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Credit card rewards face regulator's review

by Peter Andrew

The Consumer Financial Protection Bureau (CFPB) is planning to examine credit card rewards programs with a view to imposing new rules on them, according to a Nov. 15 Bloomberg.com report. A search of the federal regulator's website was unable to confirm the plans, but the Bloomberg story quotes an email from CFPB Director Richard Cordray.

Benefits of regulation debatable

"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," Cordray allegedly said via email.

Assuming IndexCreditCards.com's readership is representative of the nation, at this point roughly a third of you will be outraged at the government seeking to interfere in the private sector, a third will welcome a leveling of the playing field on which credit card companies and consumers interact, and a third will shrug. However, it's worth noting that many consumers do have issues with those rewards programs that are overcomplicated.

Rewards credit cards too complicated?

The latest edition of the Capital One Rewards Barometer, released in late November, revealed a growing demand for more simple programs. Indeed, its survey of 1,045 adults who said they have a rewards credit cards found that the single most popular change that would improve most respondents' rewards experiences was the removal of programs' restrictions. The latest study found 52 percent of those asked supporting that view, compared with just 30 percent last year, which may suggest growing consumer resistance to "gotcha" clauses, and to jumping through hoops when earning or redeeming points, miles or cash back.

Only 29 percent said they liked cards with bonus shopping categories that change each quarter, against 40 percent who preferred more simple earning rules. Twelve percent had both types of card, and 19 percent said they were unsure about their preference. When asked what would most improve their experiences when redeeming rewards, the top answer was eliminating expiration dates on rewards already earned.

Although the study was carried out by a credible, independent research company, it's worth noting that, at the time of writing, Capital One doesn't issue cards with changing bonus shopping categories.

Let the market decide

One of the joys of living in a free-market economy is that consumers can vote with their feet. Nobody's making you apply for a card with changing bonus shopping categories, and, if you're unwilling to invest the time in managing your account and scheduling your purchases so as to take full advantage of the rewards these offer, there's nothing to stop you finding a card that suits you better.

Certainly, many (29 percent in the Capital One survey, a very significant minority) consumers like these cards very much. Were that to change to a significant extent, the market would step in, and card issuers would be forced to to come up with more appealing alternatives. Until then, people who want these products would be rightly outraged, were the government to regulate them out of existence.

An unequal relationship

Of course, that's extremely unlikely to happen. In his email, Cordray referred only to improving the clarity and transparency of disclosures. And that's something even the most committed libertarian might welcome.

Free enterprise relies on laws of contract that assume equality between the parties, along with a shared understanding of the terms of the deal. But for many decades that understanding has been almost universally lacking on the consumer's side. Have you ever read a credit card agreement from end to end? Do you know anyone who has? If so, you're very unusual.

In 21st-century America, most of us enter into standard form contracts on an almost daily basis: when we register with a new website, download software, fly anywhere, rent or buy a car, change our cell-phone provider… the list is endless. Anyone who insisted on reading and understanding every word of every one of these every time she signed or accepted one would have very little time left for earning a living or having any sort of social life. Yet each one is almost certainly legally binding.

A role for government?

Credit cards have been mainstream products for decades, but the market has yet to force issuers to make clear the key terms and conditions that would allow consumers to make informed choices. The CFPB has now come up with a draft two-page alternative that has no fine print or "gotcha" clauses. If this is adopted, people should be able to understand fully what they're signing up for.

If all the regulator is now proposing is similar transparency for rewards credit cards' programs, then who's going to object?

Published 12/09/13

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