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From Dubai to Dublin to Dallas and back, air carriers are cashing in on a big business: credit cards.
In fact, analysts note that growth in the sector “significantly outpaces the overall credit card industry.” One carrier alone can profit billions from its cards in a calendar year and, in tandem, build loyalty by tying them up in frequent flier programs.
Why did airlines build out a business line through these little scraps of plastic? What’s the history of these co-branded cards? How did credit rewards come to make sky-high profits?
Fasten your seatbelts and put away your tray tables as the fourth episode of season 8 takes off, with a co-pilot who’s made a business of this business: The Points Guy himself.
Featuring
Rocio Fabbro is a staff writer at Quartz and the host of Season 8 of the Quartz Obsession podcast. She’s obsessed with etymology, matcha, and late ’90s-early ’00s romcoms.
Brian Kelly is the Founder of The Points Guy (TPG), the trusted travel media platform that has revolutionized the travel and loyalty industries through expert insight, innovative technology, and acclaimed rankings.
Show notes
Biden’s crackdown on credit card perks turns to airline loyalty programs
Airlines will have to give cash refunds and avoid surprise fees under new Biden rules
More Americans are maxing out their credit cards and falling behind on payments
Transcript
Rocio: Airlines are cashing in on credit cards like never before, with one carrier alone profiting billions a year. But it’s not all clear skies ahead. The Biden administration is cracking down, calling out deceptive practices, and more Americans are maxing out their cards and falling behind on payments. To sort through this hype, we’ve got Brian Kelly, founder of The Points Guy, joining us.
Are these cards really worth it for consumers?
Brian: They absolutely can be, but you need to know how to play the game correctly. , at The Points Guy, I’ve helped millions and millions of people get the most out of these programs. And it’s kind of incredible because the United States is like the global epicenter of points and credit cards.
And if you talk to any of your friends in any other country and they’re in the travel space, they will tell you how jealous they are of how good we have it in the U.S., but as you mentioned, there is a lot on the line and legislation could derail a ton of this.
Rocio: I’m Rocio Fabbro, and this is The Quartz Obsession, where we’re taking a closer look at the technologies and ideas that define our lives.
Today, we’re exploring the thrilling world of airline credit cards. Now, if I’m completely honest with you, Brian, I do not have an airline credit card.
And so I wanted you to kind of take us back to day one for you. What got you into this world and what was your gateway credit card?
Brian: Well, the beginning into like the frequent flyer world was in 1995. My dad was, you know, he traveled a lot for work and I was always the computer wiz in the house. So I was 12 years old and he was like, if you can figure out how to use these airline miles I have scattered across multiple programs, we can go on a trip.
And I’m one of four kids. I figured out how to get all six of us to the Cayman islands for free. And back in those days it was, there wasn’t even like the TSA fee. It was completely free and it was just the most incredible trip that brought our family together. And it just really resonated with me that my dad had to travel and miss basketball games, but these frequent flyer miles could bring our family together for at least a week every year and kind of make up for all those moments.
I first got into the game in 2007. I got a job at Morgan Stanley where I was doing college recruiting. And all of a sudden I was like my dad, where I was the one traveling, staying at hotels. I would stay in hotels more nights per month than in my own home.
So I was learning how to maximize my own points, but my aha moment, the gateway credit card for me was my Morgan Stanley corporate American Express card. I was spending tons of money on that. And I called one day and said, ‘Hey, can I get points?’ And they were like, Mr. Kelly, you can, but most people don’t want to, cause you have to pay $95 a year.
And I stopped and I was like, $95? That’s nothing. Cause I was spending up to a hundred thousand dollars a month because I was flying out 50 kids for our college recruiting program every other week to New York and paying for their hotels. So immediately I got, I said yes. And I started accruing tons and tons of points.
Rocio: That’s an amazing start, and it kind of sounds like it was meant to be from the very beginning.
When you took us back to the ‘90s, what was the state of the airline credit card industry back then, and how has it evolved to today?
Brian: So, I think to take it even one further step, just like high level, why these loyalty programs exist. So, up until the 70s, airlines were regulated. So the government set the price.
