The Man Who Turned Credit-Card Points Into an Empire

January 5, 2021 8:32 AM

Jamie Lauren Keiles interviews Brian Kelly, aka The Points Guy, on what has become of credit-card rewards and frequent flyer miles amid a global pandemic and delves into the wider history of credit cards and loyalty programs (NYT/Archive.is). "Today the business of selling points is more stable and more reliably profitable than the business of actually flying people places ... There have been transactions in the past where the loyalty program was acquired or sold at a total value exceeding that of the airline."
posted by adrianhon (36 comments total)

He's not the nicest of persons, though.
posted by dominik at 9:32 AM on January 5, 2021 [1 favorite]

I'd like to see a version of that article that takes a moment to consider whether all that extra travel is ethical, both in terms of environmental impact and now in terms of COVID. There's a lot of detailed reporting in that article but basically no critical analysis. The closest it gets is the question of whether mileage hacking is fair to airlines and credit card companies.
posted by jacquilynne at 9:35 AM on January 5, 2021 [7 favorites]

I've looked at this from the sidelines since one of my friends does a fair amount of this (mostly manufactured spending - one 'hack' I recall of his, buying gift cards of businesses or the prepaid cash cards at the local grocery store, to increase his rate of the grocery store's rewards which would give you 10% off your next grocery bill for every $x you spent at the store (which resulted in free groceries). He told me a few months ago that this 'hack' had been modified by the grocer so it wasn't worth as much for him to do it.

I briefly looked into it when I first got a credit card (~5 years ago) and it wasn't worth my time and more importantly, I didn't spend or fly enough to accumulate a lot of the 'perks'. I just use a cash back credit card, not worry about the rest, and pay ca$h when it's smaller amounts and at local businesses. It's just frustrating that there's more consumer protection on credit cards than debit cards.

The whole article reminds me of a characteristic of capitalism: anything (whether it's a corporate system, a small business, or an individual) that can be exploited, generally will be; regardless if such exploitation was sorta anticipated (w/ the airline miles) or condoned by the provider.
This is why we need government regulation and such activity doesn't exist in Europe according to the article (very briefly alluded to in the article, thanks to the cap on interchange fees).
posted by fizzix at 9:42 AM on January 5, 2021 [4 favorites]

“If you were to name your child after a hotel brand, which would you pick?” he asked.

The crowd tossed off suggestions: Regis (in homage to the St. Regis hotel chain), and Bonvoy (after the recently-merged Starwood-Marriott-Ritz-Carlton rewards program).

Surely you would go for "Holly Day Ingals."
posted by pwnguin at 9:48 AM on January 5, 2021 [1 favorite]

It took a while to get there, but I appreciated this analysis at the bottom which begins to hint at the broader ethical questions:

"But of course, value always comes from somewhere. If you trace the thread back on any one of these businesses, it’s always the same deal: The poor underwrite the fantasies of the middle class, who in turn underwrite the realities of the rich. When credit cards charge high interchange fees, they pass the cost of loyalty programs on to merchants, who in turn pass it back to customers by building the fees into their sticker prices. Those who pay with credit can earn it back in points. Those who pay with debit or cash wind up subsidizing someone else’s free vacation. According to a 2010 policy paper by economists at the Federal Reserve Bank of Boston, the average cash-using household paid $149 over the course of a year to card-using households, while each card-using household received $1,133 from cash users, partially in the form of rewards. It remains a regressive transfer to this day."
posted by soonertbone at 9:48 AM on January 5, 2021 [25 favorites]

The poor underwrite the fantasies of the middle class, who in turn underwrite the realities of the rich.
Loyalty points hackers are substantially changing the way everyone flies in a similar way. Airline loyalty programs work real close with TPG and other travel experts to make sure that parasitic relationship is mutually beneficial.
Airlines don't love giving miles away for free, but do thrive on loyalty and bank hard on premium experiences, not just upgrading to business class, but lounges, concierges, and other luxury accommodations such as checking a damn bag. Every little bit of comfort that's getting removed from the basic economy tickets you and I buy can get recategorized and monetized as a loyalty perk.
The Point Guys are finding ways to get those for free sure, but at the same time performing the valuable service of promoting those experiences to the real target: business travelers who don't have to hack, just expense to get the same perks.
posted by Freyja at 10:10 AM on January 5, 2021 [4 favorites]

