Co-branded credit cards have many advantages for banks, including the ability to quickly broaden their customer base. But there are also inherent complexities in these relationships that can lead to friction and, ultimately, a breakup of the partnership.
Javelin Card Bench estimates there are roughly 173 million co-branded card accounts in the U.S., and many of these relationships are profitable, strong and rewarding for both parties. But in recent years there have been a handful of rocky marriages and, in some cases, high-profile divorces between banks and merchants that underscore the need for banks to approach co-branded agreements with more caution than they may have in the past.
"The more things are worked out upfront, the more chance you have of the deal being successful," said Rodman Reef, managing principal of Larchmont, N.Y.-based payments consulting firm Reef Karson Consulting.
Here are four considerations for banks mulling over a new co-branded relationship:
Ensure stellar customer service
Customer service issues can cause significant tensions, so banks need to plan appropriately, said Ben Danner, senior analyst with Javelin Strategy & Research. "If an issuer signs on a major brand with 50 million potential loyalty customers, it is going to need the resources ready to service them."
This was reportedly one sticking point in the strained co-branded credit card relationship between
In 2022,
Payment experts say keeping customers happy is the key to maintaining partnerships Here's what J.D. Power has to say about user satisfaction.
Understand that it takes time to build traction
Even though co-branded cards tend to be popular with customers, the payoff for banks may not be immediate. The Wall Street Journal recently reported that
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"As with all new card launches, it takes multiple years for the initial launch to pay off and while we are in the early stages of our partnership, we look forward to continuing to work together to deliver a great value for our customers and make sure it's a win for both Bilt and
For its part, Bilt said it has been "impressed by the early traction and growth," and said it was committed to a long-term partnership with the bank. These statements came after the Wall Street Journal suggested the bank was looking to exit the relationship, an insinuation Bilt and Wells claim is inaccurate.
Make sure you are clear on other deal terms
Among other things, banks need to carefully weigh the financials behind the partnership, including costs related to customer service staffing needs and rewards, Reef said. The parties also have to determine how interchange fees will be apportioned and work out other aspects of a revenue-sharing arrangement.
Co-branded cards are potentially lucrative for banks, but there can also be a significant outlay to merchant partners. "Net of payments from merchants, issuers paid partners an average of $279 per open account in 2022," according to a Consumer Financial Protection Bureau
With credit cards, good risk forecasting and understanding how customers are likely to use these products is particularly important, Danner said. For instance, a card can't offer such amazing rewards such that the bank can't make money off interest, he said. If 80% of the customers don't revolve, for instance, it will be tough to make money, he added.
Another discussion is who takes the credit risk and who makes credit decisions. This often falls to the bank, but some merchants want input. If customers are denied because of the bank's credit profile, merchants will be unhappy, which can lead to tensions if it becomes a pattern, Reef said.
Who owns the data is another area to work out in advance, along with how charge-backs are handled. It costs $25 to $50 to process a charge-back, so it's an important consideration, Reef said.
One bank's loss can be another's gain
Even strong relationships can sour over time as the needs of one or both sides change. Reef offers the example of Costco's exclusive 16-year relationship with
At the time, Amex's then-CEO Ken Chenault said the company had been unable to reach economically feasible terms with Costco. The retailer then found a willing partner in Citibank, which illustrates the opportunity for other banks to step in after a competitor's co-branding partnership flounders.
"What one bank may be unwilling to do in terms of the margin, another bank may be very happy to do because they have the economies of scale," Reef said. "They might have the size and the operation such that a merchant's requirements are a better fit."
