← All the Hacks: Money, Points & Life
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The points and miles industry is a $140 billion machine built on a fabricated origin story. An unsolicited credit card drop in Fresno, a Supreme Court case most people have never heard of, and a business model so profitable that airline loyalty programs are now worth more than the airlines themselves. Today, I'm walking through the complete history, from the very first charge card in 1950 to the legal accident that made them wildly profitable, to the the trillions of unredeemed miles floating around the world. I'll also break down the business model that makes all of these points possible in the first place. This is really a story that I think you're going to find fascinating. And once you see how the machine works, you can make it work even harder for you. I'm Chris Hutchins. If you enjoy this episode, leave a comment or share it with a friend. And if you want to keep upgrading your money points and life, click follow or subscribe. All right, let's start at the very beginning. And the beginning is actually a lie. You might have heard the story. In 1949, a businessman named Frank McNamara goes to dinner at a restaurant in Manhattan. He reaches for his wallet and realizes he left it at home. He's embarrassed. He vows to create a card that would prevent that from ever happening again. And that is how the first credit card was born. It's a great story. The only problem is it's completely made up. The man who fabricated it was Matty Simmons, Diners Club's first press agent, cardholder number 1002. He admitted it wasn't true. Decades later in the Saturday Evening Post, McNamara never forgot his wallet. The idea actually came to him while he was sitting on a commuter train. Simmons made the entire story up to glamorize the creation of the credit card. And funny enough, as one historian pointed out, if a credit card had existed to solve this problem, it probably would have been in the same wallet he left at home. So forgetting your wallet wouldn't have helped. Anyways, what actually happened is actually a little bit more interesting. On February 8, 1950, three men sat down at Major's Cabin Grill on 33rd street in Manhattan, right next to the Empire State Building. They used the first card number, 1000, to pay for lunch. The restaurant owner and his son watched from across the room as the waiter brought out a carbon slip. Those three men were Frank McNamara, a small loan company operator Ralph Schneider, his attorney from Harvard Law, and Matty Simmons, the first press agent, who would later fabricate that origin story. The company started incredibly small. They had Convinced a handful of Manhattan restaurants to accept the card. They had about 200 cardholders, all friends and acquaintances, and merchants paid a 7% fee on each transaction. Cardholders paid nothing at first until Simmons proposed a $3 annual fee. McNamara objected. He said nobody would pay for a credit card. They charged it anyways. Half the members dropped out, the other half paid, and the company immediately became profitable. Then Businessweek ran a story, and 8,000 people signed up within weeks. By the end of 1950, they had 20,000 members. By 1953, Diners Club was accepted internationally. One quick footnote on Diners Club before we move on, because I just love this detail. And in 1963, they actually made a movie called the man from the Diners Club. The screenplay was actually written by William Peter Blady, who a decade later, went on to write the Exorcist. And for the movie premiere, the town of Winstead, Connecticut, passed an actual municipal ordinance making it illegal to use cash for one whole day. A credit card company got an entire town to ban cash in 1963. I love it. But here's where the story gets a little more tragic. McNamara believed the company had peaked. He predicted it would peter out at 250,000 members. So he sold his stake in 1952 for a few hundred thousand dollars to Alfred Bloomingdale, the department store heir. McNamara died in 1957 at age 40, and two years later, diners Club surpassed a million members. Bloomingdale eventually sold his shares for a $13 million profit. So to understand how we got from that first card to the world we live in today, you need to know a little bit more about American Express. Most people think of Amex as a credit card company, but it was actually founded in 1850 as an express mail and freight business by Henry Wells, William Fargo, and John Butterfield. When Wells proposed expanding to California during the Gold rush, the Amex board said no. So Wells and Fargo started a separate company to serve the West Coast. The same founders, two companies. And it's why American Express and Wells Fargo share so much DNA. Now, Amex invented the traveler's check in 1891, which dominated global travel finance for almost a century. And when they launched their charge card in October 1958, they deliberately priced the annual fee at $6, $1 more than Diners Club was charging at the time to signal premium positioning. Public interest was so enormous that that 250,000 cards were issued before the official launch date. But the real revolution in credit