Is Citibank Evil or Stupid for Ending Mileage Earning on Debit Cards?

Reader E.M. writes to pitch me on calling out Citibank for ending their mileage earning debit cards.

Citi’s decision to discontinue the AA Advantage debit card program is incontrovertible evidence of a corporate ethos that puts profit before customer satisfaction. Their ending frequent flier mile earning opportunities may seem like a trivial issue compared with other crimes that banks are getting away with, but it is highly symbolic of the industry’s overall disregard for the consumer. This was not a free program ($65 dollar annual fee). The Dodd-Frank law is not to blame for creating this situation. Debit card interchange fees have not been eliminated, they have been reduced. Citi’s choice to end the program will result in the loss of untold millions of debit card transactions because customers will stop using their debit cards as there is no incentive for them to do so. How can no interchange fees possibly be better than reduced interchange fees? Forcing customers who wish to continue earning frequent flier miles into credit card accounts is not the solution–for many reasons, including high interest rates.

Now, I’m not persuaded by the argument. I write back that it’s odd to say Dodd-Frank, which lowered debit card interchange fees, isn’t driving the change in debit card rewards. Lower interchange fees mean that banks no longer have the margins to support the purchase of the miles. Really straightforward.

Legislation changed the marketplace, the banks aren’t really to blame, for better or worse it was Congress that took away our miles.

But E.H. isn’t buying it:

This was not a free program. The $65 annual fee went a very long way towards subsidising the purchase of the miles. The interchange fees more than covered the rest. Yes, those interchange fees have now been reduced (rightly so). They have not been eliminated. Bottom line: GREED. The cost in lost customers, and negative PR will be far greater than what they “lose” in having to pay more for miles.

And I start shaking my head.

Citibank is willing to lose customers because they don’t believe the debit card mileage program is still profitable.

I just don’t think Citi has blood on their hands here. I’m not a huge Citibank fan, but they made an offer in the past that worked out for them. With lower revenue from interchange fees, it’s no longer worthwhile to spend on miles to push transactions through the system. Lower revenue to Citi, lower marketing spending to attract the revenue.

E.H. still isn’t buying it. He asks me to share the exchange with readers, and poses two final challenges, I’ll take them one at a time:

How could it be that the credit card mileage earning opportunities are still profitable, even with sign on bonuses, etc. ? Answer = interest rates = GREED. There’s just no getting away from that assessment.

Except that it’s the interchange fees, not the interest rates, that are driving the miles. Remember that Amex’s charge cards that require payment in full each month provide some of the most lucrative mileage deals, and that’s driven by Amex’s higher interchange fees.

I’m not really persuaded that interest is bad, either. It’s voluntary and disclosed up front. Credit card companies charge “a lot” of interest but it’s for unsecured debt. They charge less interest than payday loan folks, who charge less interest than loan sharks (who also break your legs).

And what of it? Citibank has decided it’s not worth investing the money in miles to drive debit transactions. Because those debit transactions no longer generate the revenue they used to. That’s a business decision, and if you’re looking to cast blame I’d think you would look at what’s driving the reduced revenue, which is changes to law.

You may or may not like those changes to law, and you probably can’t do much about them anyway, but casting Citi as a villain in this strikes me as odd.

There is no marketing spend involved with keeping current customers, and any spend they would have to attract new ones would be offset by being the only major US bank with a mileage debit program. Customers would flock to them. No brainer. Their marketing department is either asleep or completely inept.

They’re not spending money awarding miles as marketing to get new customers. They’re giving out miles to encourage their customers to drive transactions through the interchange system. But they no longer find it valuable to incentivize those transactions with miles, since they don’t get as much out of each transaction.

Let’s just use round (Rather than actual) numbers to illustrate. If a bank is getting 1.5 cents of a transaction, they might be willing to pay 1 cent to get that revenue.

When they’re only getting 1 cent, or 0.8 cents, it no longer makes sense to pay 1 cent to get that revenue.

Now, perhaps the pendulum will swing, it depends on the economics of interchange in a post-Dodd/Frank world. If the banks get 0.8 cents per dollar, they might be willing to pay 1 cent every three dollars perhaps… And maybe some enterprising bank will seize that entrepreneurial opportunity and make it work.