New York to L.A. was 200 bucks, no matter what carrier. So the airlines didn’t really have to compete. The government, their take was we need to protect these airlines and they need to be able to set high prices artificially, which was terrible for the everyday consumer. Really only the rich people flew.
When we look back at the golden age of travel, it was only for rich people because the price in today dollars would be something like $2,000 to go to LA. Not, you know, you couldn’t get that $189 that you can today because there was no competition. Anyway, in 1978, the government passed the airline deregulation act.
And all of a sudden the airlines were set to compete in a free market. And they learned very quickly, , the most valuable customers, like my dad, that business traveler created a preference. You know, they have a strong say you can always kind of steer your corporate booking towards a certain airline.
And so that’s when the airlines really created frequent flyer programs to separate themselves now that they had to actually compete in a free market. So loyalty programs in the beginning were truly for the best customers. You would get a free flight after five flights and it was sort of like a rebate program.
It was a marketing cost of the airlines. They would just say, well, we’re going to pull together money, To give back to our best customers. So they were kind of seen as a cost center over time, you know, in the nineties, I think the first airline co brands came out in the eighties, you know, late eighties, And in the nineties, they were really just, there were a handful of cards, very basic, you know, and they were really just geared towards business travelers, corporate cards, business travelers.
The everyday consumer was not. Maximizing their grocery purchases with their American airlines co brand. I think there are a couple of major events that push the airlines to innovate and think, wait, there’s a huge opportunity here. I think the tech boom, which was late nineties, 2000 tech boom, which kind of shattered business travel and roiled the markets, I think there’s a push for the airlines.
The airline business is so cyclical, you know, when it’s good, it’s great. But man, 9/11 hit, bam, another moment where the airlines were just scraping by. And it was in the early 2000s Delta really started to lead the pack and American Express pre-purchased hundreds of millions of dollars worth of points for their credit cards. And I think that was a wake up call to all the other airlines out there: Wait a minute. Delta was able to survive to the post 9/11 landscape and grow because they had this really strong partnership with American Express and in the ‘90s and 2000s, American Express Platinum, Gold, Green cards.
Those were the only sort of transferable points currency out there. Fast forward to 2024. Today, the Chase Sapphire Reserve portfolio, we’ve got Capital One Venture, Citi, Bilt. You know, there’s five major transferable currencies, all battling Amex. And each of the major airlines has at least one co-brand credit card partnership.
And then of course, the Great Recession of ‘07, ‘08 was another time where business travel fell off a cliff. So the airline industry kept going in ups and downs, ups and downs. And they realized the one stable way to make money. It’s brilliant. When you think about it, the airlines are like banks. They can print money in the form of miles and sell them to banks for use down the road when the economy inevitably will pick up.
Rocio: You mentioned a number of different companies and how many airlines already have these co branded credit cards, if not all of them. What were some of the first airlines to get in on these credit card programs?
Brian: American Airlines was definitely, in terms of loyalty and co branded cards, one of the first.
They’ve had a partnership with Citi for many, many years, dating back to the late ‘80s. Delta and American Express really heated up in the late ‘90s and then solidified in the early 2000s, when Amex essentially bailed them out of bankruptcy. And there have been a lot of mergers since. Some Northwest merged with Delta, Continental and United.
Continental was a Chase customer, so United ended up coming over to the Chase platform. So when we look at the big four U. S. carriers - American, Delta, United, and Southwest - two of them, United and Southwest, are paired with Chase American is with City and Delta’s with Amex and these are multi billion dollar partnerships. In fact, in 2023, Delta did $7 billion in revenue with American Express. Now, they don’t release what the profit margin is, but it’s much higher.
Their overall profit margin, I think is just under 8%. So they have $55 billion total and of that 8% was profit of the $7 billion Amex, my guess is to say that that profit margin is at least 30% because they’re selling miles for, call it 1 cent a piece, but then people are redeeming them in general for less than that.
So it’s just huge business.