cards, the one that actually created the modern industry, was not in Manhattan. But in Fresno, California, on September 18, 1958, bank of America mailed 60,000 fully activated unsolicited credit cards to the resident of Fresno. No application, no credit check. Just a card in the mail or with a $300 to $500 credit limit. The architect of this plan was a guy named Joseph Williams, who at 41, led bank of America's internal think tank. He had never worked in the bank's loans department, which would turn out to be a very important detail. They chose Fresno. Strategically, it was about 250,000 people. Bank of America held a 45% market share there, and it was geographically isolated enough that if it failed, it wouldn't make national news. The first chain to accept the card was Florsheim's shoes. Residents reportedly gathered in stores to watch people charge goods. It was like witnessing magic. And then everything went wrong. Williams had projected 4% delinquency. The actual rate was 22%, more than five times what they expected. Criminal fraud exploded. The cardholder agreement actually held customers liable for all charges, including fraudulent ones, which caused a political firestorm. And within 13 months, bank of America panicked when they learned a competitor was about to launch in San Francisco. So they expanded prematurely, hitting 2 million cards and 20,000 merchants. Williams resigned in December 1959. But bank of America stuck with it. And by May 1961, the program turned profitable. The legislative fallout was massive. Over 100 million unsolicited credit cards were mailed by various banks before Congress stepped in. The Truth in Lending act, the Fair Credit Reporting act, the Fair Credit Billing act, which created the chargeback process and limited your liability to $50. And the equal Credit Opportunity act, which gave women equal access to credit cards for the first time, all traced directly back to the chaos in Fresno. The fact that I have 40 different credit cards from dozen different issuers, each with different reward structures and perks, all traces back to a banker in Fresno who had never worked at a loan department. Deciding to mail 60,000 unsolicited credit cards to a mid sized town in California in 1958. The whole modern credit card industry is basically the result of one wildly irresponsible experiment that almost failed, but didn't. That Bank Americard program eventually became Visa. A guy named Dee Hawk found the multi bank card system in total disarray and asked a radical question. What is a bank and what is money? He persuaded bank of America to surrender ownership of the BankAmericard network and reorganized it as a decentralized cooperative and rebranded it as Visa in 1976. Within two years, losses were eliminated, and the business grew at 50%, compounded annually. Meanwhile, the rival Interbank Card association launched MasterCharge in 1969, renamed it MasterCard in 1979, and. And the multiparty network model that emerged, where you have a cardholder, an issuing bank, a card network, an acquiring bank, and a merchant, was genuinely revolutionary. Understanding that structure is key to understanding everything that comes next. Okay, so that is how credit cards came to exist. Now, here is the legal accident that made them insanely profitable. In 1978, the Supreme Court decided Marquette National bank of Minneapolis versus first of Omaha Service Corp. This case was simple. A bank in Nebraska was mailing credit cards to Minnesota residents at 18% interest, but Minnesota law capped interest rates at 12%. A local bank sued, and during oral arguments, Justice Thurgood Marshall told the local bank's lawyer, you don't have a legal problem. You have a marketing problem. The court ruled 9, 0 that nationally chartered banks could charge the interest rate permitted in their home state to customers anywhere in the country. Justice Brennan acknowledged that this would impair the ability for states to enforce usury laws, but said fixing it was Congress's job. Congress never acted. This is one of those moments where if you rewind history and you change one decision, the entire Points ecosystem might not exist as we know it. This episode is brought to you by Storyworthy. So my mom was programming mainframe computers in COBOL before I was born. But I only found that out by accident. 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Order right now and save up to $20 at storyworth.com allthehacks storyworth.com allthehills this episode is brought to you by Fabric by Gerber Life. Anytime someone asks me what kind of life insurance to get, my answer is the same. Term life. Not whole life, not variable, not whatever the insurance agent is trying to sell you. It's term life. It's the one that actually makes sense for almost everyone. The other thing worth knowing. A lot of people think they have life insurance because their employer provides it. I've been there. The problem is, the day you leave that company, the coverage is gone. That is not a plan you can build on. Fabric by Gerber Life is term life insurance you can get done today. Made for busy parents like you all online on your schedule, right from your couch. You could be covered in under 