Anatomy Of A Co-Branded Credit Card


News said Costco will break up its co-branding relationship with American Express. The Costco American Express card will discontinue after April 2016. I worked a small part in a similar co-branded credit card deal. I will share some information about the general structure of a co-branding relationship.

What Is Co-Branding?

A co-branded card carries the brand of a partner separate from the bank behind the card. The partner makes it more appealing to the target customers. Costco American Express, American Airlines MasterCard, Sierra Club Visa are all co-branded cards. They carry the brand of Costco, American Airlines, and Sierra Club respectively.

The co-branding partner is typically a large merchant, such as an airline, a hotel chain, or a retailer. It can also be a special interest group, as in the Sierra Club example.

The bank behind the card, called the issuer, is ultimately responsible for the card. It decides who is approved for the card, the credit limit, and the interest rate. If the customer doesn’t pay, the issuer is on the hook for writing off the bad debt.

What’s in it for the issuer to do co-branding? The issuer gains a sales channel. It acquires a book of customers who otherwise may use cards from other banks. American Express says the Costco cards represent 20% of its loans and 10% of all American Express cards in circulation. When Costco markets a different co-branded card, American Express is expected to lose a big chunk of those customers. American Express’s stock price dropped nearly 10% in two days after the news of the breakup.

What’s in it for the co-branding partner? Many folds.

Signup Bounty

For each customer the co-branding partner brings to the issuer, the issuer pays a sign-up bounty to the partner. It can be $100 or more. That’s why you see signs and special desks in the stores, flight attendants making announcements and passing out applications, and cashiers asking you at checkout. In many cases the employee who signs up the customer gets a special bonus called a spiff.

Fee Rebate

When a customer pays by a credit card, the store normally pays a fee to its bank, the bulk of which ultimately flows to the card issuer.

When a customer pays by the co-branded card at the partner that markets it — using Costco AmEx at Costco or using American Airlines MasterCard at American Airlines — the partner gets a rebate from the issuer for these so-called “on us” transactions. The credit card fee is often knocked all the way to zero by the rebate.

Because people who buy more at that partner tend to get attracted to the co-branded card, and because they often get double points for using the co-branded card for “on us” transactions, if the partner can increase the volume of “on us” transactions, it will dramatically lower its overall credit card fees.

Revenue Sharing

If the customer ends up paying interest or late fees to the issuer, the co-branding partner gets a revenue sharing kickback from the issuer. If the customer uses the co-branded card at other places, the co-branding partner also gets a percentage of the fees earned by the issuer. American Express said 70% of the purchases on Costco AmEx cards are made outside Costco. Costco likely gets a portion of American Express’s fees on those 70% in addition to a portion of the interest and late fees paid by the customers to American Express (not all customers pay in full every month).

When you count the signup bounty, the fee rebate for “on us” spending, and the revenue sharing, the partner’s cost for accepting a co-branded card is negative. It will do all it can to push you to apply for the co-branded card, use the co-branded card at its locations, and use it elsewhere. Costco goes one step further by only accepting American Express credit cards. This exclusivity no doubt generates additional monetary value from American Express.

Data Sharing

The co-branding partner also gets aggregated data from the issuer on the customers’ demographics and their shopping behavior. The data help the partner market its products.

Increased Spending

Because the co-branded cards often give special discounts or earn double points for spending at the co-branding partner (although it’s not the case for Costco), customers with a co-branded card tend to spend more. They already spend more at the co-branding partner before they got the card. They will spend even more after.

Who’s in the driver’s seat in a co-branding relationship? Whoever has the most sway over the customers. In most cases it’s the co-branding partner. Customers are signing up for the co-branded card because of their relationship with the partner. The partner can shop among banks for one that will pay it the most in terms of the sign-up bounty, fee rebate, and revenue sharing.

Costco is switching because Costco wants more money from American Express than American Express is willing to give. Most customers with the current co-branded card will likely follow Costco to the new bank Costco chooses. Some customers will keep the American Express card as a regular AmEx card, although Costco won’t accept it after April 2016.

If after knowing all these you get the feeling that customers are being herded by Costco to the highest bidder, that’s just business reality. Whoever can pull the strings of a large number of consumers has power. Such power is worth a lot of money. Costco is just maximizing the value of its influence.

The Costco AmEx card isn’t the best AmEx card to use at Costco or elsewhere, but customers still signed up in droves. I predict the new Costco co-branded card won’t be the best card to use at Costco or elsewhere either.

[Update on March 2, 2015: Associated Press reported that the new Costco co-branded card will be a Visa card from Citi. It means that Costco will also accept other Visa cards.]

Costco Strikes Credit Card Deal With Citi, Visa

[Photo credit: Flickr user Mike Mozart]

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  1. Curious George says

    Harry: thanks for the informative article.