Rocio: Wow, that sounds like a very happy marriage for both the banks and for the airlines. Is it a happy marriage for customers as well? Do they reap those benefits?
Brian: Absolutely. So, first of all, when you look at a credit card, it’s critical points are just one side of the coin. So there’s points. And then there’s perks.
And with the airline card specifically, you have to look at the value of the perks that come along with these cards. Airfares are actually down from 2019. Airfare is not as expensive as it used to be, and it’s relatively very cheap.
You can still fly to Europe today for under $500 and a number of different carriers where airlines are making the money are on fees. So within the last year, almost every major airline, except for Southwest, has announced increases in baggage fees, boarding fees, seating fees, even in business class. Some airlines are now charging.
To select your seat in business class, you know, some airlines are selling business class tickets without lounge access. So they’re really trying to do a pick and choose approach. That’s the positive way they spend it. From a consumer standpoint, we’re being hit with fees across the board. So these airline credit cards, one of the biggest values is the perks Delta with their Amex cards, you can get a free check bag.
For you and up to eight traveling companions each way on your flight. So with bag fees, call it 50 bucks. So you’re traveling with three family members, you’re saving $200 each way for a credit card that costs $150 a year that also has a ton of other perks. So the consumer value prop is there, and there’s a reason why consumers are getting these cards in record numbers and shows no sign of slowing down.
Because not only do you get the perks that save you hundreds or thousands of dollars, but you’re also getting these valuable miles. Which at the points guy, like our mission is to educate consumers. What I love about frequent flyer miles is that there are currency and the more you mine your knowledge in that currency, the more valuable they become.
Rocio: Right. And all of these things that you’ve talked about have obviously drawn in a ton of customers. The growth in airline credit cards has actually outpaced the growth in the overall credit card industry, which if you think about that, it’s kind of insane. So what are some of the other factors that have driven this seemingly remarkable growth, especially in recent years?
Brian: Americans are now using credit cards for more payments. And what I cannot stress enough to consumers is when you’re saying, is this worth it? Now, it is critical to note, you do not win at the credit card game if you’re paying interest.
Especially these airline co brands, you may see interest rates of up to 30% APR. Now, when we’re talking about the miles and points you’re getting from your spend, you know, you’re going to be lucky to get 2% back on your spend. So if you’re paying 30% a year and you’re only earning about 2% back in the form of rewards, you’re just getting destroyed.
You should not be using and running balances on airline co branded credit cards. Simply put, if you are in credit card debt, like many Americans, you should be focused on getting a 0% APR card with an intro fee that neutralizes your balances and allows you to pay it off.
That is the only way that you should be thinking about it if you are in credit card debt. But for many consumers, and this is why the credit cards keep going up and are profitable is that it’s called interchange, right? In America, the interchange is pretty lucrative for the credit card company.
So every time you go to a store. Let’s say it’s that merchant’s paying 2.2% of your transaction to the credit card processor and network, and that is the cost that is built in. You know, borrowing some mom and pop shops that might charge a 3% fee, your barber, but in general, the cost of purchases is the same whether you paying cash or credit card.
And this is why for consumers, if you put it on a credit card that earns you points, you’re earning those points you pay off your bill with the same cash you would have used. So you’re avoiding interest. And so not only are you getting the points that come along, you’re getting a ton of consumer protections too.
Yes, debit cards do have consumer protections, but I had a debit card stolen once. $2,000 was taken out. I did eventually get it back, but it took a couple weeks. So, with a credit card, anytime there’s fraud on it, they just take it off your statement. You never have to put cash out. So you’re protecting yourself financially, and you know, with relatively high interest rates on your cash.
Now, credit cards allow you to put a charge. Sometimes you don’t have to pay the charge off for 45 days. So the bank is essentially giving you free float. So your cash can earn money and you can pay your bill last minute. You’re earning points, earning interest on your cash. And you’re getting a free float as well, plus all the protections.
So this game is easily winnable as long as you play by some important tenants like paying off in full and not missing a payment.
