Go Back  FlyerTalk Forums > Miles&Points > Credit, Debit and Prepaid Card Programs > Credit Card Programs
Reload this Page >

Why do credit cards frown on manufactured spending or close accounts

Why do credit cards frown on manufactured spending or close accounts

Old May 8, 17, 8:36 pm
  #1  
Original Poster
 
Join Date: Mar 2017
Posts: 107
Why do credit cards frown on manufactured spending or close accounts

I will start by saying i apologize if this is totally noobish. I did search google and went through about 20 mins of pages but couldnt find out why.

Now when a card offers say 2%+ cash back on purchases i can understand why they would want to close an account as you are costing them money at that point.

But when it comes to points lets say 3 per dollar i would imagine that does not really sting since they get the points or miles at extremely discounted prices when they buy in bulk.
AceM is offline  
Old May 8, 17, 11:48 pm
  #2  
 
Join Date: Mar 2017
Programs: AA EXP, Bonvoy Titanum, Hilton Gold
Posts: 61
Originally Posted by AceM View Post
But when it comes to points lets say 3 per dollar i would imagine that does not really sting since they get the points or miles at extremely discounted prices when they buy in bulk.
Losing money is losing money.

A credit card issuer will lose more money on someone who gets a 50,000 point bonus after $3,000 of spend (especially in few transactions resulting in less transaction fees) and never uses the card again, and then cancels the card (which means no annual fee revenue) versus someone who consistently uses the card every month for years on end, has a healthy amount of transactions and pays the annual fee.

Credit card issuers paid billions of dollars to airlines for points. Manufactured spend in itself isn't what loses money; but it's a strong indicator of a card churner who will not make a card issuer money.
d3vi0uz is offline  
Old May 9, 17, 12:56 am
  #3  
FlyerTalk Evangelist
 
Join Date: Jan 2014
Location: San Diego, CA
Programs: GE, Marriott Gold
Posts: 14,713
There's a risk aspect to it too. Spending multiple thousands on gift cards a month when one's reported income doesn't seem to support that level of spending makes banks nervous about the cardholder's ability to repay.
tmiw is offline  
Old May 9, 17, 2:37 am
  #4  
Original Poster
 
Join Date: Mar 2017
Posts: 107
In regards to the transaction fee, my understanding is they get a % so it doesnt matter if i do 5 transactions at $500 or a single $2500 transaction. Well yes on the initial bonus offer they would lose money, if the individual simply stops using it. But if the card is used afterwards provided say they offer 2 or 3 points per dollar i would not understand why they would close the account.

I didnt think about the risk aspect but i suppose that could be the only reason that really makes sense aside from churners getting their accounts closed.
AceM is offline  
Old May 9, 17, 12:12 pm
  #5  
 
Join Date: Mar 2017
Programs: AA EXP, Bonvoy Titanum, Hilton Gold
Posts: 61
Originally Posted by AceM View Post
In regards to the transaction fee, my understanding is they get a % so it doesnt matter if i do 5 transactions at $500 or a single $2500 transaction. Well yes on the initial bonus offer they would lose money, if the individual simply stops using it. But if the card is used afterwards provided say they offer 2 or 3 points per dollar i would not understand why they would close the account.

I didnt think about the risk aspect but i suppose that could be the only reason that really makes sense aside from churners getting their accounts closed.
They make a % plus a flat rate charge depending on the type of merchant. Ever been to a small mom and pop that had a "minimum" requirement in order to pay with credit card? Because that $1.50 coffee from a small shop pays 2.5% plus $0.35 (assuming numbers) for that transaction to happen.

The net cost of that transaction to the small shop is now 26% (!!!) of the transaction.

Also, with the case of AMEX (who acts as both bank and network), they want users with organic spend as it will reinforce the higher transaction costs to merchants. If AMEX users only go to big stores like Walmart or go to USPS (for MS), then the smaller merchants won't see a need for AMEX and their higher costs (% and flat rates).

AMEX especially needs to keep organic spend alive at all costs. They need the user base to justify costs to small businesses.

Last edited by d3vi0uz; May 9, 17 at 12:20 pm
d3vi0uz is offline  
Old May 9, 17, 6:53 pm
  #6  
FlyerTalk Evangelist
 
Join Date: Jan 2005
Location: home = LAX
Posts: 25,189
Originally Posted by AceM View Post
I will start by saying i apologize if this is totally noobish. I did search google and went through about 20 mins of pages but couldnt find out why.

