The biggest unlicensed e-money issuers in the world?

In my last post I wrote about the interesting range of payment services that, while they have outgrown their closed-loop origins, are nevertheless not regulated as full-blown e-money services.

My favorite examples of this are frequent flyer mile programs. At first blush, frequent-flyer programs seem so limited in purpose—by flying with an airline, you accrue the right to free flights with that airline—that to talk about them as payment systems seems a stretch. But dig deeper, and you find that frequent flyer programs have many of the hallmarks of open-loop payment systems. Consider:

• You can “cash in” by buying miles.  Most frequent flyer programs allow their customers to buy miles (the “currency” which most frequent-flyer programs issue) using cash, and they promote this option when customers are shopping for reward flights but fall short of the number of miles needed to purchase their chosen itinerary. Less evident to consumers, but far more common, is the practice of selling frequent flyer miles to companies (mostly banks) who offer frequent flyer miles to customers who use their services (mostly credit and debit cards). In 2012, Citibank spent over US$1 billion buying frequent flyer miles that it doled out to its cardholders.
• You can transfer miles from one person to another. Most airlines allow this within their programs, for a fee. A few years ago, a company called Points.com made a valiant effort to create a platform where customers could transfer miles from one program to another, but the airlines permitted this only at usurious exchange rates, as anyone who has studied the competitive dynamics of interconnection would expect.
• You can purchase a variety of goods and services, not just flights, using miles. When I lived in the States, I was bombarded by direct mail solicitations inviting me to use my miles to purchase magazine subscriptions. Many US and European airlines also make it possible for their customers to redeem miles for hotel stays, rental cars, and other travel-related goods and services.
• You can “cash out” by converting miles into cash. At the aforementioned Points.com you can transfer convert miles into dollars and have them deposited into your PayPal account; an alternative is PointsPay.com, which allows you to make a similar transaction and load up a pre-paid debit card with the proceeds.

So are regulators asleep at the switch? Are the airlines actually crypto-e-money issuers that have evaded regulation simply by using the unit of “miles” rather than local currency to evade their proper compliance obligations?

I don’t think so. Customers are under no false pretenses about who controls the value of their frequent flyer miles: the airlines. They know this in part because the airlines have been stoking inflation in the mile economy for years, steadily making it harder and more costly to redeem miles for flights. Many frequent travelers (myself included) view mile accrual as a means to elite status, with its attendant lounge access and upgrades, not award flights. Customers also know that frequent flyer miles expire.

Finally, frequent flyers are well aware of what would happen to their miles were their airline to go belly up. When airlines go out of business (which, given the industry's abysmal profitability, they do with some regularity), the frequent flier miles they issued to customers disappear, too.

This suggests, I think, one useful way of distinguishing between services which ought to be regarded and regulated as e-money issuers and others that shouldn’t. E-money issuers make a promise to customers that their money is safe, won't expire, is tethered to a national currency, and will be refunded to them even if the issuer itself goes bankrupt. The issuers of reward currencies make no such guarantees. Regulators should insist that this distinction is made clear to customers--and then leave these services to extend their usefulness in innovative ways.