen over time from the airlines, (they) don’t have room to redeem a lot of these rewards (and) then a lot of these larger players get cornered in.” able to devalue the rewards consumers have earned.”

To subsidize their income, many flight attendants rely on rewards programs, which around 80% of them promote over loudspeakers on flights. Airlines pay $5 to issue a credit card application and between $50 and $100 to activate an account, Nelson said. But she also described how flight attendants face backlash from the public.

“This is a big deal for the traveling public,” Nelson said. “The problem is that when these programs are devalued or fail to deliver what was promised, it is often the flight attendants who are on the front lines or who attract the public’s ire, which in some cases leads to problems.” that we have seen the violence on board (flights).”

The hearing also touched on the money that airlines and credit card issuers generate from interchange fees that merchants pay when purchasing with credit and debit cards. Some panelists said small airlines cannot compete or gain market share because of the enormous volume of interchange fees.

Regardless, the banking industry has spoken out strongly against a controversial banking law. the Credit Card Competition Act Co-sponsored by Sens. Dick Durbin, D-Ill., and Roger Marshall, R-Kan., it would require the largest credit card issuers to offer merchants a choice between two independent card networks, one of which must be a network other than Visa and Mastercard . Lawmakers claim the legislation is expected to save merchants and consumers $15 billion a year, but issuers claim it would gut credit card rewards programs and harm consumers.

At the hearing, Erin Witte – director of consumer protection at the Consumer Federation of America – raised concerns about “bait and switch” practices, in which airlines often change the terms and conditions of award agreements or void points, but this is done by helping consumers just provide a disclosure.

“For many years the discussion on this issue has been about how long we should inform people before we do this. But honestly, I think that’s the wrong way of thinking,” Witte said. “What is unfair, misleading and potentially even anti-competitive is that this is happening at all, not how long consumers are informed about it before they are harmed. A really difficult part of this puzzle is determining the value of a point, mile or other reward currency.”

Consumer advocates also claim that rewards programs have become a wealth transfer from low- and middle-income consumers to the wealthy. Consumers who rely on cash and debit payments end up paying prices determined by the cost of processing payments for expensive rewards cards, said John Breyault, vice president of public policy, telecommunications and fraud at the National Consumer League.

“Income from rewards programs is not considered taxable income, even though consumers spend it just as if they were using dollars,” Breyault said in an interview. “What impact does this tax treatment of rewards have on the state’s balance sheet?”

Chopra also said consumers view their rewards accounts the same way they view their checking accounts, but the rewards are often devalued or non-redeemable.

At the hearing, Breyault called on the CFPB and DOT to examine not only the competitive effects that rewards programs have on banks and airlines, but also on other travel methods such as cruise ships and hotels, which he said “also play heavily into the rewards program.” Ecosystem is invested.” also similarly concentrated industries.”

Richard Hunt, board chairman of the Electronic Payments Coalition and former president and CEO of the Consumer Bankers Association, declined in a press release responding to the hearing. Low- and middle-income Americans rely on credit card rewards to make ends meet and manage their family’s finances, he said.

“To say that credit card rewards programs only help the rich or that it’s just about getting airport lounge access is nothing more than willfully ignoring the bigger picture,” Hunt said in the release.

For the largest airlines and credit card issuers, rewards and loyalty programs have become an important source of revenue, even as “the quality and value of the programs have steadily declined, a trend we often see in consolidated industries that lack meaningful competition.” said Morgan Harper, director of policy and advocacy at the American Economic Liberties Project.

Witte of the Consumer Federation of America said rewards programs incentivize a lot of credit card spending and potentially push more people into debt.

“People like to earn rewards, but we have seen that their efforts to earn them are no guarantee that they will keep them or that they will be able to use them in the ways originally promised to them,” Witte said.