10 minutes, often with no health exam required. If you've got kids and you're young and healthy, the time to lock in low rates is now. Fabric has flexible policies like a million dollars in coverage for less than a dollar a day. And if you have life insurance through work, that's a good start. But it could disappear if you change jobs. Term life insurance from Fabric follows you wherever you go and there's no risk. 30 day money back guarantee. Cancel anytime. Join the thousands of parents who trust Fabric to help protect their family. Apply today in just minutes@meetfabric.com AllTheHacks MeetFabric.com AllTheHacks and use my link so they know I sent you me. E-T fabric.com AllTheHacks policies issued by Western Southern Life Assurance Company not available in certain states. Prices subject to underwriting and health questions. Elizabeth Warren once said that the single biggest policy change in the whole consumer credit area came through an obscure Supreme Court decision. And she's right. Because what happened next changed everything. On Valentine's Day 1980, a Citibank executive named Charlie Long cut short his trip to Panama and flew to Pierre, South Dakota, to meet with Governor Bill Janklo. the time, Citibank was hemorrhaging money. New York capped interest rates at 12%, but the cost of borrowing from the Fed had hit 19%. Their 3 million credit card accounts were losing millions of dollars. They needed a new state. South Dakota had just eliminated its usury laws because local banks were also drowning. Janklo agreed to push legislation through in exchange for 400 jobs. He said, and I'm paraphrasing, you have no idea. In a state of 750,000 people, how many 400 jobs is on March 12, 1980, the very last legislative day, the South Dakota legislator suspended its rules, introduced Citibank's bill without public hearings, and passed it 97 to 3 in 47 minutes. The emergency clause made it effective immediately. By 2006, Citibank employed 3,200 workers, servicing 118 million credit card accounts from Sioux Falls, South Dakota. Other banks followed. One aide called it one of the three best things that ever happened to South Dakota. Alongside the Homestead act and Mount Rushmore, Delaware followed within a year. By 2003, nearly 3/4 of all U.S. credit card loans originated from states containing just 4% of the country's population. It's why many of the cards are mailed from a handful of states. It might also be why total U.S. credit card debt has crossed $1.27 trillion and why roughly half of U.S. cardholders carry a balance month to month. This single Supreme Court case, combined with the competitive race between South Dakota and Delaware, created the legal frameworks that make the entire modern credit card industry possible, including the rewards we all benefit from. But unlike interest rates, where the Supreme Court at least accidentally removed the caps, interchange fees in the US Were never capped in the first place. In fact, the US Is the only major economy that allows unregulated interchange on credit cards. Now, for those unfamiliar, interchange fees are what is charged in order to process a credit card. The EU actually caps interchange at about 0.3%, Australia at 0.5%. But the US average is about 2%, six to seven times higher. That interchange is what directly funds your rewards. When a merchant pays 2% on your purchase, a big chunk of that flows to your card issuer, and they pass a portion back to you as rewards. So you've got two uncapped revenue streams working together. Interest that makes the business enormously profitable, and interchange that directly funds the rewards arms race. In many European countries, a great signup bonus might be 10 to 20,000 points. And in the US we've seen 200 to 300,000 points on some welcome bonuses. It's also why our System allows earning 2,345x points on certain transactions, or up to 2 or 3% cash back. That gap is not an accident. So at this point in the story, we've got three things in place. Credit cards exist, banks figured out how to scale them nationally, and the legal system accidentally removed some of the guardrails. Now comes the part that affects you the most. Rewards. And to tell that story, we need to go to the airline industry. Now, here's something you probably don't know frequent flyer programs wouldn't have been allowed before 1978. The Civil Aeronautics Board, which regulated every aspect of commercial aviation, including fares, routes, and literally the thickness of the sandwiches served on board, didn't allow discounts or rebates. As Justice Stephen Breyer noted, offering a frequent flyer program would have been illegal prior to airline deregulation. Executives might have even gone to jail if they tried it. The Airline Deregulation act, signed by President Carter in October 1978, opened the door and the very first airline frequent flyer program, which probably wasn't American's Advantage as often cited. In fact, many sources say the first program was actually called Payola passes, launched in 1979 by Texas International Airlines, a carrier originally named Tinker Toy Airlines. But it lacked the computerized infrastructure to scale Texas Internationally, eventually merged into