CFPB targets card industry over the devaluation of rewards

UPDATE: This article includes reaction from an industry group, an analyst and a consumer group.

The Consumer Financial Protection Bureau is again targeting the credit card industry as the Biden administration comes to a close, arguing Wednesday that issuers may be violating federal laws if they devalue the rewards earned by cardholders or make them hard to redeem.

The warning on rewards was part of a trio of CFPB announcements involving the card industry.

The bureau also launched a tool to enable consumers to compare the features of more than 500 credit cards — an effort to bring more transparency to a market the CFPB says is too opaque. And it released a report criticizing store-branded credit cards as more expensive than general-purpose cards.

The three actions are less aggressive than the CFPB’s sputtering attempt to slash late fees on credit cards to $8. But they represent another attempt to make changes to the card market.

“Large credit card issuers too often play a shell game to lure people into high-cost cards, boosting their own profits while denying consumers the rewards they’ve earned,” CFPB Director Rohit Chopra said in a news release.

The agency is “taking aim at bait-and-switch tactics and promoting more competition in credit card markets to protect consumers and give people more choice,” Chopra said.

The latest moves are likely to irk the card industry, though not as much as the CFPB’s attempt to cut late fees. Industry groups that have sued the CFPB over the late-fee rule got a victory in federal court this month, when a federal judge wrote that the CFPB rule “clearly violates” its authorities.

Industry groups have also had smaller clashes with the bureau over what they argue is the CFPB’s fundamental misreading of the card market. After the CFPB released a report in February indicating the sector was dominated by big banks, the Consumer Bankers Association called the market “vibrant and competitive,” with nearly 4,000 banks offering their own cards.

On Wednesday, the Electronic Payments Coalition, which represents companies in various parts of the card business, slammed the CFPB on its latest action on credit card rewards. The agency is “out of touch with the realities of how American families rely on these valuable reward benefits to fight record inflation,” EPC Executive Chairman Richard Hunt said in a news release.

One of the actions the CFPB took Wednesday appears to be an effort to prod other agencies to take action against card companies. In a circular to other regulators and law enforcement agencies, the CFPB warned that some card issuers may be violating laws protecting consumers against deceptive practices.

The CFPB said in a news release that potential violations include devaluing rewards that cardholders have earned; canceling rewards based on “fine print disclaimers or vague terms buried in a contract;” and making it overly difficult for cardholders to redeem their rewards, including with issuers’ merchant partners.

The CFPB last year penalized Bank of America for allegedly withholding credit card rewards. 

And in May, the CFPB and the Department of Transportation held a hearing on airline credit cards. The DOT has since launched a related probe and has asked American Airlines, Delta Air Lines, Southwest Airlines and United Airlines for more information about their partnerships with card companies. One of the issues that has gotten the DOT’s attention is airlines devaluing customer rewards.

The CFPB message to law enforcement agencies “may survive the election,” and state attorneys general might use it to go after airline rewards, Jaret Seiberg, an analyst at TD Cowen, wrote Wednesday in a note to clients. The effects could include shifting rewards programs from miles-based to being tied to the dollar, which “makes it harder to devalue them,” Seiberg wrote.

The Trump-led CFPB is unlikely to use the circular to bring enforcement actions against banks, but it also may not “want to endure the political hit” of scrapping the circular, Seiberg wrote. And by leaving it in place, state AGs or private lawyers may latch onto the warning when fighting card companies.

“We appreciate that the banks will argue that the contracts spell out these terms in detail,” Seiberg wrote. “The problem is that few consumers read the fine print. It is why the contracts may limit legal risk, but not political risk.”

By launching credit-card comparison tools, which the CFPB said will provide “unbiased, comprehensive data for more than 500 cards,” the bureau followed through on its promise earlier this year to provide neutral data to consumers.

The agency has taken issue with existing card comparison websites, which get compensation from card issuers, and which the CFPB says can steer customers toward a small selection of cards.

“By enabling consumers to explore cards based on credit score range, interest rates, fees, and rewards offerings, the tool also affords consumers with a higher degree of certainty when searching for cards for their situation,” the agency said in a news release.

The tool will “promote more competition in the credit card market and allow smaller providers and companies with better offers a chance to compete,” the agency said. It also said it would welcome other lenders to contribute to the data set.

Hunt, of the Electronic Payments Coalition, said the fact that the CFPB has more than 500 cards to put on its tool “shows how competitive the credit card market is.” He also noted that almost 80% of Americans have a rewards card and said that customers take some 15 million flights with co-branded cards.

The Consumer Federation of America, meanwhile, praised the CFPB for making clear that card issuers and airlines need to “hold up their end of the bargain” with the rewards customers value.

“Thanks to the research and guidance from the CFPB today, people are empowered to make informed decisions about their credit cards, and the public has a clear picture of rampant problems with many of these programs,” Erin Witte, the group’s director of consumer protection, said in a news release.

In its report on retail credit cards, the CFPB highlighted the fact that those products are more expensive than general-purpose credit cards. Nine out of ten retail cards have maximum annual percentage rates above 30%, the agency said in its report, compared with 38% of general-purpose cards.

One out of every four credit card accounts are for retail stores, the agency said. Four larger banks — Synchrony Financial, Citigroup, Capital One Financial and Bread Financial — issue more than 80% of store cards, according to the bureau. 

The agency also flagged complaints it’s gotten from consumers over store cards, citing customers who say they’ve experienced “aggressive sales tactics at the point of sale, inability to redeem promotions, and frustration with paper statement fees and late fees.”

Synchrony and Bread, whose businesses are built on store cards, would be the companies most heavily impacted by the CFPB late-fee rule if it were to take effect. To make up for the potential revenue hit, both companies have started implementing fees for customers who want paper statements.