How banks’ co-branded card relationships are breaking down | PaymentsSource

Co-branded credit cards offer banks many benefits, including the ability to quickly expand their customer base, but these relationships also come with complexities that can lead to friction and, ultimately, the end of the partnership.

Javelin Card Bench estimates that there are approximately 173 million co-branded card accounts in the U.S., and many of these relationships are profitable, strong and rewarding for both parties. However, recent years have seen a handful of difficult marriages and, in some cases, spectacular divorces between banks and merchants that underscore the need for banks to approach co-branding arrangements with more caution than in the past.

“The more things that are sorted out up front, the better the chances of the deal being successful,” says Rodman Reef, managing partner of Larchmont, New York-based payments consulting firm Reef Karson Consulting.

Here are four considerations for banks considering a new co-branding relationship:

Provide excellent customer service

Customer service issues can cause significant tension, so banks need to plan accordingly, said Ben Danner, senior analyst at Javelin Strategy & Research. “When an issuer signs a major brand with 50 million potential repeat customers, they need to have the resources in place to serve them.”

This was reportedly a sticking point in the strained co-branded credit card relationship between Apple and Goldman Sachswhich was introduced in 2019. The agreement provided for a billing period from the first to the last day of the month, but from a customer service perspective, this arrangement proved stressful as it was not possible to spread billing throughout the month, industry observers said.

In 2022 Goldman Sachs The consumer credit card division, which includes Apple Card, has lost $1.2 billion in just nine months, mostly related to Apple Card. Recently, Apple reportedly proposed ending the partnership. The investment bank declined to comment and Apple did not respond to a request for comment.

The Its multi-year co-branding relationship with Walmart also ran into problems over alleged customer service issues, according to court documents. Capital One was the exclusive issuer of Walmart cards for several years before the partnership was dissolved. A federal court ruled earlier this year that Walmart could end the relationship. In a statement, Capital One said the litigation had been fully settled and reiterated that it “disagrees with the basis of Walmart’s claims and its interpretation of the contract.” The bank also said it was “disappointed with the court’s decision.” Walmart did not respond to a request for comment.

Understand that it takes time to build traction

While co-branded cards may be popular with customers, they may not pay off immediately for banks. The Wall Street Journal recently reported that Wells Fargo is losing up to $10 million each month on a co-branded card it began offering with Bilt Technologies in 2022 that offers a rewards program for consumers to earn points on rent.

A Wells Fargo The spokesman declined to comment on specific financial details or on the Wall Street Journal’s report that the bank had stopped bidding on new co-branded credit card programs.

“As with all new card launches, it takes several years for the initial launch to pay off, and while we are still in the early stages of our partnership, we look forward to continuing to work together to deliver great value to our customers and ensure it is a win-win for both Bilt and Wells Fargothe banking company said in a statement.

For its part, Bilt said it was “impressed by the early momentum and growth” and announced a long-term partnership with the bank. These statements came after the Wall Street Journal suggested the bank wanted to end the relationship, an insinuation that Bilt and Wells’ claims refute.

Make sure you understand the rest of the terms and conditions

Among other things, banks would need to carefully consider the financial aspects of the partnership, including costs for staffing and customer service compensation, Reef said. The parties would also need to determine how interchange fees will be split and work out other aspects of a revenue-sharing agreement.

Co-branded cards are potentially lucrative for banks, but they can also involve significant expenses for merchant partners. “After merchant payments, issuers paid partners an average of $279 per account opened in 2022,” according to a survey by the Consumer Financial Protection Bureau. report“For their key co-branded partnerships, major banks made net payments to their trading partners totaling over $28 billion in 2022, an increase of 34 percent over 2019 levels,” the report said.

With credit cards, good risk forecasting and understanding how customers are likely to use those products is especially important, Danner said. For example, a card might not offer such great rewards that the bank can’t make money on interest, he said. If, for example, 80% of customers don’t rotate, it will be difficult to make money, he added.

Another discussion is who bears the credit risk and who makes credit decisions. This often falls to the bank, but some dealers want a say. When customers are turned down based on the bank’s credit profile, dealers are unhappy, which can cause tension if it becomes a pattern, Reef said.

Who owns the data also needs to be clarified up front, as does how chargebacks are handled. It costs $25 to $50 to process a chargeback, so this is an important consideration, Reef said.

One bank’s loss can be another’s gain

Even strong relationships can break down over time as the needs of one or both parties change. Reef cites Costco’s exclusive 16-year relationship with American Expresswhich included a co-branded card. The partnership ended in 2015.

At the time, Ken Chenault, Amex’s CEO at the time, said the company had been unable to agree on commercially viable terms with Costco. The retailer then found a willing partner in Citibank, showing that other banks have a chance to step in when a competitor’s co-branding partnership falls through.

“What one bank may not want to do in terms of margin, another bank may be very happy to do because they have economies of scale,” Reef said. “They may have the size and the processes so they better suit a trader’s needs.”