Continental, which merged into United States. So the DNA of the first ever frequent flyer program probably still lives on today inside United. Mileage Plus. But the program that changed everything was American's Advantage. It launched on May 1, 1981. The mastermind behind it was Bob Crandall, one of the most colorful executives in aviation history. The Wall Street Journal called him the man who changed the way the world flies. His management style was legendarily obsessive. He famously once removed one olive from every salad served on American flights. To save $40,000 a year, he cut security at a Caribbean warehouse down to nothing but a tape recording of a guard dog barking. Now, Advantage was revolutionary because it tracked actual miles flown, which was enabled by the Sabre computer system. Membership was free. The original reward levels were astonishingly generous. 12,000 miles for a first class upgrade, 50,000 for a first class round trip, no capacity controls, and the critical detail that could have prevented everything. As we know today. Advantage was introduced as a temporary one year promotion. It wasn't supposed to be permanent, but United was blindsided and scrambled to launch MileagePlus in roughly 10 days. Delta followed within weeks. And the competitive pressure made it impossible to end. American signed up over 200,000 members at launch, and as of 2021, 144,000 of them were still active. The real transformation came in 1982, when American partnered with Hertz and Holland America to let members earn American miles through rental cars and cruises. Now, this may seem obvious now, but it was revolutionary because it meant that airlines had to put a monetary price on their imaginary points. For the first time, miles became a currency that could be bought and sold if Hertz paid about a cent per mile and a domestic round trip required 25,000 miles. That means American earned $250 for giving away a seat that had a variable cost of maybe $15. The profit margins were extraordinary. And this is a good moment to tell the story of aerpass, because it perfectly illustrates how even the airlines didn't understand what they might be creating. In 1981, struggling American Airlines started selling something extraordinary. Unlimited lifetime first class travel passes for $250,000, which is about $850,000 in today's dollars. You could add a companion pass for another $150,000. 66 people bought them, including Michael Dell, Mark Cuban, and Willie Mays. And two holders became legendary. First, Stephen Rothstein, a Chicago investment banker who took over 10,000 flights and accumulated roughly 40 million miles over 21 years. You heard that right. Not only did they sell an unlimited travel pass, but you also earned miles while traveling with it. He flew to New York about a thousand times, to Paris and Sydney about 80 times each. He sometimes gave his companion seat to complete strangers, people heading to funerals or dealing with family emergencies. The other famous person was Jacques Vroom, a Dallas marketing executive who traveled 38 million miles, sometimes taking 50 or more trips a month. In 2007, American's Revenue Integrity unit discovered each of these guys was costing the airline over $1 million a year. Both were stripped of their passes in 2008. Both of them sued the airline. And in perfect irony, the resolution of those lawsuits was delayed because American filed for bankruptcy in 2011. The program that was created in part to prevent bankruptcy eventually became such a big liability that maybe it was even contributing to the financial problems of the company. What a story arc. I tried to figure out actually what happened here, and it seems that Steven settled out of court in 2012, but never got his pass back. And unfortunately, I have no idea whatever happened to Jacques Pass. This episode is brought to you by Gelt. One thing I've come to appreciate, especially as a business owner, is how much your tax strategy matters year round, not just in April. When it comes to building wealth, taxes are one of the biggest levers. And working with G the past few years, I feel like I have a partner I can trust to handle all of it. 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Join thrive market@allthehacks.com thrivemarket for $20 off your first three orders, plus you'll get a free $60 gift. That's allthehacks.com thrivemarket let's go back to 1987. American teamed up with Citibank for the first major airline co branded credit card. For the first time, customers could earn airline miles from everyday spending, not just from flying. That single partnership has endured nearly 40 years and was renewed in December 2024. For another decade, it transformed airlines from transportation companies into lifestyle brands embedded in our daily financial life. Meanwhile, Discover had launched during the Super bowl in 1986 with a radical position, no annual fee and a pioneering 1% cashback program. The model Discover proved would eventually become the baseline that every rewards card had to beat. Amex launched membership Miles in 1991, which later rebranded as Membership Rewards, and it introduced what I love today, and I know many of you do as well, transferable