U.S. Consumer Bureau Examined Credit-Card Rewards Programs

According to Bloomberg,

The U.S. Consumer Financial Protection Bureau is examining whether customers are being misled when they sign up for complex credit-card reward programs and will mull new rules in this area.

Consumers can face “detailed and confusing rules” about using rewards, CFPB Director Richard Cordray said in an e-mail yesterday. “We will be reviewing whether rewards disclosures are being made in a clear and transparent manner, and we will consider whether additional protections are needed.”

Restrictions on card rewards programs could crimp the ability of banks to use the enticements to sign up customers. Top issuers such as JPMorgan Chase & Co. (JPM), Bank of America Corp. and American Express Co. (AXP) rely on rewards to attract and keep cardholders.

“Rewards are the No. 1 reason why customers select the card, and there’s almost a battle to provide the highest rewards,” Jim Miller, senior director of banking services at J.D. Power & Associates, a market research firm, said in an interview.

The consumer bureau’s inquiry involves the marketing of rewards programs, particularly the marquee promise of a given card, such as cash back, or redeemable airline miles, and what a customer needs to do to get it, said a person involved in the work who asked not to be identified because the effort is in an early stage.

Card issuers’ main challenge with rewards is making them alluring and straightforward, while still profitable for the company, said Discover Financial Services (DFS) Chief Operating Officer Roger Hochschild.

Easy, Profitable

“As we think about the rewards space, it really comes down to two things: making them easy to earn and easy to redeem, and trying to do all of that at an affordable cost,” Hochschild said during a Nov. 13. investor conference in New York.

Oliver Ireland, an attorney for card issuers at Morrison & Foerster LLP, said that rewards could prove a “tempting issue” for regulators. In contrast to interest rates and fees, there’s no existing federal regulation on the disclosure of rewards.

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