Those who pay with credit can earn it back in points. Those who pay with debit or cash wind up subsidizing someone else’s free vacation

I think this gets the ethics of the way we pay for things completely backwards. I'm totally in agreement that allowing credit card companies to extract 2-3% out of every consumer transaction is criminal. We should absolutely have an electronic payment system with realistic costs of a fraction of a percent and we should break up the processor monopoly that maintains the current cost structue. It is also true that people who pay in cash pay extra as businesses offset these fees by raising prices.

However, I don't understand how you can blame those who find ways to leverage the fine print of credit card agreements to get the maximum possible return on that spending for the evils of the system in general. As far as I can see, I'm completely in favor of people finding every loophole in the terms and conditions of the various promotions from the credit cards to maximize the amount of those fees they get back. The limit on going after these things for me isn't moral, but just my sense of the value of my time.
posted by Lame_username at 10:28 AM on January 5, 2021 [2 favorites]

Credit card fees and rewards are just another way in which markets are rigged to make the rich richer and and poor poorer.

The Great Inequality didn't arise out of "free markets." It came about as a result of markets rigged to create that inequality, anything but "free markets."
posted by JackFlash at 11:02 AM on January 5, 2021 [4 favorites]

TPG has been in my RSS reader for a while. It's one of the lower-quality feeds, as there seems to be a lot of:

- clickbait
- bragging
- ads (both normal and submarine)
- tangentially travel related news

I do appreciate that in some ways, it provides insight into the market of credit card points, miles, loyalty programs, etc. where as consumers, we're at a severe disadvantage to businesses who spend their time and money to capture our money but return the least amount of perks.

But it starts to feel like there's an army of middlemen there making money at the margins, inflating everyone's costs, making everyone's lives worse except for those who have enough money and time to push the needle in the other direction. The system is rigged and we're countering it by creating our own terrible system.
posted by meowzilla at 11:06 AM on January 5, 2021 [2 favorites]

The airline loyalty programs have been a cash cow since the 90s. I feel zero regrets for gaming benefits out of AA back in the late 90s/early 2000s. Yeah, I took a lot of extra segments to do it, but those flights were going whether I was on them or not. I actually enjoyed being on airplanes, so abusing the fare rules to get the most miles out of my $200 tickets was a fun game.
posted by wierdo at 11:16 AM on January 5, 2021 [1 favorite]

But it starts to feel like there's an army of middlemen there making money at the margins, inflating everyone's costs, making everyone's lives worse except for those who have enough money and time to push the needle in the other direction.

I think those are called 'influencers'
posted by kurosawa's pal at 11:16 AM on January 5, 2021

Yeah I saw this article flying around on Twitter today, particularly with the point that soonertbone makes which is true for many other things as well (health insurance anyone?). And you can see the machinery chugging along to really try to capture more of the transactional data about how and why we buy, where we are going, and what we care about. There was a local holy-war-level-conflict in my town recently where we had firefighters (who are volunteer but then paid when they go out on a call) who hadn't been paid since JUNE because they refused to get direct deposit. The town, for various efficiency reasons, decided this was the only way they would pay people. Firefighters refused, for reasons that made sense, even if they may have not been practical. There was a stalemate. And at some real level, while I can 100% see why direct deposit is the Way of the Future, I can also see traditionalists not wanting to give the town/government (who they may not trust for entirely good reasons) their banking information. The people who are getting wealthy off of these schemes are people who, often, can't be harmed by the dribbling out of their personal data, but the people who don't want to get on board often find there are weird "costs" associated with non-compliance.
posted by jessamyn at 11:28 AM on January 5, 2021 [3 favorites]

But it starts to feel like there's an army of middlemen there making money at the margins, inflating everyone's costs, making everyone's lives worse except for those who have enough money and time to push the needle in the other direction.