Rocio: Yeah. I think that that’s one of the trickiest things with credit cards. I mean, most Americans have credit cards and yet most of them are not taught how to use them properly and how to take care of their financial health while also building their credit.
And so from a consumer perspective, what are the pros and cons of getting an airline specific credit card versus a general travel rewards card from their bank?
Brian: I think for consumers, you’ve got three main choices in rewards cards, right? So, cash back, and cash back, there are cards with no annual fee that you can get about 2 percent back.
That’s like what you should be aiming for, 1-2%. There’s cashback, there’s the airline and hotel. We’re going to call them co-branded cards. So you’re earning a currency with one singular airline or hotel.
Then, and personally, my favorite, the most valuable cards for points for sure are transferable point bank credit cards. So with the airline co brands, while you get really good perks, like free bags, free boarding, lounge access. The downside is that you only earn into one singular airline currency, and the risk in that is that that airline currency can devalued rapidly what I mean by devalue is if United Airlines today charges 200,000 miles round trip to go to business class.
The odds are in a year, it’s going to be like 220 on average, or 240, and devaluations don’t just happen in terms of how many more points it’ll cost for a flight, they can add in fees or they can make rules saying, oh, well, we’re going to change the amount of stopovers you can have, you know, they can add last minute ticketing fees, etc.
So when you only have one currency, you are setting yourself up for failure. The transferable bank cards are my favorite and of pretty much any points expert you talk to. Most of our points accruing and credit card spend goes on these transferable points credit cards.
Because instead of just earning one airline mile or one hotel point, you can earn into a central program that allows you to transfer to numerous.
So there’s still a lot of really good deals to be had with foreign frequent flyer programs I almost exclusively transfer my amex points to like air france flying blue one of the best programs out there I book routinely 50,000 mile one way business class awards to Europe the same exact flight on Delta is 375,000 points.
So think about that seven times more expensive for the same exact light. That’s how crazy the devaluations have been with the U.S. carriers. So basically, simply put, the transferable bank currencies are worth more now. The airlines know this and the airlines are now like, okay, we got to compete against how, what assets do we have that would make people want to spend, even though most savvy consumers know they’re getting less value and that’s, they’ve been juicing up the perks and elite status specifically.
So elite status used to be how much you fly now. It’s almost exclusively how much you can spend on a co-brand. So all the airlines have put in a really valuable perks. And pathways to get elite status with free upgrades and VIP treatment as the core, because the frequent flyers who need elite status.
It’s like a drug. Once you get it, you can’t fly without it. It’s brilliant marketing once again. So points are a whole brilliant marketing strategy. But then the elite status, if you talk to anyone in your life who has airline elite status, it’s game changing because the airline values you. Oh, text message, rebooked in first class in the next flight out and you see everyone else in line begging, screaming to be treated like a normal human.
So once you start getting treated like that, it’s amazing, but it can be a toxic relationship. It’s not always amazing, right? The airlines have been naughty too, where, you know, especially over the pandemic, everyone was elite, so then the lounges got so crowded and there were so many elite members where you weren’t getting upgrades.
So there’s this sort of skinning of the herd going on where the airlines are increasing the threshold to get elite status. And the key pathway now is by spending on their co brands. And that’s how the airlines are continuing to get people to spend on their cards. But it’ll be, it’s an interesting, it’s definitely an arms race.
And as a points expert, I personally don’t really care about airline status anymore because I accrue enough points to just book business or first class. So I don’t have to worry about biting my nails down to the last minutes, begging and hoping for an upgrade. I have so many points I just redeemed for it, which to me, at my phase of life, works for me, but I can get, not everyone has as many points as I do, so I get it.
So, yeah, that’s the interesting phenomena happening in the airline co brand space. They’re fighting against their own partners, in a way.
Rocio: Right, yeah, and they’re trying to maintain this air of exclusivity and luxury, and I think, I also found it really interesting, it’s interesting the point about how this devaluation of points. It’s almost like there’s hyperinflation within the points world that doesn’t even match the inflation that we’re seeing, at least in the U.S. and the outside world.