But there’s nothing evil about a bank concluding that given a new revenue model, its old expense model no longer makes sense. Sorry!

Am I off base here?

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. I am just amazed by people’s hate of banks. Nothing they do it forced on us. People will defend freedom, but not for corporations to make business decisions?

    Any company should be able to offer or end any program as long as its legal. And if I hear GREED again, I’m going to be sick. People, profit is the ONLY reason any bank exists. And yes, community banks too, just its not called profit but salaries for management. PROFIT is the reason anything happens at all!

  2. I have to side with you here… don’t get me wrong, I believe that banks are in the wrong in some things (such as robo mortgage signers and foreclosure, etc.), but I have to agree.. it makes good sense to discontinue the miles… Especially, because, as I understand it, banks are now limited to $0.23 per transaction. At that amount of revenue, they’re losing money on the miles, I would think.

    That said, I use USAA and only have non-USAA Credit Cards for the miles (AAdvantage, Marriott, etc)… While not everyone has the ability to bank with USAA, I have a sneaking suspicion that a lot of people could be banking with more reasonable banks, rather than Citi or Bank of America (who recently instituted the $5 charge for using debit cards).

    Ultimately, all this outrage should be followed by consumers voting with their feet and dollars. Otherwise, its just a bunch of people whining.

  3. This strikes me as a ridiculous sense of entitlement. I’m mystified at how people equate profit with greed, and somehow think business should just give them whatever they want regardless of cost.

  4. You’re both wrong. We were already getting charged the money (in the form of higher prices at the merchant end), but it was invisible, because the interchange fees were invisible. The legislation has essentially made them visible to the consumer and thus allowed the consumer to make a more informed decision about what bank to use.

  5. Seriously, CitiBank is not a charity or your grandmother. Companies are not out to help consumers, they are meant to pursue profits.

    Occasionally this equates to improved customer service, but most cases customer service is paid for by something else. If CitiBank deems a program no longer profitable, and has the legal ability to terminate the program (i.e. no contract with consumers), they are free to do so. If you are no longer happy with CitiBank, take your money elsewhere. It’s likely that CitiBank would rather you take your money than continue an unprofitable program.

  6. “Forcing customers who wish to continue earning frequent flier miles into credit card accounts is not the solution–for many reasons, including high interest rates.”

    This is a weird argument. Presumably, debit card customers are living within their financial means and have no need to borrow money for their day-to-day transactions.

    If one pays their credit card balance in full every month, there is no interest charged, rending this example moot.

    IMHO, the only reason a credit card might not be a suitable replacement for a debit card is that a person has bad credit and can’t get one.

  7. Gary you are spot on the mark. It makes no sense for any bank to offer any incentive to use debit cards given their low profitability. Note how BofA is actually going to start charging $5 a month if you use your debit card. EH sounds like one of the loonies ranting at the “wall street” protests with no conception of reality and wanting to blame some ominous omnipotent “bad corporate” for taking away their little joys in life. Very sad and VERY stupid

  8. What IS evil is that, effective in November, CitiBank will begin charging $20 per month for checking accounts with balances below $15,000. That is just stupid. I bet small banks and credit unions are going to be getting lots of new customers!

    In the end, I think that all of these changes are part of a grand scheme to get citizens to whine to Congress so that Congress will relax some of the new banking rules. I certainly hope that effort fails.

  9. Except the interchange fees have gone down from an average of 44 cents per transaction to a maximum of 24 cents per transaction. Obviously there’s a tradeoff there. If Citi is awarding one mile per dollar spent, if we were to (arbitrarily) say that the cost of the miles program to them is one cent per mile, then they used to profit on any transaction less than $44 (which I’d wager is probably a whole lot of debit transactions). Now they’ll only profit on transactions that are less than $24, and that changes the calculus entirely.

    I think it’s very likely that this shifted things enough that the mileage debit card wasn’t profitable anymore, or at least not profitable enough to keep going in its current form (I suppose they could have reduced the mileage award, to one mile every $2 spent, something like that, to compensate). But as much as I like and take advantage of credit card rewards programs, the fact is that they’re necessarily opaque, and necessarily represent a transfer of capital from the less responsible, and the masses, to the savvier cardholders. Fees and interchange fees fueled the program, and since merchants aren’t allowed to charge differently for different types of payment, every type of customer, whether paying debit, credit, cash or check, is indirectly subsidizing those rewards programs through the higher prices imposed across the board by merchants.