They're a drop in the bucket compared to the banks and Visa/Mastercard.

The Federal government should just take over the interchange system under the guise of it being an extension of their authority to facilitate trade by printing currency.

I don't want the government getting into the credit card business, per se, but the transactional cost portion should be nationalized. Let the corporations make money off loans and fees, not by skimming 2.9% off every retail transaction.

Then of course, continue to crack down on loans and fees.
posted by explosion at 11:34 AM on January 5, 2021 [3 favorites]

The poor underwrite the fantasies of the middle class, who in turn underwrite the realities of the rich. When credit cards charge high interchange fees, they pass the cost of loyalty programs on to merchants, who in turn pass it back to customers by building the fees into their sticker prices. Those who pay with credit can earn it back in points. Those who pay with debit or cash wind up subsidizing someone else’s free vacation.

I've been out of the payments industry for a bit now, but I'm reasonably sure interchange isn't different for any specific credit card. The merchants' credit card processor (Authorize.net and the like) can (and always does) charge a bit different depending on whether or the not the card was swiped or keyed, a gift/debit/credit card was used, etc etc. But that's because of the "risk" involved.

Contrary to popular belief, Visa and friends and the banks are way down the list when it comes to who is on the hook for refunding a fraudulent purchase. If the merchant is unable to pay because they are out of business, the processor has to. And since fraud is more likely for certain types of cards and transactions (Amex gift cards from CVS for example), the fees go up.

I'm totally in agreement that allowing credit card companies to extract 2-3% out of every consumer transaction is criminal. We should absolutely have an electronic payment system with realistic costs of a fraction of a percent and we should break up the processor monopoly that maintains the current cost structue. It is also true that people who pay in cash pay extra as businesses offset these fees by raising prices.

Up to 6 different distinct entities make up that 2-3%, and not only are their literally hundreds of different credit card processors out there, their piece of that 2-3% is among the smallest.
posted by sideshow at 11:39 AM on January 5, 2021

It's one of the lower-quality feeds, as there seems to be a lot of:
- clickbait
- bragging
- ads (both normal and submarine)

wait how many points do I need for a submarine?
posted by Huffy Puffy at 11:51 AM on January 5, 2021 [4 favorites]

Up to 6 different distinct entities make up that 2-3%, and not only are their literally hundreds of different credit card processors out there, their piece of that 2-3% is among the smallest.

You are correct and I apologize for my imprecise language. Its really the interchange & assesment fees that I have the biggest problem with. As you point out, there is plenty of competition for the processor portion and those fees are probably the least of the problem.
posted by Lame_username at 11:53 AM on January 5, 2021

I had a brief period of time in my life when I thought doing the points game might make some kind of sense - I was traveling frequently enough for work that I had Gold status on United, I got the free bottle of water when I checked in to a Marriott. A couple of factors finally dissuaded me, chief among them was that we were thinking of buying a house and opening a ton of credit lines and moving balances around didn't seem like the best way to ensure that future. At about the same time, a lot of these loyalty programs (separate from the points game, admittedly) devalued their statuses and I lost the incentive to stick with any one provider of anything. (I finally broke when United removed the free checked bag from their lowest tier status level, which was the last reason I was clinging to that program.)

I think of these points chasers the same way I think of a lot of the other "subcultures" who try this sort of individual arbitrage game - given the amount of time and effort involved, it's probably more worthwhile to just get a second job. These people in particular would probably do great as bookkeepers, since they're already basically cosplaying CPAs and contract lawyers.
posted by backseatpilot at 11:55 AM on January 5, 2021 [3 favorites]

And before we all start arguing about what something like "interchange" actually means:

When I started at the credit card processing division of the personal finance company you've definitely heard of, back in the 2010, the "here's exactly what happens when you use your card at the liquor store down the street" class was a day and a half. And we only went into detail for the US system, Europe has their own thing going on, and much of it is very different.