Now when a card offers say 2%+ cash back on purchases i can understand why they would want to close an account as you are costing them money at that point.

But when it comes to points lets say 3 per dollar i would imagine that does not really sting since they get the points or miles at extremely discounted prices when they buy in bulk.
It might depend on whether they give 3 points per dollar unlimited or capped. The bank doesn't design caps as an invitation to walk right up to the cap and stop; it designs caps to catch people who happen to do big purchases "naturally" with the card and they don't want to give them points on that. The bank doesn't like people who walk right up to a cap, then stop, then walk right up the next cap, stop, then walk right up to the next cap, stop.

The bank designs capped points promos on the assumption that most people get nowhere near the cap, so if it's MS that gets you right up the cap every single time, it's the going up to the cap they might not like, as opposed to the MS itself. It's just that people who don't MS are not likely to get up to the cap on most points promos.

For example, a rotating promos card (a la Chase Freedom or Discover It) doesn't expect most users to cap most categories, and so if they see you capping one category one quarter and capping another category another quarter, they may feel like you're trying to "game" their system, no matter how you're getting "just up" to the cap.

Meanwhile, a lot of points programs may be points to you but are cash back to other people. To someone who only has (and only plans to have) a Freedom card (as their only Chase card), Freedom is a cashback card. The fact that you may consider it a transferable points card doesn't change how most people view it and how Chase markets it.

So it depends what kind of points you're talking about. Hotel points, they buy from the hotel. But transferable points that double as cashback, they don't buy them from anyone.

Last edited by sdsearch; May 9, 17 at 7:00 pm
sdsearch is offline  
Old May 13, 17, 4:22 pm
  #7  
 
Join Date: Dec 2004
Location: SFO
Programs: BART Platinum, AS MVPG 75K
Posts: 1,102
Originally Posted by AceM View Post
But when it comes to points lets say 3 per dollar i would imagine that does not really sting since they get the points or miles at extremely discounted prices when they buy in bulk.
I think it's pretty clear that a lot of the miles programs cost them more than 1 cent per mile. Most telling is the fact that mileage transfers are typically only available on "premium" cards with AFs. If miles cost them less than 1 cent, they'd encourage as many cardholders as possible to redeem for miles instead of cash. Also consider that Chase Freedom Unlimited only earns 1.5 pts/dollar, while Citi Double Cash earns 2 cents/dollar. I don't think that's because Citi cards are more generous than Chase cards -- if anything the opposite is true. Rather it's because UR points can be redeemed for miles or travel (in conjunction with a premium card), while Double Cash literally just earns cash.
milypan is offline  
Old May 14, 17, 10:39 am
  #8  
 
Join Date: May 2003
Location: CA
Programs: AA Lifetime Gold, HHonors Diamond
Posts: 2,879
Originally Posted by AceM View Post
I will start by saying i apologize if this is totally noobish. I did search google and went through about 20 mins of pages but couldnt find out why.

Now when a card offers say 2%+ cash back on purchases i can understand why they would want to close an account as you are costing them money at that point.

But when it comes to points lets say 3 per dollar i would imagine that does not really sting since they get the points or miles at extremely discounted prices when they buy in bulk.
Look at it a different way. You buy a $500 GC. Fee is about $6. Most people believe that the merchant only pays the CC issuer on the fee ($6) and not the total purchase. (there have been long threads where people guess who is actually taking the loss: the CC issuer; the merchant or; the gift card issuer. Most feel that it is the CC issuer because they, for the most part, have the right to refuse giving points on GC purchases) You now have a situation where the CC issuer gets a few cents for the transaction but they pay out $5-$10 or more in benefits. That is why they do not like people to MS.
deant is offline  
Old May 15, 17, 2:41 am
  #9  
FlyerTalk Evangelist
 
Join Date: Aug 2009
Location: ZOA, SFO, HKG
Programs: UA 1K 0.9MM, Marriott Gold, HHonors Gold, Hertz PC, SBux Gold, TSA Pre✓
Posts: 13,001
Originally Posted by AceM View Post
I did search google and went through about 20 mins of pages but couldnt find out why.
Contrary to the belief of most people, losing money is not the major reason why issuers take actions on MS. Instead, issuers take action primarily due to AML regulations.

The problem is after you load the GCs, the value in the GCs will become untraceable. What makes it even worse is people who MS use GCs to buy MOs and then repay the balance.

