Overview
On May 9, the Consumer Financial Protection Bureau (CFPB) published a report (Report) on credit card rewards and framed it as an “Issue Spotlight.”
The Report identifies four areas of concern with respect to the management and servicing of credit card rewards programs. Each of the four areas relates to “consumers not receiving the rewards they were promised.” The CFPB identified these areas after it reviewed and analyzed over 1,200 consumer complaints “involving credit card rewards programs in 2023…a more than 70 percent increase over pre-pandemic levels.”
Specifically, the CFPB focused on the following:
- Unexpected Promotional Conditions. “Consumers fail to receive promotional rewards when financial institutions impose vague or hidden conditions.”
- “Consumers lose benefits that they previously earned when issuers and merchants devalue rewards.”
- Redemption Problems. “Consumers face obstacles in receiving their preferred redemptions when companies fail to quickly resolve rewards-related issues.”
- “Consumers suddenly lose rewards when issuers unilaterally revoke previously earned balances.”
Background and Context
Recent Related CFPB Items. The Report follows two other recent related CFPB communications. The first, on April 30, reported the results of testing that showed that consumer products and services with complex terms and pricing structures tend to lead to higher costs for consumers. The second, on May 2, was a blog post indicating that the CFPB intended to address such complexity in the credit card market by lowering costs to consumers, including by focusing on credit card rewards programs. The Report appears to be the result of that focus.
CARD Act Reports. As the Report notes, this is not the first time the CFPB has expressed concerns over the conduct of credit card rewards programs. In particular, the CFPB’s “CARD Act Report,” published in 2015, warned card issuers about a number of practices the CFPB viewed as problematic, including, e.g.: (1) lack of clarity on acquisition bonuses; (2) lack of clarity on expiration and forfeiture of earned rewards; and (3) program complexity that presents an obstacle to effective account management, such as when point values vary based on redemption channel. The CFPB’s guidance motivated many issuers to revisit their rewards programs and make changes as appropriate to address the CFPB’s concerns. While the 2015 CARD Act Report was among the agency’s most robust discussions of rewards programs, there were many others, including enforcement actions.
UDAAP – Clear Warning of Enforcement Actions to Come. The Report notes that while Regulation Z and credit regulations generally do not cover card rewards programs, such programs are subject to prohibitions on unfair, deceptive or abusive acts or practices (UDAAP). The Report also refers to previous CFPB UDAAP enforcement actions against card issuers related to rewards. We expect that the CFPB will pursue enforcement actions based on the concerns raised in the Report. Indeed, the Report begins with a warning that “[t]he CFPB will continue to monitor credit card rewards programs and work together with government partners to take necessary action on these issues as appropriate.”
Key Takeaways from the Report
- Similarity to New York General Business Law § 520-E (“NY Rewards Law”). In 2021, the State of New York enacted the NY Rewards Law, which codified certain consumer protections regarding the devaluation and forfeiture of credit card rewards. The NY Rewards Law addresses many of the UDAAP concerns raised in the Report. The similarities are numerous and substantial; the CFPB appears to have studied the NY Rewards Law and its policy concerns when analyzing complaints and identifying focus areas in the Report. Thus, it may be helpful to issuers who are crafting policy changes in response to the Report to revisit the requirements of the NY Rewards Law.
- Reasonably clear guidance. As noted, the Report appears to be a warning of future potential enforcement action. It focuses on colorable UDAAP claims regarding specific practices, for example, rather than on general concerns about equity or recommendations that emphasize consumer benefit without a reasonable nexus to legal non-compliance. To its credit, the Report does a reasonably good job of clearly identifying its specific areas of concern and, in many instances, suggests potential actions to address those concerns.
- Potential revenue losses. While many of the changes that seem to be required by the Report can be implemented on a cost-effective basis, some changes may result in significant revenue losses. For example, the Report suggests that issuers must provide a precise definition of “gaming” and/or “churning” in order to seize the rewards balances of fraudsters and close their accounts. But clear, prescriptive definitions would also identify to those same fraudsters (1) key behavioral flags indicating fraud and (2) loopholes for avoiding forfeiture.
- Responsibility for Decisions by Co-Brand Partners. The Report presses issuers to take responsibility for the decisions of their co-brand partners that have a negative impact on their rewards programs. For example, the Report cites to numerous consumer complaints that “card issuers do not protect customers from co-brand partner decisions to remove benefits from merchant ‘loyalty’ programs or change requirements for achieving status.”
An extended subsection of the Report describes how co-brand partnerships present special challenges to issuers who market and share in the financial benefits of the partner’s program but otherwise lack control over or insight into management of that program. The balance of power between issuers and partners is carefully negotiated in co-brand agreements, especially with respect to resolving questions of applicable law, and such questions are often the source of conflict between the parties during the life of the card program. The Report warns both parties to take heed of the concerns raised in the Report, and we expect the CFPB to review changes to partners’ proprietary programs, including devaluations, through a more critical lens going forward.
Areas of Concern
The Report begins with the broad observation that “rewards programs distort the true costs of credit cards, create a barrier to entry for would-be competitors, and make it harder for smaller issuers with often lower pricing to compete with sizeable rewards offerings by the largest banks.”
At the same time, consumers “report that rewards and sign-up offers are top factors influencing their shopping decisions,” often to their financial detriment – e.g., CFPB research has found that “consumers with revolving debts on average pay far more in interest and fees than they get back in rewards.”