Getting a dollar from your bank account to the merchant's account is extremely complicated. It can take lots of different paths that look identical to the end users on both ends, and lots of companies you've never heard of are in the middle making it happen.

Do all these middle men charge too much? Is too much of the payments infrastructure based on ideas and thinking from the late 60's? Is too much of it based on basically handshake deals between billion dollar corporations and the United States Federal Government and quasi-United States Federal Government that everyone is "good for it"? Is PCI-DSS just theater that allows Visa to wash its hands of the extra minimal risk they had in the first place? Perhaps (well, except that last one, that's definitely true).

But all that's like 10 different FPP, and really isn't relevant to the (IMO) incorrect statement that rewards credit cards are significantly worse for merchants that any other card.
posted by sideshow at 11:57 AM on January 5, 2021 [1 favorite]

But all that's like 10 different FPP, and really isn't relevant to the (IMO) incorrect statement that rewards credit cards are significantly worse for merchants that any other card.

That may be your opinion, but your opinion is wrong. As a merchant, when I ring up a $100 sale, I literally have no idea how much the customer is actually going to pay me. It may be $97 or it may be $99. It depends on the card they present and I don't know how much that card charges for interchange fees. There are different fees for debit and credit. That is pretty straight forward. There are different fees for Visa vs Amex. That is also pretty straight forward. But there are also different fees depending on whether it is a business credit card, a rewards credit card or a regular credit card. And I literally have no idea which is which at the time of transaction. I only know how much the processor puts in my bank account at the end of the month, and the higher the rewards, the higher the fee taken out.

Since I don't know the cost of the transaction at the time of sale, I have to base my prices on the average cost of transactions. This means that the rewards person is getting a bargain and the non-rewards person is getting screwed.

But I can't help that because the costs are completely hidden from both me and the customer. That is exactly the opposite of a transparent free market. They are hidden because the market is rigged to screw the poor and transfer wealth to the rich.
posted by JackFlash at 12:32 PM on January 5, 2021 [11 favorites]

given the amount of time and effort involved, it's probably more worthwhile to just get a second job

You can play an extremely tame and conservative version of this game--no loophole-hunting, no increases in spending--and net around $1000 annually without much effort (rewards redemptions, even into cash, generally aren't taxed). The biggest pain is filling out direct deposit forms at work if you go the bank-bonus route. I'm middle class, and $1000 for routing my regular spending through a different card or filling out some forms online is a meaningful amount. But you need to be in a particular situation: good credit, steady income, enough regular spending to meet the minimums without increasing spending, no character predisposed to gamble or spend carelessly (in some ways, the most important thing; if you don't change your spending, the worst thing that can usually happen is you don't earn the bonus, but if you do, you can cause damage--as always in personal finance, knowing yourself is rule #1).

Personally, given all the interest the banks extorted from me when I was broke, I take spiteful pleasure in annexing some of it back.

TPG is widely regarded as a shill in these subcultures.
posted by praemunire at 12:55 PM on January 5, 2021 [5 favorites]

I've been following TPG for years. I've watched him become more of a shill over time (which makes sense, it's his income stream). I do still find certain items valuable. For example, he has a points valuation table which gives an estimate of what those points would be worth in cash. This can help you make the decision as to whether you should pay in points or cash.

He also has good data on which cards don't charge fees when you use them internationally. This comes in awfully handy when you are stuck out of the country due to COVID-19 and would otherwise get hammered on bank withdrawals. Not that I'd know what that's like.

I do not play the points game hardcore, but I have been accruing them on and off for years. His site has given me enough information that I have avoided some dumb decisions that looked alluring at the time. It has also occasionally left me with analysis paralysis. But on balance it's been more of a benefit than a drawback.
posted by rednikki at 2:08 PM on January 5, 2021 [1 favorite]

But I can't help that because the costs are completely hidden from both me and the customer.