To issuers, since MS looks like money laundering, they would rather shut down the accounts to prevent all the troubles with the Fed (as well as the costs) than keep the customers.

This thread should explain why banks take the shut down approach:

http://www.flyertalk.com/forum/manuf...t-stopped.html
garykung is offline  
Old May 15, 17, 12:37 pm
  #10  
Moderator: Budget Travel forum & Credit Card Programs, FlyerTalk Evangelist
 
Join Date: Aug 2002
Location: YYJ/YVR/SEA
Programs: UA lifetime MM / *A Gold
Posts: 13,585
Originally Posted by garykung View Post

This thread should explain why banks take the shut down approach:

http://www.flyertalk.com/forum/manuf...t-stopped.html
Thanks, an entertaining thread. Sadly do not have time to read it all right now. And with much of MS shut down not as relevant today. Though many points still apply.
EmailKid is online now  
Old May 19, 17, 9:42 pm
  #11  
Original Poster
 
Join Date: Mar 2017
Posts: 107
I did look at that thread before i got into MS, i do agree the repaying of balances with MO is not a wise IMO. I deposit it into a bank where they know me and i have a business account there as well.
AceM is offline  
Old May 20, 17, 8:53 am
  #12  
 
Join Date: Oct 2007
Posts: 196
Thumbs up

Originally Posted by garykung View Post
Contrary to the belief of most people, losing money is not the major reason why issuers take actions on MS. Instead, issuers take action primarily due to AML regulations.

The problem is after you load the GCs, the value in the GCs will become untraceable. What makes it even worse is people who MS use GCs to buy MOs and then repay the balance.

To issuers, since MS looks like money laundering, they would rather shut down the accounts to prevent all the troubles with the Fed (as well as the costs) than keep the customers.

This thread should explain why banks take the shut down approach:

http://www.flyertalk.com/forum/manuf...t-stopped.html
I think you nailed this... MS looks very much like ML, then combine that with the issuer's loss for MS, and boom - cards shut down.

-db
dburns is offline  
Old May 21, 17, 3:23 pm
  #13  
Moderator: Manufactured Spending
 
Join Date: Jul 2011
Posts: 6,124
Originally Posted by milypan View Post
I think it's pretty clear that a lot of the miles programs cost them more than 1 cent per mile. Most telling is the fact that mileage transfers are typically only available on "premium" cards with AFs. If miles cost them less than 1 cent, they'd encourage as many cardholders as possible to redeem for miles instead of cash. Also consider that Chase Freedom Unlimited only earns 1.5 pts/dollar, while Citi Double Cash earns 2 cents/dollar. I don't think that's because Citi cards are more generous than Chase cards -- if anything the opposite is true. Rather it's because UR points can be redeemed for miles or travel (in conjunction with a premium card), while Double Cash literally just earns cash.
I don't think that is necessarily the case. The AF on the premium cards is meant to cover the extra benefits such as lounge access and whatnot, not the rewards for spending. People are willing to get premium cards because they find the miles/points more valuable, which has nothing to do with how much the bank paid for them.

Also remember that there is more competition among cash back cards. Anyone can "buy" cash and give it out to customers, but only a few selected companies can obtain miles from a given airline. Therefore, those companies can charge an annual fee without losing business.
cbn42 is offline  
Old May 23, 17, 2:59 pm
  #14  
 
Join Date: Dec 2004
Location: SFO
Programs: BART Platinum, AS MVPG 75K
Posts: 1,102
Originally Posted by cbn42 View Post
I don't think that is necessarily the case. The AF on the premium cards is meant to cover the extra benefits such as lounge access and whatnot, not the rewards for spending. People are willing to get premium cards because they find the miles/points more valuable, which has nothing to do with how much the bank paid for them.

Also remember that there is more competition among cash back cards. Anyone can "buy" cash and give it out to customers, but only a few selected companies can obtain miles from a given airline. Therefore, those companies can charge an annual fee without losing business.
Also consider that mileage programs and their associated credit card deals are widely believed to generate a large share of the profits at big carriers like UA, AA, etc. I doubt the carriers are making huge amounts of money on these deals by selling miles at significantly less than 1 cent/mile to Chase, Citi, etc. Anyway, we'll probably have to just agree to disagree on this.
milypan is offline  

Thread Tools
Search this Thread
Search Engine: