All The Fintech - 5.31.19 - On co-branded credit cards
I have historically been a semi-loyal United flyer, mostly due to the fact that Newark is the closest airport to where I live. However, over the past few months I been flying on a few different airlines and while the experiences have all been quite varied, there’s one thing that’s been extremely consistent: the co-brand credit card signup broadcast in-flight.
Naturally, this got me thinking more about co-branded cards and exploring what are the primary business drivers. It turns out the numbers are pretty eye opening. For example, United Airlines - “in the year ended December 31, 2018, 2017 and 2016, the Company recognized, in Other operating revenue, $2.0 billion, $1.8 billion and $1.7 billion, respectively, related to the marketing, advertising, non-travel miles redeemed (net of related costs) and other travel-related benefits of the mileage revenue associated with our various partner agreements including, but not limited to, our Chase co-brand agreement.” It turns out, a big drivers for airline company profit comes not from selling tickets, but rather co-brand credit cards.
But Charley you may ask, how do companies make money in a co-brand relationship? I decided to spend most of my flight back from SF doing some more research and breaking it down into 5 main revenue drivers for most co-brand programs for card issuers (like Chase or Amex) and co-brand partners.
1) Signup Payouts
Whenever someone signups for a United MileaguePlus card with a flight attendant, United gets a healthy signup bounty from Chase, which probably explains why announcements have become so prevalent.
2) Fee Rebates
For every credit card swipe, the merchant typically has to pay interchange on that transaction with a large portion flowing to the card issuer. However, whenever someone spends with a co-brand card at the partner (for example, using Citi’s Costo card at Costo), the issuer [Citi] will issue a fee rebate for “on-us” transactions, thereby enabling the parnter [Costco] to capture a greater share of the transaction as revenue! This often leads to co-brand partners creating unique incentives to encourage more spend since they make more money off those transactions.
3) Revenue Sharing
This is where things start to get really interesting in my opinion - a lot of co-brand card deals have a rev share agreement where if the card-owner spends at other merchants, incurs interest, fees, etc a portion of that revenue will be sent to the co-brand partner! This aligns incentives for both the issuer + co-brand partner to encourage spending for all transactions, not just at the partner.
4) Advertising + Data Sharing
This is a bit indirect, but companies do put a significant dollar value on being able to advertise each other’s products and share user data between the issuer + partner. The partner also often gets aggregated data from the issuer for marketing + demographic insights and behaviors.
5) Selling Miles
Finally, this is a bit unique to travel cards (still figuring out if hotel cobranded cards work like this too…) but airlines such as United will establish a significant contract to sell MileagePlus miles to its co-branded credit card partner, Chase. This ends up being a huge other revenue line item for United from Chase! In United’s 10k, they identified the following significant revenue elements around their co-brand partnership: the air transportation element represented by the value of the mile; use of the United brand and access to MileagePlus member lists; advertising; and other travel related benefits.
I’m really curious if there are interesting co-brand opportunities for a lot of the new fintech credit cards that are starting to hit the market. Co-brand partners have also gotten a ton of market power over the past few years and have been able to dictate the terms from the issuer - case in point, Amex losing Costco to Citi which was a huuuge deal. It’ll be interesting to see if there will continue to be other big moves with several of the big co-brand card agreements coming up!
For some more fund co-brand readings, see below.