Brian: Oh yeah, 5 % inflation, 6% — you wish. I mean, some programs have doubled the amount of points almost over every year and that’s where the government is now coming in and this is the balancing act the airlines are playing. It’s like, are you going to get your hand caught in the cookie jar? Because today the airlines say, ‘Oh no, these aren’t worth anything. These are just our personal marketing program.’ But I mean, there’s a saying like pigs get fat, hogs get slaughtered, right? Like, so as they become enormous monoliths, like Delta in their corporate earnings last year said 1% of total U.S. GDP is put on Delta co-branded credit cards.
Rocio: Given that now so many airlines offer credit cards, and like you mentioned, there is a bit more of a push from consumers to have more transparency on how to pick the best thing for them, how can consumers sort of whittle it down to what’s going to be best for them given all of the options that they have presented to them?
Brian: Yeah, so today the process is pretty manual and that’s where people get tripped up. There are a couple tools, some are kind of paid freemium premium that will actually, so I would say the largest one is Point.me and it’s a platform where you can go. It’s not perfect, but it will check if you have chase points, it’ll actually show you or Amex points.
It’ll show you which partner you should transfer to. So you want to go to New York to Paris. If you have Chase points, let’s say you can transfer to United. You can transfer to Air France. You can, and even with Air France, they’re partners with Virgin Atlantic. So you could actually even transfer to Virgin Atlantic to book an Air France flight.
The average consumer does not know this, right? And they’d have to go to the United site, check the price, go to Virgin’s Air France. So Point.me pulls that all into one screen. And it’s free. If you have a Bilt or Amex card, they now offer it as a free service.
There’s also one called Seats.arrow, which it displays the data in different ways. It actually will let you search for an entire program over a year. So I love flying JFK to Milan on Emirates. They have a special flight and it’ll search for an entire year and I can plan my trip around that. So it’ll show me, Hey Brian, first class is available on these 40 dates over the next year. So I plan my trips around the award availability.
So that’s another expert way of gaining insight versus having to check 360 days of the calendar, which no one has time to do. There’s Roame.travel. So these are all like kind of paid. I think these tools will continue to evolve and, you know, if Seats.aero wins their case against Air Canada, that could, I think, spur even more innovation to help consumers get more value.
Rocio: Is there a risk of market saturation within the airline credit card industry given the amount of offerings?
Brian: How much can this market grow? It’s an interesting question. I don’t think we’re close to that yet, but I do think what will happen is as the airlines devalue so much, I think consumers will realize, Well, why don’t I just get 2% cash back and I can buy whatever I want? Because think about it: If you spend $100,000, let’s call it on a credit card, you’re earning 100,000 Delta miles. Or if you’ve got a 2% cash back card, you could get $2,000 cash. Savvy consumers will say, okay, well for a hundred thousand Delta miles, I’m now only getting a flight that’s worth $800, but if I got a cash back card, I’d have $2000.
So I think consumers will start saying, okay, how much are these perks really worth? Am I checking bags with eight companions often? So I think, you know, my warning to the airlines and specifically in hotels is like, the more you water it down, it might be great for short term, but you will reach a tipping point where you cut too far to the bone and Delta actually experienced that last year there was, they tried to raise their qualification threshold. They started telling consumers, you couldn’t come into the lounge. Even if you have this $500 credit card, that didn’t go over well, consumer outrage, and they did roll back some of those changes, so it will be interesting. It’s up to the consumer to say and cancel the card or change it when the behaviors are not in their best interest.
And it is really like dating. It’s like a toxic relationship. Well, how much are you willing to put up with? The ultimate testament will be, well, I’m going to cancel this card, you know, and switch to another product that better suits what I need.
Rocio: Yeah. I remember, I guess, using the metaphor of the toxic relationship. Delta came back to its customers with a box of chocolates and flowers and said, I’m sorry. It had to come back with its tail between its legs and walk that back. And so, how are carriers and credit card issuers also trying to differentiate their products and kind of gain an edge on their competitors within the crowded space?
