
Anatomy of a Co-Branded Credit Card - breck
http://thefinancebuff.com/anatomy-co-branded-credit-card.html
======
bradwschiller
One of the big issues with the credit card business is fraud. Fraud is around
1% of all credit card transactions. Fraud tends to be higher on online
payments where the "card not present" rate that merchants pay is higher than
the "card present rate" enjoyed by brick and mortar stores.

In addition to fraud, credit card companies have to contend with the
purchasing power of large companies (e.g., the Costco example ditching Amex)
and also their own expenses as many people like concierge services and other
"perks" that cost money and are becoming more standard on cards for people
with higher credit and income.

In practice, it's fairly difficult to offer much of an incentive beyond 2%
cash back (which Fidelity Amex and the Capital One Visa Spark Card offer).
However; these cards are closer to being loss leaders for their institutions
as they want to incentivize you to do your banking with them as well (Fidelity
does this fairly well as the cash back must be deposited into a Fidelity
account). Charles Schwab was the first to have a 2% cash back card many years
ago and they discontinued it, likely because they lost money on it.

Travel-based rewards cards can get away with offering seemingly better
incentives because of their margin. Starwood is a perfect example of this as
hotels have a high fixed cost base and low variable cost base. The variable
cost to stay at a high-end hotel is something like $50-60 per night if the
room is vacant. So while Starwood seems to be paying out 2 cents on the dollar
(e.g., 10,000 points for a $200 room), they are really only paying out 0.5
cents on the dollar. This is why the Starwood Amex is seemingly the best
Credit Card. It's all about the economics of the company that brands it.

~~~
pbreit
"Fraud is around 1% of all credit card transactions"

No, card fraud rates are in the 5-20 basis point range (0.05%-0.2%).

~~~
Artemis2
Do you have a source for that? I mostly hear about numbers around what your
parent comments gives, or a bit over.

~~~
pbreit
For example, from the Fed: "By number, the fraud rate for general-purpose
cards was 3.60 basis points (3.60 unauthorized transactions per 10,000
transactions) and by value the fraud rate was 8.27 basis points."

[https://www.frbservices.org/files/communications/pdf/researc...](https://www.frbservices.org/files/communications/pdf/research/2013_payments_study_summary.pdf)

Even the riskiest card-not-present/online merchant would rarely hit 1% or they
lose their merchant account entirely.

I'd be curious to see what numbers you're looking at.

~~~
Artemis2
I should clarify, I was only talking about online payments, which I know a lot
better than physical transactions.

From talking to some acquiring banks, I gathered that 1%-1.5% was the maximum
fraud rate they would tolerate, depending on the value of your account. With
fraud rates like that, you will not see volume discounts anytime soon either.

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allworknoplay
I interned at MBNA, which was the independent credit card issuer (later
acquired by BofA) known for its early, strong successes with "affiliate"
cards, what are called co-branded cards here. The company's explanation for
its success with these cards was the combination of an exceedingly low default
rate with a relatively high usage rate.

The company's koolaid anecdotes included stories about people who would
literally default on their mortgages before failing to make the minimums on
their Dale Earnhardt card, and who were consistently indifferent to interest
rates or annual fees relative to competing, non-affiliate cards they might
have.

~~~
marincounty
I'm not sure if MBNA still has mandatory non-arbitration clauses in their TOA,
but if they are; go to another CC company.

They use these non-arbitration clauses, and they are always right.

~~~
ars
MBNA doesn't exist anymore.

Are there any Credit Card companies, for that matter, are there any large
companies at _all_ without those clauses?

Telling people to avoid those companies is pointless - they can't.

This needs to be a matter for state law or the entire class action concept
will no longer exist.

An idea I had: Mandatory arbitration clauses are null and void unless the
contract was individually negotiated between the parties. Burden of proof on
the party demanding mandatory arbitration. Automatic defenses: A lawyer was
involved by both parties, or the contact is a singleton purpose written for
that negotiation and not used with anyone else.