points that could be used across multiple airlines. The original Seven transfer partners were Continental, Delta, Northwest, Pan Am, Midway, Southwest, and MGM Grand Air. Of those seven, only Delta and Southwest survived, a haunting reminder of airline mortality. But the model Amex created became the template for Chase Ultimate Rewards, Citi, thank you, Capital One, Bilt, and every other transferable points program. The 2000s and the 2010s saw an explosion of rewards competition. Chase launched ultimate rewards in 2005. The Chase Sapphire Reserve launch in 2016 was so popular that Chase reportedly ran out of the metal they used to make the cards. People were sharing unboxing videos of a credit card on social media, which might tell you something about how central points and miles have become to consumer culture. Today, about 71% of Americans have a rewards card, and more than 90% of all credit card spending occurs on rewards cards. We've gone from a world where rewards didn't exist to where they are the default in about 40 years. So let's follow the money, because the economics of how all this works is hiding in plain sight. And it's fascinating. Every time you swipe a credit card, there's an invisible cascade of fees that gets triggered. For example, on a $100 purchase, the merchant typically keeps about 97 to $98. The rest flows through the network. The biggest piece, anywhere from $1.50 to $2.40, is the interchange fee paid by the merchant's payment processor to your bank, which is the bank that issued your credit card. And then Visa or MasterCard take a small network assessment fee of about 10 to 18 cents, and the merchant's payment processor takes another cut. Amex operates differently than Visa or MasterCard. Visa and MasterCard are open loop networks. They route transactions, but they don't issue cards or extend credit. They're essentially toll collectors. Amex, on the other hand, runs a closed loop system where they're the network, the issuer and the acquirer simultaneously. That's exactly why Amex charges 2.3 to 3.3%, which is higher than Visa and MasterCard. And it's why Amex can afford to offer richer rewards. Amex cardholders also spend about three times more annually and have 60% higher incomes on average, which makes the premium worthwhile for merchants despite the higher fee. To give you a sense of scale by purchase volume, in the U.S. visa handles about 3 trillion, or 52% of the market. MasterCard about 1.4 trillion, or 24%. Amex about 1.1 trillion, or 19%, and Discover about 300 billion, or 5%. But by cards in circulation globally, Visa has 4.3 billion. MasterCard has 2.9 billion, and Amex has just 141 million cards. So Amex does nearly as much volume as MasterCard. With 1/20 the number of cards. Each Amex card is doing dramatically more work. And that is the power of their affluent customer base. Looking at these companies across the fees they collect is also interesting. Visa and MasterCard earn about $10 per cardholder in assessment fees. Amex earns 350 or more per cardholder in total revenue. Someone is paying for these points that we might feel like they're free, even if it's not you directly. And when you look at the total numbers, it's staggering. In 2022, the six largest US credit card issuers collected about $100 billion in interchange fees. They paid out about 68 billion in rewards and partner payments. JPMorgan Chase alone paid 22 billion, nearly a third of the total. After covering all the rewards, the net interchange profit was about $32 billion. Capital One has shared similar metrics. That two thirds of their interchange revenue covers all their rewards cost, leaving a third as pure profit. Now that's interesting because it contradicts an argument that I've heard lots of times that the balances people carry and the interest they pay on those balances is what's funding the rewards for everyone who's not paying their balance in full. However, multiple banks have stated that the interchange fees on those cards fully cover the cost of the rewards and create some profit. And even if the industry is paying out the majority of interchange as rewards, that doesn't mean the industry isn't wildly profitable. Right now. Total annual credit card industry revenue exceeds $140 billion, 90 billion of it coming from interest, 41 billion from interchange, and about $10 billion from from fees. But another source of profit is breakage. Americans earned $41.4 billion in credit card rewards in 2022, but they only redeemed about 38 billion. So there's a $6 billion gap of unredeemed rewards. And about 23% of cardholders didn't redeem any rewards in the past year at all. And 3 to 4% of all rewards end up expiring. So. So what should you actually take away from all of this? Well, if you carry a balance month to month, the rewards game is not working in your favor. Full stop. The interest you're paying dwarfs any points you're earning, unless you happen to be on a 0% intro APR card. But if you do pay in full each month, you should be going as deep into rewards optimization as you're willing to manage. The system is literally designed to reward you for doing that. Now, everything I've told you thus far has been about how the credit