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Co-Branded Cards Give Retailers The Benefit

American Express CEO Kenneth Chenault announced last week (Feb. 12) that the company couldn’t find an agreement that “made economic sense” to move forward with its co-branded card with Costco, so the two companies will sever ties comes March 31, 2016.

But was Costco getting the better end of the deal from the start? When it comes to retailers and co-branded bank cards, that may be the case, according to a Reuters article that discussed how “consumer companies’ banks are realizing the co-branded deals aren’t such a deal after all,” and suggested that “retailers are cashing in” as companies don’t typically switch card brands.

But times may be changing.

“Stiff competition is resulting in margins that are so low they are barely there, analysts said,” David Henry reported for Reuters.

Because the competition to grab a store-branded deal has increased, it’s tipped the scales in favor of the retailer. That was the case with the AmEx/Costco split as “greater competition” was cited as a reason the two couldn’t strike a deal. American Express was particularly impacted by the Costco breakup because co-branded Costco cards make up 8 percent of AmEx’s customer spending; according to Reuters, a third of AmEx’s purchasing volume comes from co-branded cards. As pointed out in the article, Visa and MasterCard are more widely accepted in retail than American Express because of having lower fees, so there may be a reason for Costco to look elsewhere to benefit its bottom line. 

“But it is unclear how much more revenue banks can wring from Costco cards than has American Express. That card issuer’s customers tend to be wealthier than Visa’s or MasterCard’s, and their higher spending can generate more fees, an American Express spokeswoman said,” according the article, which also explained how co-branded cards can have a benefit for both parties.  “Co-branded cards offer benefits to retailers and banks alike. Customers who, for example, shop often at a department store will spend more there if their credit card gives them discounts, allowing a retailer to reward loyal consumers. These customers will also spend more outside of the store than they might on a regular card, in an effort to earn more discounts. That higher spending translates into higher revenue for banks for processing transactions.”

In the conference call about cutting ties with Costco, Chenault said the decision will negatively impact earnings in revenue for 2015 and into 2016, but should be able to bounce back through other company revenue strategies, like its investments in pre-paid cards.

“We believe we have a number of different ways to drive growth going forward,” he said, noting that 70 percent of spending on the co-branded credit card was being done outside of Costco.

That’s where you see the benefit to both the card company and Costco: when it’s being used outside the retailer. A research analyst at Burke & Quick Partners, which covers credit cards, told Reuters that the competition in the co-branded credit card space should ease eventually, but didn’t know when that would be.

 

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