Co-branded cards offer a more versatile alternative to the traditional private label store cards. Consumers can use their Amazon Chase Visa card to purchase goods from Amazon and buy groceries at their local store. Chase can adjust the rewards program to encourage everyday spending while maintaining loyalty among brand customers and offering the same options as a bank card.
In a new report, Co-Branded Credit Cards: 2024: Top Issuer Market Review, Benjamin Danner, Senior Analyst, Credit and Commercial at Javelin Strategy & Research, examines why these cards have become so popular with consumers and issuers. He also looks at some of the concerns the industry is facing, such as increased scrutiny from the Consumer Financial Protection Bureau.
The Case for Co-Brands
An analysis of 12 large issuers’ portfolios reveals that co-brands make up 62% of consumer credit card products, attracting willing partners among issuers and merchants and drawing in consumers with reward programs. This data comes from Javelin Card Bench, an in-depth tool for credit card issuers.
Co-brands are experiencing significant growth. As store cards continue to decline slowly, several new co-branded cards have launched. In addition, with higher credit scores post-pandemic, more people now qualify for co-branded cards. Another factor driving growth is the surge in travel. Travel cards have created their own economy, with lucrative point reward systems leading consumers to free and discounted trips and travel perks like exclusive lounges.
Millennials are the top owners of co-branded credit cards, primarily using them for travel. Since travel cards are the most common co-branded credit cards, issuers continue to tailor their programs towards younger audiences.
Surveys show that millennials are less interested in owning things and more interested in experiences. As a result, they’re an active generation that wants to travel and explore, making them an excellent choice for co-branded travel cards. These consumers are expected to be the most frequent users of co-branded cards now and in the future.
“But the name of the game is still to try to capture everyday spend, because you’re not traveling all the time,” said Danner. “I can use the card for all my airline rewards, which encourages loyalty to a certain airline and building up rewards with them, but also it’s a card that I can use for dining out and for entertainment and groceries.”
How the Process Works
A merchant looking to partner on a co-branded card will issue an RFP, and issuers will respond with different proposals detailing the revenue-sharing agreements. Typically, the chosen partner will sign a contract lasting five to 10 years. The issuer assumes all the risk, managing both the underwriting and the rewards program.
“Sometimes, people make the mistake of thinking it’s the merchant that handles the rewards program,” said Danner. “They might have a little say, but the issuer is going to be that one that’s managing the program, as well as earning all that money off of interest and the annual fee. And of course once the issuer has all your information, there’s a cross-sell opportunity. If I sign up for the Amazon Chase Visa card, they will try to sell me into checking and savings accounts at Chase.
The merchant usually earns a bounty from the new card member signing bonus, as well as from revenue-sharing agreements and sometimes an interchange benefit. The idea is that if customers are spending at your store, you shouldn’t have to pay the processing fees.
CFPB Examinations
One concern for the co-brand industry is the interest that the CFPB has taken in the practice of issuers buying points from airlines. In 2020, during the height of the pandemic when travel was down, some of the major issuers bailed out some airlines by buying pre-purchasing large blocks of points. For example, American Express purchased 50,000 points from Delta to make them available to customers as promotional offerings.
Recent hearings indicate that the CFPB is closely examining airline rewards, particularly the point redemption scenarios that vary across the industry. They are investigating whether some issuers are buying these points at discounted rates and examining issues with redemption rates.
The concern is that frequent flyers could turn in their points only to find they’re not worth what they expected. Many consumers are confused by points rewards programs; one airline’s representative said that 85% of customers felt they never received any benefit from frequent flyer programs. Danner warned that this scrutiny could lead to legal changes significantly affecting several co-branded card products.
