Why Banks and Airlines Love Rewards Cards More Than You Do

Brian Kelly is The Points Guy, a pioneer in the cottage industry that helps credit card users get the most out of airmiles and other rewards. He got into it when young out of a determination to always fly business class. His motivation? “I’m six-foot-seven!” he says.

Unfortunately for points obsessives like Kelly, rewards programs are under threat. This is a multibillion-dollar business in the US based on swipe fees that card users love, but opponents say hurts small shops and raises prices for consumers. Leading the campaign is Illinois Senator Dick Durbin, who got debit-card processing costs slashed over a decade ago, and last year introduced a Credit Card Competition Act.

None of this is straightforward. Forcing down the fees that fund such programs will hurt the profits of banks and airlines, but that doesn’t mean that Main Street will benefit. In fact, the biggest winners might be big spenders who are just bad at managing their money.

Credit-card rewards are a fascinating and peculiar phenomenon first launched in the early 1980s. At heart, they are a classic trick that lets people think they’re getting something for nothing while the real costs are hidden. Points are funded by so-called interchange fees, which are set by networks like Visa or Mastercard and are paid to the bank that issues your credit card out of the sticker price of the thing you are buying.

Rewards are very profitable for the businesses that run loyalty programs: They encourage customers to spend more and return to the same brands. In many ways, consumers are being led by the nose and yet everyone thinks they are getting a great deal. “They give huge value to consumers,” Kelly insists. “It takes a while to work it out, but people are getting better and better at using them.”

The difference between swipe fees and the cost of rewards is worth up to $20 billion each year to the two biggest US card issuers — American Express Co. and JPMorgan Chase & Co. — alone. That’s not pure profit: There are other costs and not all those fees come from reward card use. It’s big business for airlines, too. AmEx paid Delta Airlines Inc. $6.8 billion last year mostly for its SkyMiles, up from $5.5 billion the year before. Some of these miles are never used, but the majority help Delta fill seats often on less popular flights, or are spent on baggage allowances or cheap access to lounges. Competition is getting fiercer, and the cost of rewards programs has been growing faster than swipe-fee income at JPMorgan and AmEx for years, especially since 2021.

Points Make Prizes For Credit Card Issuers