card industry works. Let me show you what happens when airlines figured out they were sitting on something even more valuable. During COVID airlines were hemorrhaging money and needed loans. And to get those loans, they needed collateral. And the collateral they offered were their loyalty programs. And the financial disclosures that resulted were wild. United's Mileage plus was valued at almost $22 billion. They borrowed 6.8 billion against it. The largest loyalty program financing in history. Delta SkyMiles was appraised at approximately $26 billion. And American's advantage was independently valued from 18 to $31 billion. But that's not the crazy part. What's wild is that every single one of those loyalty program valuations exceeded the airline valuation or total market cap. Okay, I'm going to pause to make sure that lands. Delta's loyalty program was worth $26 billion against a $19 billion market cap. That means that the actual business of flying planes, employing pilots, maintaining aircraft, operating routes, everything that wasn't the loyalty program was worth negative $7 billion. Same for American and United, where the implied valuation of the airline operations for United was minus 12 billion, and American negative 20 billion. The miles were the real business. How is that even possible? Well, because airlines create miles for essentially zero marginal cost. It's a virtual currency. But banks buy those miles for roughly 1 to 2 cents each to reward cardholders. That is why loyalty programs earn 30 to 80% operating margins, versus the airline industry's 3 to 4%. Another fun stat. Delta's Amex partnership alone generated $8.2 billion in 2025. And Delta's CEO has claimed that spending on Delta branded Amex cards approaches 1% of US GDP. And analysts say that no major US airline would have been profitable in 2024 without loyalty revenue. Remove the loyalty programs, and Delta's 10.5% operating margin flips to minus 2.5%. American goes from almost 5% to minus 8%. Southwest collapses to minus 20%. As Reuters reported, the modern airline is just a gigantic rewards program that happens to fly airplanes. I know that sounds hyperbolic, but just look at the numbers. The global airline industry, which moves 5 billion passengers a year across a trillion dollar enterprise, earns a net profit per passenger of just $6.14 per trip. In North America, it's a bit better at $10.30 a trip per passenger. But IATA's director general put it perfectly when he said earning $6.14 per passenger is barely enough for a coffee in many parts of the world. And if we look at one example, American airlines earned about 14.42 cents in passenger revenue per seat per mile flown. But it cost them 14.85 cents to operate that seat one mile. So they actually lost about half a century for every mile they flew, every single seat. The airline stayed profitable entirely because Advantage their program contributed 45 to 55% of the total operating earnings at roughly 90% margins on mile sales. American Airlines lost money flying people places and made it all back and then some by selling their points to banks. And those points they're selling are just sitting out there because there are an estimated 30,000,000,000, unredeemed frequent flyer miles floating around globally today. Let me say that again. 30 trillion. That is enough for a billion domestic one way flights just sitting there slowly losing value. There are nearly 30 million Airline Co branded credit cards in circulation in the US and 72% of elite status members in 2024 earned some of that status through credit card spending rather than actual flying. In fact, American Airlines now rewards its top loyalty tier to customers who have no never stepped on a plane, which I know very well because I earned American Executive Platinum status last year, 100% from credit card spend. So what did the airlines do with all of that power over their loyalty currencies? They used it. And that brings us to the great devaluations. This episode is brought to you by Delete Me. I think we're in a moment where trying to make yourself a harder target online is more important than it has ever been. The tools available to scammers, fraudsters and people trying to commit identity theft, they're easier and cheaper to use than ever. 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You can find all the links, promo codes and discounts from our partners@AllTheHacks.com deals. These are brands I love and use, so please consider supporting those who support us the original Avantage model was simple fly one mile, earn one mile. A transcontinental round trip earned 5,000 miles regardless of the ticket price. That created mileage runs where people would book circuitous routings just to rack up miles. Instead of LA to San Francisco, they'd fly through Chicago to earn 10 times the miles of a direct flight. Some people, myself included, have taken those round trips just to earn miles. Interestingly, America West Airlines saw where this was heading way back in 1987 when with their flight fund program, which awarded miles only based on the ticket price rather than distance, they were 30 years ahead of the industry. The shift to revenue based earnings happened