  10. I’m unhappy with Citibank for discontinuing their AAdvantage debit card and switching to another bank because without a mileage option, another bank looks to be a better option for me. But I can’t say that I blame them.

    The banks are no more greedy than the retailers that supported the Durbin amendment to Dodd-Frank.

    I saw a sign at a 7-Eleven the other day that read “Thanks to loyal customers like you, 7-Eleven collected nearly 1.7 million signatures nationwide to stop unfair credit card fees. Senator Richard Durbin stood with consumers and retailers and voted for credit card reform. Call the senator at 202.224.2152 and tell him thank you for making a tough vote.”

    7-Eleven hasn’t lowered prices or given a raise to the guy behind the counter. Instead we have more fees and fewer benefits with our checking accounts.

  11. Aadvantagegeek, exactly right. This has been a fight waged between retailers and banks about who will get to keep your money. There’s been no talk about actually letting consumers spend less.

    But then on the other hand, would there be any effective way for regulations like this to land on the banks and not be passed on to consumers?

  12. @Gary, @Greg Z, @Some Guy, @Matt, @Mike, @phil – I agree 100% with everything you say. While I am angry that Citi has elminiated the AAdvantage debit card program, I can’t expect them to continue a program that they don’t think they can make money on. Conversely, they can’t expect me to continue to bank with them if they no longer meet my needs. I opened my Citi account a few months ago for the sole purpose of earning AA miles, and my anger is based mostly on personal inconvenience. I don’t think that Citi is evil, nor do I think banks or profits are evil. The bad guy here is Dick Durbin, who, if memory serves, was the force behind the amendment regarding swipe fees.

    I’ve had a BofA account for years, and I have a US debit card, and that’s where the money in my Citi account will be headed shortly. Yes it’s only .5 miles per $, and yes BofA just announced a $5 per month fee for debit purchases, but I am willing to pay that for the ability to earn miles. I get enough out of my US debit card to make it worthwhile (though I realize I may be in the minority here).

    @E.M. – What are you going to do, stuff your money under your mattress?

  13. First of all the Wall Street Bankers are just another gang of thieves. The main culprit of this mess are the Merchant association who pushed for this legislation. I hope these people like that more people will be writing checks and using cash and I hope their cost for those methods is not higher then the interchange fee. As a consumer you have the power and use the power well.

  14. I don’t understand how people are claiming that it’s merchants who are at fault here. Sure, they’re no heroes in this particular skirmish, since it appears they’re going to reap a windfall by not reducing prices after swipe fees have to be reduced, but the ultimate problem was the fact that swipe fees were WAY TOO HIGH relative to the marginal cost of each transaction. That’s not the merchants’ fault.

  15. 7-Eleven hasn’t lowered prices or given a raise to the guy behind the counter.

    You know this how?

  16. Wow, this EW dude is a clueless dolt. Demanding that a company keep a low revenue piece of the business. I guess he just cant accept the fact that a 3-6% margin business is not as good as a 10-12% margin. At some point the return will drag down shareholder profits (if there are many LOL). Some people are clueless to business models.

  17. The situation before the regulations was anticompetitive because interchange fees exceeded processing costs and merchants were not allowed to charge surcharges to make up for the fees, so instead they had to pass on the cost to all customers so cash customers subsidized rewards for debit customers. The dodd frank regulations fixed that, and if debit companies want to charge more they can do it transparently and try proposing a per transaction charge to their customers. The loss of mile earning for debit transactions is not greed, cash customers were subsidizing that mileage earning through higher prices and it would be greed to expect that to continue.

  18. @ Fargus – Agreed that the consumers loose out in a fight between retailers and banks, but ultimately merchants control the pricing of their product.

    If 7-Eleven can’t make money because of the swipe fee, then they should raise their price of their products. If they can’t raise their prices and can’t make a profit, then maybe they should just start an airline.

    But turning to Dick Durbin and Congress and asking them to force the banks to subsidize their profit isn’t a fair solution either.

