Airline credit card rewards
The U.S. Department of Transportation (DOT) and the Consumer Financial Protection Bureau (CFPB) have announced plans to hold a public hearing in order to review airline credit card rewards programs.
The hearing, set to take place on May 9, is expected to include regulators, airline executives, consumer advocates and banking officials.
During an interview with TravelPulse this week, consumer protection attorney and managing partner of Consumer Attorneys, David Chami, explained that as part of the upcoming review, processing fees that airline rewards credit cards charge retailers when consumers use those cards to make purchases, may be reduced.
Regulators hope that if the credit card processing fees retailers pay are reduced, then consumers may benefit from reduced prices retailers charge for goods and services.
But Chami says that’s unlikely. Instead he thinks retailers will hang onto the savings from reduced credit card processing fees and consumers won’t benefit at all.
“The only thing will happen is that money will be taken from the credit card processors and instead be put into the pocket of retailers,” explains Chami.
“The intention is that retailers will lower their prices, but they’re not going to pass on that savings. This is literally going to be a transfer of wealth from one multi-billion company to another,” continues Chami. “The consumers won’t see any of the benefits of slashed credit card processing rates – but what they will see is their rewards will get slashed.”
Why would consumer airline and credit card rewards get slashed in such a scenario?
Here’s how Chami explains it.
Credit card companies charge processing fees and then use part of the revenue generated from such fees to cover the costs associated with providing consumers with points and rewards on their credit card programs.
For instance, says Chami, when a consumer charges $100 on their airline rewards credit card at a retailer, the retailer may pay a processing fee of about $3, which goes to the credit card company. And the credit card company, in turn, uses $1.50 from that fee to give the consumer points or rewards.
“But if that credit card processing fee is cut from $3 to $1.50, who’s going to take the hit?” says Chami. “It will be the credit card company and so they will have to devalue the consumer’s points.”
In other words, if processing fees are reduced by government regulators, credit card companies will not have as much money available to cover the costs associated with credit card reward programs.
“The money won’t be there to support the program,” says Chami.
While the CFPB and DOT may be seeking to ensure better prices for consumers through its efforts, Chami contends that’s not likely to be the long term result.
“Consumers won’t actually see the benefit,” he says. “The result will be just transferring the profits from the bank to the retailers. In fact, this will hurt consumers, because consumers who get the airline rewards cards with the cash back option will be negatively affected.”
“If I believed this would have a beneficial impact on consumers I’d be all for it,” Chami concludes, pointing out that he doesn’t benefit one way or another from the proposed changed. Nor does his practice. “This to me is just grandstanding, I think the effect will be negative for consumers.”
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