How Much do Banks Pay for Airline Miles

Discussion in 'General Discussion | Miles/Points' started by lsed, Nov 8, 2013.  |  Print Topic

  1. lsed

    lsed Silver Member

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    I read back in 2009 that Citibank paid $1B to AA in advance for purchase of miles for their credit cards.

    I wonder what cost per mile that the banks pay these miles.

    A bank in my country pays a high amount of miles per dollar so I wonder if they are actually making money when merchants only pay about 3% for the transaction fee.

    Anyone have an idea?
     
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  2. Counsellor
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    Counsellor Gold Member

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    I suspect that (what the bank pays for airline miles) is considered close-hold proprietary information, although I'd be curious as well.

    If the bank you mention has only begun doing this, it may be a "loss-leader" where the bank is just trying to draw more customers (kind of like the 25,000 to 50,000 bonus miles some banks offer new customers to sign up for a card). If so, and if all else is equal, I'd suggest using that card while the opportunity is there (they'll probably drop the number of miles per dollar after a while).
     
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  3. marcwint55

    marcwint55 Gold Member

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    If they weren't making money, the programs would have disappeared by now.
     
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  4. mrx900
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    mrx900 Silver Member

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    this is exactly right.
     
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  5. Muerl
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    Muerl Gold Member

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    I have to disagree. There are some that are definitely not making money.

    The Sun Trust Debt card comes to mind as something that (finance) people expect to NOT be making money but they keep offering it to keep their assets on books higher so they can make more mortgage and commercial loans.
     
  6. moongoddess

    moongoddess Silver Member

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    Doesn't surprise me. Most businesses have loss leader products. There's no reason why miles or points can't serve that function in some cases. I suspect that's exactly what most signup bonuses function as - if everyone churned cards efficiently, those bonuses would be a lot lower than they are now. But the banks know that most cardholders will keep the card long-term (and if they are lucky, carry a balance on it), hence the use of big signup bonuses as enticement.
     
    Last edited: Nov 8, 2013
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  7. newbluesea
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    newbluesea Gold Member

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    Where did your hear that? Suntrust ( who have my checking account with) offers a measly DL 5k bonus to get the card which carry an annual fee of $75.plus you get 1 dl point for
    every $2 spent. They tried to get all their ATM card holders to go for replace their cards with that card. A fell for it the first year but didnt get my moneys worth ( I rarely use debit cards)
    so went back to my regular ATM card.
    Personally I don't think they are shelling out a ton of DL with that debit card
     
  8. TravelBear

    TravelBear Gold Member

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    If you didn't get your monies worth then you did not use the card to its potential.
     
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  9. Muerl
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    Muerl Gold Member

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    From mr gleff : http://boardingarea.com/viewfromthe...-use-it-to-earn-large-amounts-of-miles-cheap/
    I know I saw further discussion about this on the board, but I remembered the article.
     
  10. newbluesea
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    newbluesea Gold Member

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    Well that applies to pretty much any or every card doesn't it? However to get my moneys "worth" in DL miles which I value at about 1 cent per mile I would have to
    charge about $15k which is just about the worst return I know of in all FF land :)
     
  11. LETTERBOY
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    LETTERBOY Gold Member

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    The current version gets 1 mile per $ spent.
     
  12. lsed

    lsed Silver Member

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    Based on some rough calculations - to break even on the miles accrual (supposing spending is maximised to optimum) - the bank will have to buy miles at US$0.007 per mile or US$7 per 1000

    Do you guys think this is profitable?


    Alternatively, when a bank offers say 50K sign up bonus, how much do you think the bank quantifies this cost to be - $150- 200?
     
  13. Muerl
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    Muerl Gold Member

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    I suspect that both of those are on the lower side.

    For example : The Barclaycard Arrivals card is 40,000 'miles' but its really $400, and that's their regular sign up offer. I have to say a 50k sign up offer has to cost Chase or Citi around the same amount. I mean considering Capital One was offering effectively $1000 cash for new signups a few years back I have to imagine that what everyone is offering for signups is >$350.

    Both of those cards basically give 2% cash back, which means that if those banks think they make money at that rate, other banks could be paying about 2% for miles as well. That's a good bit higher than your numbers.
     
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  14. Wandering Aramean
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    Wandering Aramean Gold Member

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    They pay over a penny per but less than two according to someone "in the know" I spoke with recently. They also can negotiate things like a cut of finance charges or other fees into their side of the revenue stream.
     
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  15. lsed

    lsed Silver Member

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    Wow $1000 cash for new sign ups is quite a lot.

    Considering the transaction fees charged to merchants are around 3.5%
    They have to be banking (pun not intended) on people not paying up their debts in time and accruing the 2% interest?
     
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  16. Wandering Aramean
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    Wandering Aramean Gold Member

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    You mean the 15-25% interest, right??

    Costs to acquire new customers are high. It takes a while to make back that investment in most cases. Customers who just churn are nearly universally money-losing for the banks.
     
  17. lsed

    lsed Silver Member

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    Yup, the 2% compounded monthly interest was what I was referring to - hence 24.3% P.A.
     
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  18. Muerl
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    Muerl Gold Member

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    They come around every now and then, The Amex 100,000 point offers that float around are at a minimum (in GC or Pay with Points) the much, but they are for the Amex Plat, which carries a high annual fee and is targeted at high spenders.

    This was the capital one venture 100,000 point offer if you showed that you had 100,000 miles in a different frequent flier account which you had a credit card for. They were aiming to recruit people who had spent 100k on a normal 1 mile Credit Card and were frustrated with using those miles. They wound up with alot of people who had 3 months earlier gotten the 100k BA offer ;)

    They offered the deal a second time a year later but you had to actually SHOW that you had spent 50k the previous year on a card. They actually basically offered 2x on whatever you spent the last year for a sign up offer.

    Again it was directed at people they expected to spent a lot of money on the card.
     
  19. mrx900
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    mrx900 Silver Member

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    Seth..on a side note, my US*Bank WorldPerks VISA card (R.I.P) was canceled back in 1998. When I called them to ask why, I never got a straight answer. I went back and forth with the branch and telephone, and finally got an answer from someone who had a similar experience--they said basically, I wasn't paying interest, and it wasn't doing them any good. So the bank can actually end their relationship with you, if they feel you are just a moocher.
     

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