    Maybe the only solution really, is for Congress to force the banks to give us our miles (just joking:-)

  19. WTF is EM whining about? Since he was already paying $65 for a mileage debit card, simply get a AAdvantage Visa for only $50. If you treat it like a debit card ie. only spend what you can afford to pay off every month, there are no interest fees at all. You save $15 on annual fee, and the first year is free. If you haven’t had a card with them before, you can also get bonus miles for signing up. Just what is the problem here?

    As for the GREED question, yes banks want to make a profit. Really, would you go to work if your employer stopped paying you? You know you wouldn’t, and it’s not a matter of greed.

    It’s not “greed”, it’s self interest, which makes the economic world go round.

    I say it’s greed on EM’s part. He wants his miles, and he demands that Citi give them to him. Whether or not Citi finds that in it’s own self interest.

    Give me “my” miles, give them to me now…

  20. I’m with you. EH is off on this one. Also, there is nothing wrong with companies putting profits before customers. Profits are why owners create companies in the first place.

    I echo the above commenter’s feedback about USAA. They are good. Anyone dissatisfied with their bank out to try out USAA’s customer service. They’re one of the few large banks that is not publicly traded.

  21. Gary, you’ve done what you can. Hopefully E.M. and others like him come to their senses. Even when they were still around, debit cards often offered worse rates than credit cards, e.g., 1 mile/$2 vs. 1-3miles/$1 for credit cards depending on the type of transaction. I would hope that Citi would remove this benefit if it is no longer profitable. People need to realize that banks are not there to provide free benefits. The fees have a purpose: to cover expenses.

    If E.M. hates Citi so much, he can choose another bank with better service at a better value. I left BofA in 2008 because I was fed up with their crappy service, dilapidated branches, etc. As I emptied out my accounts (which were opened in CA) the teller handed me a receipt and asked if I wanted to open an account in WA…….. I moved my checking, savings, brokerage, and IRA accounts to Wells Fargo, which offered me higher rates, lower fees, and a personal banker. There are always options out there, if you’re willing to lose the anger and realize banking is just like shopping for groceries.

  22. Gary — As usual, you are 100% correct. If people do not like the unintended consequences of the stupid actions of Chris Dodd, Barney Frank, Dick Durbin, etc. (all liberal Dems with no knowledge of the free enterprise system), they should vote accordingly in November of 2012. As someone once said: “The road to hell was paved with good intentions.” PBS just ran a Ken Burns documentary on Prohibition — which made organized crime prosper. Prohibition was a “do good” program of “progressives” — what Hillary Clinton proudly proclaimed she was in 2007.

  23. E. M. sounds like a 16 year-old who has stumbled across DAS KAPITAL for the first time.

    Quit wasting your time.

  24. I think there are two questions which are getting mixed up here. One question is whether the interchange fees should have been lowered at all, i.e. are you with the banks (current fees let us give rewards to debit card users) or are you with the retailers (interchange fees exceed the processing cost and should be lowered)? I don’t personally care about the answer to this question because the consumer doesn’t benefit. Ultimately the money just ends up in either Citibank’s pocket or 7-11’s pocket (to continue the example cited in the thread). But I also don’t think Congress is evil to pick winners and losers, they do it all the time. It’s just that when you’re on the losing end, you tend not to see the issue objectively.

    The second question is whether Citibank is wrong to end debit card rewards. I don’t think there is anything wrong with a company responding to changes in the marketplace. It’s not as profitable for them to offer the rewards now. We might have wished that they increased the annual fee on the card or cut the rewards, rather than them eliminating it entirely, but it is what it is.

    Is it as EM says that Citibank is putting profit over everything else? Of course it is. But that’s capitalism. Some companies sacrifice profit to give their employees better health care or more vacation, but others don’t. As has been said above, if you don’t like it, you take your business elsewhere.

  25. Guess most forget that Chase stopped giving Continental miles on their debit cards last fall. As for USAA banking, it should be no problem for anyone as only their insurance products are restricted.