Brian: That’s a great question because a lot of, there is a lot of copycat going on when you look at the core value prop of most, it’s, you know, the premium cards have an elite status and lounge component, the mid tier cards, you know, they all pretty much offer like global entry, priority boarding. Some of the interesting ways it’s just like offering non-flight redemptions or cool experiences.
Marriott’s actually, you know, they, they sponsored the Taylor Swift Eras Tour, so they’re allowing a lot of their members to redeem for sold out concerts and tickets. With the amount of new points and miles being created every month.
There’s not an increase, a corresponding increase in capacity, especially with airlines. There’s actually a huge shortage of new aircraft so airlines cannot add the routes they wanted to. A lot of airlines have had to pull back expansion plans due to the 737 Max groundings. Pilot shortages.
So there’s like this restriction on supply, but still being pumped in with billions and billions of trillions of points a year. So there needs to be an expanding of like what consumers can use these points for Air Canada. I actually have their Air Canada co-brand, and it has this interesting feature where if you spend a million dollars on it, you get a free companion ticket for up to two years, and that includes award tickets.
So I can, and I have a young son who I travel quite a bit with. So, and I do a lot of small business spend. I get spend that I can put on my card that I get reimbursed for. So I decided to put a million dollars on that co brand card but I get two free years of flights for my son, even when I redeemed tickets in first class.
So that’s a really interesting and ultra lucrative way to get that super top tier customer. Most of the airlines have not gone that far. You know, Southwest Airlines also has a similar companion pass. If you spend enough on their co brand, they’ll give you free. Like super lucrative perks. So that’s sort of where I see it going, where they’re going to start.
They’re going after the mega spenders, the small business spenders and giving huge, huge perks, . So I foresee more elevated earn for the upper echelons. You know, there’s kind of like a gap because it’s the people who spend a super amount of money on their credit cards are know that they have a lot of options when it comes time where, what credit cards to spend on.
Rocio: Right. Yeah, I guess those are their biggest, I don’t want to say cash cows, but the biggest sort of target demographic that is bringing in the big bucks for them, really.
Brian: Yep, because think about it, because a airline co-brand, it’s a brilliant business because, you know, if you fly, most people fly an airline a couple times a year, but when an airline has their credit card that you’re using every day for coffee, they’re earning every single day from their customer and, you know, whether you fly or not, they’re earning every single day.
Let’s say 1% of everything you spend and that as they multiply that, that becomes, it kind of compounds and grows on, you know, and that’s why these programs are, there is a fierce battle for your wallet, for what credit cards you actually use day to day.
Rocio: I kind of wanted to touch on the most recent major disruption to the travel industry, which was the COVID-19 pandemic. What impact, if any, did that have on airline credit card signups and usage, and how did airlines adjust if they had to meet that?
Brian: Yeah, so, interestingly, in the beginning of the pandemic, the offers kind of slowed down, because I remember a lot of economists were calling for a depression, right? Like, no one knew what was going to happen, and what the airline, you know, the credit card companies learned during the Great Recession, Was that they gave a lot of people credit who shouldn’t have.
That was the point of that recession that anyone could buy a house. You want a house, you get a house, you want a credit card. Sure. You know, you make $40,000 a year. Here’s a 50,000 credit line that didn’t make sense. And it didn’t add up and they got cut, you know, hit with billions and losses. So in the pandemic, from the beginning, it was, they kind of clamped down and there weren’t a lot of offers as I think everyone was seeing what was going on.
I think we quickly learned that consumers weren’t traveling anywhere anytime soon, but we were spending like bandits with that stimulus money. Shopping in the credit cards within 2020 by summer, fall, the bonuses were back a hundred thousand point offers.
Because at the same time, the airlines were in crisis mode. They got decent bailouts from the government to not lay off all their employees, they still needed to make up a huge gap. Travel wasn’t coming back anytime soon. United airlines got loans where they leveraged their loyalty program as collateral.
And if I recall correctly, they valued the Mileage Plus program at like $20 billion. So they were able to secure relatively low interest loans because they had this insanely valuable asset that if the airline were to default, the United Mileage Plus program still had value ‘cause it was a credit card program.
So, and a lot of airlines have, even during the pandemic could, would sell or spin off their loyalty programs for cash infusions. Funny enough, programs that have done that, like Air Canada, they did about 15 years ago. They realized how dumb that was as this industry has grown, and they actually bought back their loyalty program four, five, six years ago, I think, and they now own it again because the airlines realized, in order to be a profitable airline, you must own your consumer.
Simply put, during the pandemic, the airlines once again, realize loyalty programs and credit cards are our savior. And let’s double down. Let’s keep those members happy. Let’s extend their elite status. Kumbaya, we love you all.
And then what that happened when travel started to bounce back, like we saw in ‘22, there were so many new travelers, so many lucrative promotions. There was this. A lot of elite travelers. And if everyone’s elite, no one’s elite. And so now we’re seeing the great contraction. So it’s a delicate balance like Delta learned in trying to balance.
Rocio: Right. It sounds like they kind of went too far in one direction and now they’re pulling back. It’s like we saw that cycle play out extremely, extremely fast in the past few years.
Brian: And it was the same with like pricing prices two summers ago to Europe or $8,000 tickets. People were, you know, people are spending $2,000 a night for a Sheraton in Miami. You know, like I remember that people were like, wait a minute, this is crazy. So there’s like a stabilization going on right now.
Rocio: Looking forward now, how might airline credit cards evolve in the coming years, and what kind of technologies, features, or partnerships might shape the industry as we move forward?
Brian: So the biggest existential threat to airline rewards, credit card rewards, and the ability for all Americans, like, earn points as lucratively as we do today, Is this piece of legislation that Senator Dick Durbin and Roger Marshall are trying to push through Congress is called the Credit Card Competition Act.
And on the surface, that sounds great. Oh, more competition. It’s kind of funny to me because the United States has more credit card competition than any other country in the world. Like as a consumer today, as an American, you can get a hundred really good credit cards. You know, most other countries have a handful of credit cards.
There’s like one major issue or here there’s like 10 solid credit card issuers of people, all shapes and sizes. So I think it’s a little silly to say, name a bill when the credit card competition act, when we have the most competition in America, but what this act would do is that interchange I briefly discussed earlier that really funds rewards.
So whenever you go to your coffee shop, restaurant, et cetera. That merchant is eating the 2% or so fee to use your card, of which the credit card company is using that interchange, what they’re getting, to kick you back, let’s say, half of it in the form of rewards or cash back, points, whatever. This bill would force you as a consumer to have essentially a debit card on to your credit card.
So say you spend $550 a year on a Chase Sapphire Reserve Visa, comes with Visa Infinite Perks protections. You know, if you use that card, you’re gonna get triple points on dining, which can be used for travel, purchase protection, etc. This bill would force you to have a debit network, and it would take the choice away from the consumer, so every time you use your credit card, the retailer would get the choice to decide what network.
So the waitress or waiter at the restaurant could run it on the debit network, even if you want your triple points. They get the choice to decide what reward you get, which is really backwards. The reason why they’re pushing this, the merchants, the retail association of America is they hate these fees, right?
Cause if they can get rid of these 2 percent fees, they’re, you know, Walmart. Their stock price goes up. That’s a huge win. So there’s huge amounts of money. I’ve been told this is the biggest lobbying battle that’s ever hit Congress because on one end, you’ve got the banks battling the retailers to huge, huge lobbies in general, lobbying is usually one side versus the government, right?
Trying to convince the government. This is two Titanic industries coming together. And clearly I’m on the side of points because they did this a decade ago. Dick Durbin, the Senator, he did this with debit rewards. And their whole point. So if you ask, why would they want to do this, they’re going to say inflation.
If we can give retailers relief with interchange, they’re going to be super nice and lower the prices of products across the board for consumers. Trickle down economics, trust us. These big retailers, they’re just going to drop prices overnight. Everyone says woohoo.
Rocio: Right, that’s always worked.
Brian: It’s ridiculous.
And we know it hasn’t worked because Dick Durbin did this a decade ago with debit cards. Many people don’t realize you used to be able to earn airline miles with debit purchases, which was amazing for people who did not have credit scores to get rewards. So they could still participate in the ecosystem, earn rewards for their purchases, protections, et cetera.
Dick Durbin did the same similar legislation that killed interchange for debit and overnight debit card rewards went away. There was no money to fund them. The bank stopped. Not only that free checking banks used to offer free checking, which costs banks to Have your account, but they would get interchange on your swipes, your debit card.
So it was worth it. So not only did low income consumers lose points, they were boxed out of the ecosystem. Banks then started charging monthly maintenance fees. To make up for the loss in interchange. So with any legislation, there’s always a law of unintended consequences, what ended up happening the federal reserve bank did a study three years after that overwhelming majority of retailers never lowered prices.
In fact 10% raised prices, so consumers saw no relief low income consumers lost the ability to earn those valuable points. So then they had to spend more on travel because they didn’t have their points. And they got hit with fees. So that was on a smaller scale. That was just debit. So now they want to do this because the retailers debit was a small portion.
Now, because everyone’s using credit cards, the retailers have dumped huge amounts of money to lobby for this and it could pass and they’re trying to attach it to every piece of legislation. So if that passes, I don’t mean to be a doomsdayer. Points aren’t going away. You don’t need to use your points today. I don’t recommend squandering them. However, if you’re used to earning triple points on dining or one point per hour. If this bill were to pass, that could very well go down to you’re earning one point for every two spent. So consumers will earn, unequivocally, you’ll earn far less points. And not only that, you’ll have to argue every single time you use your credit card and force them and negotiate for every single swipe to put it on the network of your choice.
Because at the end of the day, the retailer gets to choose. You’ll have to say, ‘Oh, I’m going to walk away.’ So you have to threaten them to get your points. Every single time you use your card. So that would be catastrophic for this whole industry. So that’s the biggest threat to this industry, in my opinion.
Rocio: Wow. Yeah, that sounds extremely existential and like it could reshape the whole points world. So that’s definitely something we all have to keep an eye on. And then finally, I know you’re The Points Guy, but what other than points are you currently obsessed with right now?
Brian: Ooh, that’s a great question. So Taylor Swift, I became a late in life Swiftie, and I’m actually about to see her for the fourth time in London.
I saw her at Lisbon recently, which was insanely amazing and seeing her in Europe is a fraction for floor seats. In the U. S. tour, it’s $5,000 and up. And in Lisbon, they were $500 and it’s open floor seating, close to the stage, zero, like three euro beers. It’s a good vibe.
Rocio: Amazing. And did you use points to get there?
Brian: Of course I did! And you can actually still use points to go see a lot of her shows. So you can get a European vacation for four people for the price of one ticket in the U. S. And you get a chance to explore. So, yeah, I am a Swiftie.
Are you a Swiftie?
Rocio: I personally am not. I don’t have an airline card and I’m not a Swiftie, so we’re a little mismatched here.
Brian: We’re going to at least start off, I think after this conversation, you’ve at least got to look into, if not an airline card, at least get like a good cash back or, you know, like a good Chase Sapphire Preferred or Capital One Venture Card.
Rocio: Yeah, thank you. Thank you so much, Brian, for all of your advice personally and for all of our listeners. This was really great for anybody considering getting an airline credit card or any other rewards.So thank you very much for joining us today.
Brian: Thank you for having me in safe travels.
Rocio: Brian Kelly is The Points Guy. This episode was produced by podcast fast track with additional support from Jason Russum, Amy Perry, Liliana Zapata, and Juan Palacios. Our theme music is by Taka Yasuzawa and Alex Suguira.
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I’m Rocio Fabbro. Thanks for listening.
Credits
The Quartz Obsession is produced by Podcast Fast Track, with additional support from Jason Russum, Amy Perry, Liliana Zapata, Juan Palacios, and Lorena Caro. Our theme music is by Taka Yasuzawa and Alex Suguira. This episode was recorded at G/O Media headquarters in New York.