Accordingly, the CFPB believes that issuers should make significant efforts to (1) help consumers better understand the higher potential costs of rewards programs, and (2) ensure that consumers can enjoy the value of the rewards they’ve earned.
In that context, the CFPB focuses on the areas of concern discussed below. Italicized language designates specific problematic practices called out in the Report and/or suggests potential actions that would address the concerns identified.
1. Unexpected Promotional Conditions. The Report warns against “rewards policies as reflected in account documents [that] differ from marketing materials.” In such instances, consumers do not “get […] what they claim was promised at the time of application.” The Report provides the following examples:
a. An account-opening offer that markets a particular reward as an incentive but delivers a less valuable reward (or none at all) when the consumer opens a new account. This may occur because, e.g., the offer was limited only to applications made through particular channels and the consumer did not apply through any of them.
b. Failure to fulfill on a promotional offer “due to hidden or vague conditions.”
i. Limiting the number of acquisition bonuses a consumer may receive by limiting the number of new accounts that the consumer may open within a specified period. In some cases, a consumer made ineligible by this rule nonetheless receives direct marketing that encourages a new application without disclosing the limitation.
ii. Increased clarity as to what spend counts (and does not count) toward the spend threshold required to earn an acquisition bonus.
iii. Vague policies to prevent “churning” – i.e., the practice whereby a consumer opens new card accounts offering acquisition bonuses in succession, and, in each case, closing the account after redeeming the earned rewards. The Report recognizes that churning can be unprofitable for issuers. However, it also warns not to deny the bonus and – in some instances – claw it back without “clearly defining” what triggers such penalties. Otherwise, the issuer risks punishing innocent consumers (and also seems to take the position that a consumer who behaves consistently with the issuer’s terms and conditions is not engaged in wrongdoing even if that consumer earns one acquisition bonus after another without using the card accounts).
2. Devaluation.
a. Rewards inflation. Issuers and their co-brand partners regularly increase the number of points previously required to redeem for a reward. While the CFPB acknowledges devaluations are a long-standing practice, the Report cites recent program changes, such as airlines’ elimination of rewards charts, as exacerbating the burden on consumers who, for example, want to plan and save for a specific trip. Unlike most other sections of the Report, it is not as clear here how issuers can address these concerns. That said, technical problems with issuers’ own branded travel booking sites often quote one rewards price at the search stage but require a higher rewards price at the time of payment.
b. Obstacles to use. Consumers “find the redemption process more complex, opaque, or time-consuming than they had assumed.” The Report offers several examples of issuers and merchant partners “erect[ing] barriers that make it more difficult to redeem rewards for their full value.”
i. Programs require that a cash back account balance meet a specific threshold before permitting redemption (or require redemption only in specified amounts). In some cases, this may cause a consumer to lose the entire accrued value of the account balance – e.g., when the consumer closes the card account.
ii. A program that marketed cash back as a redemption option subsequently removed that option and replaced it with a less useful cash equivalent– e.g., statement credit.
c. Co-Brand partner benefit modifications and refunds of annual fees. Some issuers refuse to refund, in whole or in part, an annual fee charged in connection with a co-brand card when there is an adverse change to one or more of the benefits marketed and offered with respect to the card. For example, a co-brand card may no longer offer a free night each year as advertised, or may significantly devalue redemption rates shortly after account-opening.
3. Redemption Problems
a. Customer service issues. Better customer service resources dedicated to rewards programs should be available. Consumers complained about customer service resources unable to resolve even straightforward claims. Complaints also addressed: investigations that took too long to resolve (e.g., two to three months); little or no communication about ongoing investigations or issuer resolution procedures that do not adhere to the applicable terms and conditions; and inconsistent answers depending on who is speaking at the bank (or at the bank’s third-party agent).
b. “Doom loops.” Customer service quality is particularly harmed when consumers are passed back and forth between the issuer and the merchant rewards partner. The CFPB believes that financial institutions “may sometimes lack the basic infrastructure to communicate with merchant partners and effectively resolve rewards issues.”
c. Technical glitches. Points transfers can be subject to technical delays due to faulty systems and integration of the issuer's and the partner's systems. The Report states that because “[c]onverting credit card points to airline miles or hotel points can be one of the costliest redemptions for issuers to provide,” such conversions should happen seamlessly and immediately to ensure that the consumer is receiving the value disclosed at the time of the transfer and can use the partner’s currency for their immediate needs.
d. Rewards reimbursement. When a consumer transfers card points to a partner’s currency, but is unable to redeem that currency with the partner after the transfer – e.g., due to a technical error on the partner’s website – the issuer is unable or unwilling to reverse the transfer and restore the consumer’s card points.
4. Revocation. Policies regarding forfeiture, expiration and revocation prevent consumers from redeeming rewards they have earned. Accordingly, issuers should disclose with particular clarity the terms and conditions relating to the loss of rewards. The Report criticizes programs where the consumer loses all rewards when the account is closed by the issuer. According to the Report, the double impact of both losing access to credit and losing the entire value of a saved rewards balance can be “particularly painful” for consumers.
a. In some cases, “companies do not adequately communicate impending rewards revocation.” This suggests that UDAAP requires reminding a consumer prior to points expiration. In addition, if expiration is tied to account inactivity, then the terms and conditions should clearly define what constitutes “inactivity” for that purpose.
b. Revocation reversals. Rewards that have been previously revoked should be quickly reinstated, either due to UDAAP concerns, or the program’s own terms and conditions. For example, if an account is closed in error and then reopened, the consumer’s rewards account and account balance should be quickly restored.