Your merchant agreement lays this out in painful detail. In fact, since my wife at the time worked customer service for the same processor I worked for, I can tell you that somewhere there is building full of long suffering customer service agents standing by that spend 8 hours a day explaining all those painful details.
posted by sideshow at 2:54 PM on January 5, 2021

Your merchant agreement lays this out in painful detail.

You don't seem to understand. Every single card transaction can have a different fee rate, depending on the card type and rewards structure. At the time you run the card you have no idea what the fee rate will be on that transaction. You can't tell just by looking at the card. You only get fee information at the end of the month.
posted by JackFlash at 3:09 PM on January 5, 2021 [5 favorites]

I think you do better with Doctor of Credit, who doesn't use affiliate links for credit cards (but does for some other deals).
posted by praemunire at 3:22 PM on January 5, 2021 [5 favorites]

The Federal government should just take over the interchange system under the guise of it being an extension of their authority to facilitate trade by printing currency.

That's pretty much happened with check clearing, via the Federal Reserve system.

Congress gave the Federal Reserve System the authority to establish a nationwide check-clearing system. The System, then, was to provide not only an elastic currency‍—‌that is, a currency that would expand or shrink in amount as economic conditions warranted‍—‌but also an efficient and equitable check-collection system.

That's why check clearing is free to both merchants and customers.
posted by wuwei at 4:16 PM on January 5, 2021

JackFlash: You don't seem to understand. Every single card transaction can have a different fee rate, depending on the card type and rewards structure. At the time you run the card you have no idea what the fee rate will be on that transaction. You can't tell just by looking at the card. You only get fee information at the end of the month.

Sounds like you need a version of The Points Guy's promised consumer app, but for merchants.

This whole thing puts an interesting spin on the usual moral conversation around spending, saving and credit. Surely you are earning your rewards points because some people are lazy and impecunious and fail to pay their bills on time, and pay high interest rates as punishment. But no: You are earning your rewards from those who save and stay out of debt and pay in cash.
posted by clawsoon at 4:26 PM on January 5, 2021 [1 favorite]

Personally, given all the interest the banks extorted from me when I was broke, I take spiteful pleasure in annexing some of it back.

I once had this same attitude toward gaming the points systems. But as explained toward the end of the article, the uncomfortable truth is that banks aren't the ones paying for the points.

What first woke me up to this reality was reading the story of John Woolman. He was an early American Quaker abolitionist, who would visit slaveholding Quakers in their homes to dialogue with them. But much to their annoyance, he would scrupulously decline any hospitality they offered him. He knew full well the ultimate source of that generosity, and the ethical peril of taking comfort in the household of a slaveholder.
posted by ContinuousWave at 4:27 PM on January 5, 2021 [4 favorites]

Sounds like you need a version of The Points Guy's promised consumer app, but for merchants.

Figuring out a way to game the system is no answer because the system is rotten. Any individual might be able to work the system but that doesn't get away from the fact that the rich person is always the winner and the poor person is always the loser. The fees are complex and hidden because that is the way they transfer wealth from the poor to the rich without them noticing.
posted by JackFlash at 4:51 PM on January 5, 2021 [1 favorite]

I don't believe that if there weren't points, prices (or fees) would drop. Every member of this system charges based not on value provided, but on market leverage. It is, as others have noted, a lousy system. Like many subsystems of capitalism generally, it's not really possible to extract yourself from it.

Additionally, when it comes to sign-up bonuses per se, which is my tactic, there actually is a significant cost per acquisition to the banks. You can see it in their 10Ks. I don't spend enough to recover significant money from ordinary rewards.

(It should also be noted that this isn't quite right: You are earning your rewards from those who save and stay out of debt and pay in cash. Saving and staying out of debt aren't inherently linked to paying in cash. I save and I have zero debt of any kind month-to-month (there's no benefit otherwise); I just enjoy the benefit of a short-term interest-free loan to cover some of my expenses every month courtesy the banks. I actually feel far more concern about the impecunious and the involuntarily unbanked than about people who could use cards but refuse to because they think paying in cash is somehow morally superior!)
posted by praemunire at 4:56 PM on January 5, 2021 [4 favorites]

praemunire: Every member of this system charges based not on value provided, but on market leverage.