airline by airline. Slowly. JetBlue went first in 2009, then Southwest in 2011, then Delta and United, and finally American in 2016. Instead of earning miles based on distance, members mostly now earn 5 to 11 miles per dollar spent, depending on the fare class and their status. Simultaneously, most airlines eliminated their fixed award charts in favor of dynamic pricing that fluctuates with demand. What used to be a guaranteed 25,000 miles for a domestic round trip can now be 8,000 or 80,000, depending on the day. From the airline's perspective, this closed a lot of loopholes on both ends. You can't exploit earning through creative routings, and you can't exploit redemption through fixed pricing. Gary Laff of View from the Wing has a sharp take. He argues that revenue based earnings turns what was a reward into a mere rebate, which fundamentally undermines the key insight that made frequent flyer programs the most successful marketing innovations in history. When a mile is just a rebate, loyalty kind of becomes a commodity. And when loyalty becomes a commodity, the airline has to keep sweetening the deal or risk losing you, which, as we'll see, is exactly what's been happening. But there will always be deals and loopholes to take advantage of, and I will do my best always to share them here or in the newsletter as soon as I find them, because I think there's still so much great opportunity. Sadly, I doubt they will be as profitable as some of my favorite point stories back in the day that I'd love to take a quick break and share in 1999, a UC Davis civil engineer named David Phillips spotted a Healthy Choice promotion offering 500 frequent flyer miles for every 10 product barcodes and that doubled to 1000 miles for early submissions. He found individual pudding cups and at a discount store for 25 cents each. Ten cups cost $2.50 and earned 1,000 miles. He was buying miles for a quarter of a cent each when they were worth one and a half to two cents. He went to 10 stores around Sacramento and bought 12,150 pudding cups for about $3,140. He told the cashiers he was just stocking up for Y2K to explain why he was buying pallets of pudding. His wife, his kids, his co workers, his mother in law, they all helped peel these UPC labels. But with the early submission deadline approaching, he decided to donate all the remaining pudding to the Salvation army in exchange for their volunteers helping peel labels, which also earned him an $800 tax deduction. His total haul was 1.25 million frequent flyer miles across four airline programs, plus automatic lifetime advantage gold status worth 50 to $150,000. Another great story was from Stephen Belkin, a great travel hacker who ended up earning 40 million frequent flyer miles over three decades. He actually wrote an entire book about all his crazy antics called Mileage Maniac. But one of the craziest moves was that he ended up hiring Thai rice farmers and masseuses to repeatedly fly a 30 minute $8 route across Northern Thailand to accumulate segments for a mileage promotion. Now, back in the day, you didn't necessarily need to show id, so it didn't matter if someone was necessarily you. And it actually got him investigated by the DEA as a suspected drug smuggler operating in the Golden Triangle. So I'm not saying that was the best strategy, but this guy's done a bunch of crazy stuff and I love hearing these stories. But the loyalty industry isn't just built on good economics and creative exploits. It's also built on a very sophisticated understanding of how our brains work. In 2006, researchers Joseph Nunes and Xavier Dres ran an experiment at a car wash. Two groups of customers received loyalty cards. Both needed eight more washes to earn a free one, but one group's card had 10 stamps with 2 pre filled and the other just had 8 stamps with none pre filled. The completion rate for the Head start group was 34% versus 19% for the control. By reframing the task as partially complete rather than not yet begun, they nearly doubled engagement. And that's called the endowed progress effect. And it's why airlines, hotel groups and other loyalty programs give you some starter bonus miles and points when you sign up. It's why LinkedIn starts your profile completion bar above zero. And it's why Starbucks gave Christmas gift card recipients automatically loyalty stars in 2013 and ended up gaining one and a half million new loyalty members from that single tactic. Then there's the goal gradient effect. Clark Hull discovered way back in 1932 that rats in a straight alley progressively ran faster as they approached food. Researchers confirmed the same thing in humans. At coffee shops, customers bought coffee more frequently as they got closer to their free cup. This is why airlines send you those emails at the end of the year, showing you you're 3,000 miles away from the next redemption. They know that the closer you get, the more irrational you become about closing the gap. The and then there's the sunk cost fallacy, which is the original insight that made Advantage so effective. Once someone's earned 10,000 miles on American, they'd rather keep flying American than switch to United and start from zero, even if the