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?