Curious what others think of this idea.

~~~
tclmeelmo
I've noticed that a many (certainly not all) contracts have an escape hatch
for the binding arbitration portion, but it usually requires a timely act:
American Express, for example, requires a letter to be sent to a specific
address within 30 days (or some such) of opening the account to opt-out of the
binding arbitration clause.

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minouye
Interesting info and highlights how powerful Costco has become. They continue
to capture revenue streams outside of margin from actually selling goods
(credit card bounties/rev-share, membership fees, etc.) and they presumably
were able to get Visa/Citi to lose money on this deal. Visa set interchange
fees at _less than_ 0.4% (vs. 0.6% I believe for the old Amex deal).

[http://www.bloomberg.com/news/articles/2015-04-17/costco-
see...](http://www.bloomberg.com/news/articles/2015-04-17/costco-seen-paying-
almost-zero-to-accept-cards-in-citigroup-deal)

------
Havoc
These cards are also quite powerful from a psychological point of view.

e.g. I've got an assortment of cards on my - including some snazzy ones. Yet
given a choice I use a british airways amex because there is a direct
quantifiable link to something I can use (points for flights). Sure I know on
a logical level those points are worth uhm not much but still the effect is
strong.

>It means that Costco will also accept other Visa cards.

They didn't before?

~~~
twoodfin
It depends on what you value. I use my BA Chase card exclusively, because with
~$100,000 worth of spending you can get a pair of RT BA First trans-Atlantic
tickets for about the price of coach.

Are those "worth" the $10,000-$20,000 fare difference? Surely not, but to me
they're worth more than the ~$2,000 I'd get from the best cash back cards.

These partner cards really are marketing genius, and a great way to capture
more attention, dollars & loyalty from your best customers.

~~~
modoc
I have had almost no luck finding routes/dates that am ALLOWED to use my
500,000 Avios BA Chase points on:( Or my free companion tickets. And that's
also not counting the insanely high Heathrow taxes/fees for all flights routed
through London.

Any suggestions?

~~~
csoghoian
Pay an award booking service to find you the best flights possible. There are
several out there, and they know a lot more than you about how to find obscure
flights/routing. it's worth the $150.

------
pjg
Nice article! Anybody who's been in the Credit Card business - either from the
issuing side or from the Merchant or Network side knows this stuff. The author
has done a good job summarizing the details without disclosing information
that may be considered confidential

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Cyph0n
Is it normal in the US for a business like Costco to accept only one type of
credit card? Here where I live there are branded cards but businesses still
accept cards from all issuers.

~~~
saryant
No. Costco was unique in that.

~~~
secabeen
Costco did accept MC/Visa-branded debit cards.

~~~
adrr
Interchange on most debit cards is 0.05%. Only small banks have higher
interchange.

~~~
arielpts
Actually the interchange does not vary per issuer.

It can vary per card type (pre-paid, debit or credit), card level (basic or
signature/elite, etc.), type of transaction (CNP or present), Merchant type
(supermarket, airlines, etc.) and some other rules, depending on the scheme
and the region (US, Europe, etc.).

For instance the Interchange (to be paid to the Issuer) when a US issued
MasterCard Debit Card is used in Gas Station is 0.70% US$ + 0.17 with a cap of
US$ 0.95, but when used in a Restaurant is 1.19% + US$ 0.10 without caps.

Visa: [https://usa.visa.com/dam/VCOM/download/about-visa/visa-
rules...](https://usa.visa.com/dam/VCOM/download/about-visa/visa-rules-
public.pdf)

MasterCard: [https://www.mastercard.us/content/dam/mccom/en-
us/documents/...](https://www.mastercard.us/content/dam/mccom/en-
us/documents/MasterCard_Interchange_Rates_and_Criteria%202015-16.pdf)

What can vary from issuer to issuer is the processor/network costs.

~~~
adrr
Debit cards from big banks are covered by the Durbin Amendment which fixes the
interchange to 0.05%. Smaller banks are regulated by Visa/Mastercard rules on
interchange.

~~~
arielpts
Great to know, thank you for the information and source.

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paulhart
I find it interesting that they've chosen to partner with different vendors
(and different card networks) in other jurisdictions - here in Canada, the new
Costco card is a MasterCard in partnership with Capital One.