United flight is cheaper or more convenient. Those 10,000 miles have zero cash value until you hit your redemption threshold. But they feel like an investment that would be wasted by switching. Now, airlines understood this from day one. It's the whole point of the program. Now, my advice in that situation is that if you have enough miles in enough programs, then you'll always have a redemption for all of them, and you don't need to worry about which airline you fly. But that is a story for another day, because there's one more behavioral trick that I think is the most powerful, and it's the one that gets even the most sophisticated points optimizers. It's called the separate mental accounts effect. When you earn points, your brain categorizes them differently than money points. Feel free, like a bonus that appeared from nowhere, even though they represent real economic value that you earned through your spending or flying, and usually earned on a credit card at the cost of earning real money from cash back. The combination of all of these effects creates what might be the most effective customer retention system ever designed. People hoard points because they're afraid of making a suboptimal redemption, but in the process, the points devalue and they're worth even less. And if you take one thing from this section, it's to Set a rule from yourself that just redeem your points. It's a lesson I need to teach myself more often because I'm guilty of the same problem of hoarding points. Don't wait for the perfect redemptions. The companies are literally banking on you hoarding points until they can devalue them again. So let me bring all of this together. What started with three guys paying for lunch in a Manhattan restaurant in 1950 has now become a $140 billion industry and a $1.3 trillion consumer debt machine. And a shadow currency of trillions of points and miles. A Supreme court case in 1978 accidentally removed the guardrails on interest rates. A governor in South Dakota cut a deal in 47 minutes that turned Sioux Falls into the capital of credit cards in America. And a one year promotional program at American Airlines became permanent because United launched a copycat in 10 days. And then Covid forced airlines to mortgage their loyalty programs, revealing that the points were worth more than the airlines themselves. And the system keeps evolving, right? United just announced that if you don't hold a United credit card, your earning rate on flights is dropping. Americans stopped giving away miles on basic economy tickets. The Southwest ended bags fly free. Bank of America pushed the threshold for their preferred Rewards tier from 100,000 to a million dollars. And on the legislative side, the Credit Card Competition act was reintroduced into Congress in January this year. And the Department of Transportation launched a formal investigation into the loyalty programs of airlines, citing unfair and deceptive practices around devaluations. Each one of these changes might make the system better for you, worse for you, but it definitely makes the system more complex, which I think is a competitive advantage for people who take the time to understand it. And that's really the whole point of this episode. Once you understand how the machine works, I hope you can use it to take $10,000 vacations for a fraction of the cost. I hope you can use it to turn everyday spending into first class flights, luxury hotel stays, or even cash back if that's what you want. No matter your goal, you can play the game that's being played around you anyway and come out ahead. 75 years ago, a press agent made up a story about a forgotten wallet to sell a piece of cardboard that let you pay for dinner. Today, the idea moves more money than most countries. The only real question is whether you're going to play the game or the game will play you. If you want to go deeper on any of this, I'll put links in the show notes to some of the best sources I found the Wendover Productions video on airlines as banks is excellent. The Saturday evening piece where Matty Simmons admits to fabricating the Diners Club story is great. And there's another good deep dive on Interchange if you want to get more into the numbers. And if any of this makes you want to open a new credit card or earn a big bonus, please don't forget that we have links to the best bonuses on our site@AllTheHacks.com cards. I appreciate everyone for using those links to help support the show. If you have any questions or follow ups, send them to podcastlthehacks.com or go to allthehacks.com ama to submit a question for a future AMA episode. If you have feedback on this narrative storytelling style episode, I would love to hear it. That is it for this week. I will see you next week. Some Follow the Noise Bloomberg follows the money because behind every headline is a bottom line. Whether it's the funds fueling AI or crypto's trillion dollar swings, there's a money side to every story. And when you see the money side, you understand what others miss. Get the money side of the story. Subscribe now@bloomberg.com the right window treatments change everything. Your sleep. 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