    I was intrigued by the comment “The Costco AmEx card isn’t the best AmEx card to use at Costco”. I thought it was the only card, Amex, or otherwise, that could be used at Costco. Perhaps there is a debit card Costco accepts that it better for the user than the Costco Amex? Or am I missing something else?

    • Artie says

      The Fidelity Amex card is the best card to use at Costco. It pays 2% back on Costco purchases rebated monthly in real cash, where the Costco card only pays 1% and only issues rebates yearly rebates only spendable at Costco.

    • Harry Sit says

      George – Think how many customers signed up for the Costco AmEx card because they didn’t know they could use a different AmEx card at Costco for twice the cash back.

      Artie – The annual rebate check can be redeemed for cash. Think how many customers didn’t know that either.

  2. Merle says

    For me it’s convenient to use a credit card at Costco. I buy gas there and my in store purchases run to several hundred dollars. So cash is not convenient. Using the co-branded card reduces by one then number of cards I carry around. Otherwise I need my membership card.

    And when Costco no longer has the co-brand with AmEx, Amex will see me gone.

  3. oleditor says

    So the bank and the retailer benefit, but what about the customer? I don’t shop at Costco, so this change makes no difference to me. In taking the co-branded card, you give up even more of your personal data than you would otherwise, which is undesirable for me. Most co-branded cards that I have been offered carry higher interest rates than the handful of cards I do carry. A few offer reward points or other inducements, but my favorite card has a generous money back program, so Ill stick with it, thank you.

  4. Bucky says

    great article, very informative!

    I was one of those that initially didn’t know that I could use non-Costco AMEX at Costco. It was probably 5 years later that I found out.

  5. KD says

    Harry has talked about this earlier: Credit cards give consistent higher cash back like Fidelity Amex 2% or Citi double cash back, or only for certain rotating categories like Chase Freedom, Discover cash back, Citi Dividend, Amex Preferred Cash back (no rotating categories but limits on eligible spending or lower cash back) or high sign up bonus ones, usually co-branded. Having cycled each variety, I would say high sign up bonus ones are biggest bang for the buck as you earn something tangible to use for a large purchase like airline tickets etc. Rotating categories have a lot of hold too for me as I can spend ahead of time on things I will eventually spend – like groceries, gas etc for extra cash back. So this puts consistent higher cash back of 2% variety on the lowest rung when I am spending on something unusual like attorney fees etc. It takes a village of credit cards to make it all work. 🙂

  6. JohnInIowa says

    Does anyone know if AMEX allows existing cardholders to apply for the Fidelity Amex 2%?

    AMEX will not let me apply for another AMEX rewards card, the “Blue Cash Preferred® Card from American Express”, because I’m an existing cardholder (with Costco).

    • Bucky says

      What, seriously? AMEX won’t let you apply for Blue because you already have Costco? Is that really true?

      Anyways, you can apply for Fidelity AMEX 2% even with Costco AMEX. I know for a fact because I did.

      BTW, from what I read, Fidelity’s AMEX is not a real AMEX, it is a licensed AMEX through FIA issuer. Licensed is different than co-branded. So maybe that’s why you can get a Fidelity AMEX.

    • Harry Sit says

      Fidelity AmEx is issued by Bank of America’s FIA Card Services. AmEx has no say in who can apply for it.

      I heard AmEx has a limit of 4 cards for each person. You can have more than one card issued by AmEx, just not more than 4. Maybe close one of the four if you are hitting that limit?

  7. JohnInIowa says

    Thanks Harry. And by the way, your explanation of how the issuers and merchants pay each other to get a customer’s business was very helpful.

    Actually I don’t have four cards. Just two in my name, one for Costco and one for Hilton Hotels, with another Costco card in my account that’s in my wife’s name. So just two or three for me, depending on how they count it.

    When I attempted an online application for that Blue Cash Preferred card, this message was printed in red:

    “You have been identified as a current American Express Card Member. You may have seen an offer advertised for this product previously, but the offer is not available to current American Express Card Members.”

    The wording seems to imply that no current AMEX member, regardless of number of cards, can apply for that rewards card.

  8. Sam Seattle says

    Costco’ll find new card partner that we’ll probably be happy with; Amex will probably try to bribe us to stay. We’ll win either way?

    • Sam Seattle says

      Yay! It is Visa! BofA Travel Rewards Visa is the best deal, right? By the way, thanks, Harry, for the awesome post on that Visa.

  9. Brian says

    Harry, do you have a sense for who is paying for the “earnings” these co-branded cards create. When I apply for a Citi AAdvantage card that gives me a 50K AA mile bonus after spending $3K, does AA just provide that as part of the deal? Or does Citi buy those miles off them? Or is there kind of an indirect quid pro quo…AA provides the miles but that’s offset by the bounty Citi gives AA for the new customer? I guess same question would apply to the ongoing earnings…if every dollar I spend on the card earns 1 AA mile, who is providing that?

    • Harry Sit says

      Citi buys those miles from AA, both the initial bonus and the ongoing rewards.

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