Aye. The economics textbook phrase "money as a store of value" doesn't quite capture the reality quite as well as "money as a store of power."
posted by clawsoon at 5:11 PM on January 5, 2021

Just because it is messed up doesn't mean we should just give up. For years the credit card companies prohibited sellers from giving discounts for cash. The card company lobbyists even got state laws prohibiting cash discounts. Think about that -- card companies got state laws requiring you to pay fees even if you didn't use a credit card! Well, it took a while and a lot of effort but that prohibition is now illegal.

But the card companies still prohibit the opposite, levying a surcharge for use of a credit card. Card rules require that the marked price on the item must be the credit card price, not the cash price. So we still have a ways to go.

If we had a strong Consumer Financial Protection Bureau we might be able to prohibit card companies from charging different transaction fees for different classes of cards. That would be a step toward putting everyone on an equal and fair footing.
posted by JackFlash at 5:24 PM on January 5, 2021 [1 favorite]

JackFlash: But the card companies still prohibit the opposite, levying a surcharge for use of a credit card. Card rules require that the marked price on the item must be the credit card price, not the cash price. So we still have a ways to go.

Reminds me of one of my favourite signs on a pizza joint: "Free Delivery! Walk-in discount!" It's a win-win either way!!

Unfortunately, "cash discount" carries the smell of "I cheat on my taxes" rather than "I'm not charging you credit card fees."
posted by clawsoon at 5:40 PM on January 5, 2021

It may be $97 or it may be $99.

One of the interesting things about the popular new segment of low-effort credit card processors like Square is that they charge a flat rate for all cards, so you know exactly how much they're taking. Has anyone written about the implications of this? I assume they're averaging out their own costs, allowing the rewards card transactions to be subsidized by others.
posted by alexei at 6:08 PM on January 5, 2021

Has anyone written about the implications of this? I assume they're averaging out their own costs, allowing the rewards card transactions to be subsidized by others.

All they have done is add one more layer of abstraction which hides the payment price disparity. By averaging fees, the rewards card people are getting a discount at the expense of the folks who don't have rewards cards, who tend to be poorer. It's just all around obnoxious and unfair.
posted by JackFlash at 6:25 PM on January 5, 2021 [1 favorite]

There's got to be some market to combine people who need to spend a minimum amount and people who need to organize a bachelor(ette) weekend and would find it easiest to put everything on one card, and have all the groomsmen / bridesmaids pay their split later.

(^^^ 2048, but with manifestations of capitalism)

I do not like really like travel (jetlag destabilizes my sleep for a long time), so I just take the 2% cash back on my Fidelity card and 3% for groceries from my free tier Amex. Oddly enough, my bank is now giving me points for using its app, and I seem to be able to redeem points for cash.
posted by batter_my_heart at 10:05 PM on January 5, 2021

Dont mean to derail, but there seems to be some knowledgable folks in the thread, so I'm going to take advantage.
Fantasy Question for those in the know about payment processing etc.
If we were to do Postal Banking, where you had an online checking/savings account with a cash debit card through the USPS, what's the best way to implement that?
Not in terms of super-couponing for perks, but in paying for your groceries with a card that has a little postal eagle logo on it instead of the Visa flag?
Is there some way to bypass this existing complex web of middlemen by treating payment at the register as...a check clearance? Some new format?

Or would you commandeer the payments bureau of Discover or Diners Club or something, saying you can keep your branding and your credit and loan divisions, we're just nabbing your entire merchant transactions setup and expanding it so people can spend their Post Office money via chip&PIN?
Having a financial institution where, say, all Federal salaries and Social Security benefits are Direct Deposited by default, would give you a lot of leverage. So speculate wildly. How would you do it theoretically? Or why couldn't it be done?
posted by bartleby at 10:50 PM on January 5, 2021