------
tclmeelmo
Since it features heavily in the article (N.B., from 2015), more information
on the Costco/Citibank card just came out the other day:
[https://www.citi.com/credit-
cards/creditcards/citi.action?ID...](https://www.citi.com/credit-
cards/creditcards/citi.action?ID=citi-costco-credit-card-conversion)

------
DanBlake
I have been contemplating creating a new credit card the last few years. Most
likely under the Visa or Mastercard line.

The thought is, create a reward card specifically for high-value/vips that has
the best rewards/cashback program on the market. Currently the best card is
the SPG card from Amex which gives points that can be transferred to a
plethora of partners and are among the most valuable points of all cards
(around 2.9cents per point). What surprising is the cards currently for high-
worth users have terrible rewards programs, ie the amex black card.

If you created a new card, the hope would be that you could offer more rewards
to transfer partners by upselling 'these are vips' you should compete to get
them.

The challenge is in figuring out how to make it all work. Credit cards make
money 2 ways as far as I can tell- The 2.9% + 30cents on every transaction, as
well as the interest paid on their bill.

So you should ideally have at least 3% of every transaction to give back to
the user in rewards while living off of the 30 cents per transaction.
Hopefully the interest paid on debts breaks even with the defaults.

~~~
saryant
I expect there's a reason that Amex's high-end credit cards are light on
rewards and heavy on benefits: people in those income brackets don't really
care about getting an extra percent back on their credit card bill.

~~~
jhall1468
I doubt it's because they don't care, more like the cost of a concierge
service/personal shopper, free airline tickets, etc all end up being MORE than
1% of their credit care bill. And they are probably buying those things either
way.

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dawhizkid
I'm a huge fan of credit card points hacking. I've probably redeemed over
$100k in free travel in last 4 years between flights and hotel stays. The avg
user acquisition cost for these issuers must be over $800-$1000

~~~
ikeboy
Some people do millions in manufactured spending a month.

(Source: [http://www.travelcodex.com/2016/02/how-much-manufactured-
spe...](http://www.travelcodex.com/2016/02/how-much-manufactured-spend-is-too-
much/))

~~~
chris11
How do they get away with it? I've seen credit card agreements where the
company reserves the right to close the account and remove accumulated
rewards. I'd think it be really easy to flag those accounts and have the
customers banned.

Edit: the comments talk about it more and it looks like those people were
probably using multiple cards spread across multiple family members, or also
using smurfs.

~~~
dawhizkid
Shut downs are pretty rare but do happen. Biggest mass shutdown I've heard of
was with a unlimited 5% cash back card at drugstores, grocery stores, and gas
stations. People would buy $100k+ a month in visa gift cards at CVS and net
$4-5k a month in tax free cash back.

~~~
kchoudhu
Ah, the good old days of the BCE.

That was a major breakdown in Amex's risk management.

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dfc
"Many folds"?

The benefit to the co-brander is "many folds"? I'm not familiar with this term
and nothing in the dictionary made sense. Is this industry lingo or the
author's inability to bother editing and reviewing the piece?

~~~
maxerickson
Reads like an individual quirk to me, a bastardization of many fold.

(It still doesn't read very sensibly, but it isn't a huge leap from many
folds->many fold->there are several)

~~~
oceanofsolaris
It's simply a misspelled version of "manifold", isn't it? And if you replace
it by "manifold", the sentence makes perfect sense.

~~~
dfc
The question was "what are the benefits?". I do not think an answer that
describes the number of benefits makes perfect sense.

------
encoderer
My wife and I flew business class from SFO to Greece last year, airfare that
would've cost $25k to book cost us $2k cash and the reward points from about
18 months worth of spending. In this case, it was on British Airways co-brand
card that gave us 100k mile bonuses (to each of us). One $11.5k business class
ticket ran about 190k miles, and we earned a companion pass for spending $30k
on the card in a year. (The flight was great, and combined with the BA lounges
saved us from the schlep).

Most of our spending is on cards that earn cash (or cash-redeemable) rewards
but I love to take advantage of big bonuses on co-branded cards. We also
earned 250k AA miles, 100k from a bonus on a new card, and the rest from US
Airways cards that Barclays was giving away to burn thru their cache of
prepaid miles ahead of the AA merger. I cancel the card the following year
before the annual fee hits -- or not, because often it's waived for a second
year. Don't get crazy and it doesn't impact your credit.