  26. What was the fuss to begin with?
    Farewell debit cards and good riddance
    very happy with the mileage earning credit cards
    No salted tears here.I never knew what was so good about them in the first place
    From the consumer end I never saw their value in the slightest except for people that can’t control their spending and interest damage.
    I have close to a month to pay on a CC,the ability to stop a charge and fantastic point/mile incentives and discounts from Amex and all others CCs
    Debit cards why on earth?If one loves debit cards so be it.Start writing checks and the banks may soon reverse their trend when they have to process all that paper 🙂

  27. Seems like greed goes both ways. If a bank (or other company) decides to stop offering an incentive (for whatever reason) that does not cost the consumer any money, a consumer who demands they keep getting the free incentive is being greedy.

    Just do what everyone else does, find another company merchant who offers something you want and buy from them. If a customer is worth the cost to a bank, they will come back after you. If they don’t, then maybe your “greed” is not worth the costs associated with them providing the service to you.

    I love miles but as a miles buyer on a wholesale level, I know they don’t come cheap and you must justify their distribution on a profit and loss basis.

    There is no free lunch and there is no free miles.

  28. See, here’s my thing. I agree that the consumer is not going to win out in this fight, because whichever way it goes, the cost of the regulations are going to be passed on to the consumer, either by the merchants or the banks. But it shouldn’t have to be that way. If the marginal cost of a debit card swipe is zero and they’re charging instead 44 cents per swipe, that’s extortionate. Reducing it to 24 cents is still awful, and given the fact that there’s next to no competition, the operators of the card networks can charge essentially whatever they want. This isn’t an issue of free enterprise. It’s an issue of a duopoly colluding, explicitly or not, to extract rents.

  29. As a merchant I have to accept both credit and debit cards and cannot charge a premium for the former even though I lose on average 2.75% of each credit card transaction. If Congress really wanted reform they would ban the prohibition imposed by the cc companies on charging less for cash or debit cards.

    So, the next question is whether prices could or would be lowered. Prices are set by the market and any individual player can’t make any difference. But if you alter an entire industry’s overhead by 1 or 2%, yes this will filter through to pricing.

  30. @EM welcome back! Glad I didn’t chase you away.

    Posting a link to an oped claiming ‘Debit Card Fees Are Robbery’ has nothing whatsoever to do with the claims about giving out frequent flyer miles for their use. Now, arguing whether the fees are “justified by a product’s cost” to me misses the point. You aren’t forced to use a particular bank, nor are you forced to use a particular bank’s specific products. If a bank charges $5 for something, and you don’t like it, why use it? I don’t use a debit card at all. I hate debit cards. They lack the same consumer protections as credit cards, and why would I want to keep track of my bank balance on a transaction-by-transaction basis? So I don’t use them.

    But very much an argument that bears little on whether any consumer has a right to miles for using a debit card, if a bank decides it no longer makes sense to spend the money to buy those miles to incentivize the transactions.

  31. @Gary, I’m not easily chased away and my life’s primary goal is not saving the Citi AAdvantange debit card program. Clearly, our political and economic philosophies differ, and that’s fine.[Sentence sharing details of my personal life removed. – gary] I disagree with your assessment of what the mission of banks (and other service oriented business ventures) should be, and we will therefore never agree on whether taking a program such as the debit AAdvantage away is contrary to all the banking/corporate marketing hype that the customer comes first. I learned some interesting facts in this exchange, and understand your unyielding free market dogma. I just wonder what you will think when the banks take away the credit card miles too! And especially when insurance companies raise your premiums to unaffordable levels, or deny a procedure to you or someone you care about because it’s not cost effective, all in the name of making a profit. I’m confident in predicting you’d lay the blame on government regulations, free market interference, etc. At the end of the day, it’s not at all about the miles. It’s a philosophical debate, and it’s one that’s tearing American society apart and leading us into uncharted waters. This of course is a topic for a different blog, but thought it would be a fitting way to close our debate. I’d wager a mile or two that you think it has “nothing whatsoever” to do with where our conversation started–I would of course beg to differ.

  32. I have the AA Citbank debit card. Yeah it cost 69 a month but I was getting a lot of miles per month. Now with my checking with Citi, they will be charging 15 a month since I’m not able to meet their minimum requirements. That’s 180 a year. If BAC is going to chagre 5 a month for debit card fees, I would rather pay that which comes to 60 plus the other fees they charge. Yes I will likely be moving my checking out of Citi but hey banks make more money off their checking, savings, etc…they have to make money somewhere….we all got used to everyone offering free checking and forgot that banks have to try to make a profit.

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