Why Are Major Companies Shutting Down Co-Branded Credit Cards? - NerdWallet

Walmart’s discontinuance of co-branded credit cards (issued through partnerships between major brands and issuing banks) marked yet another high-profile defeat among such credit products. Banks and merchants were unable to make certain cards work, leading them to discontinue or plan their breakdown altogether. Uber Credit Card, for example, was discontinued shortly after it launched in partnership with Barclays four years prior in 2021. Chase and Starbucks announced plans to end their Starbucks Rewards Visa Card partnership in July 2023 – five years after it first debuted – while Apple Card issued in 2019 is likely in need of new banking partner following Apple notifying issuer Goldman Sachs that it wanted out in late 2023. Credit cards are constantly shifting in their market landscape and issuer turnover is commonplace, yet retailers like Walmart and Starbucks remain household names recognizable worldwide. Yet these merchants struggle with co-branded cards from banks due to poor partnership between themselves and these financial services organizations. “To create an effective business model,” notes Brian Riley, Director of Credit Advisory Services & Co-Head of Payments of Javelin Strategy & Research – an investment services research firm. “It should not lean too heavily in one direction.” Does co-branding offer win-win partnerships? A report by Javelin indicates that co-branded credit cards make up 62% of consumer card portfolios of 12 major card issuers, making the relationship mutually beneficial for both. These bank-brand relationships can be mutually advantageous. When an issuing bank enters into a credit card partnership with a brand, they gain access to its consumer base for which they can sell other financial products such as mortgages or auto loans; at the same time, brand can gain a financial windfall through selling more merchandise at higher margins and earn commission. Under its contract terms, an issuing bank may pay its brand partner when new accounts are opened or for services provided such as rewards programs for cardholders such as airline miles or hotel stays that pass on directly. According to the Consumer Financial Protection Bureau’s 2024 Credit Cards Rewards report, banks transferred nearly $30 billion in 2022 alone to major co-brand partners. Successful co-branded cards require collaboration among partners working and innovating together in response to customer needs, according to John LaCosta, head of co-brand relationships at Citi. Are the partners compatible? Although co-branded card programs typically share similar goals, innovative initiatives may uncover philosophical disagreements among their members which cause tension within relationships despite shared goals. With their Apple Card offering, both Apple and Goldman Sachs were striving to diversify. Apple has long had aspirations beyond hardware and software development, and Goldman Sachs reportedly took note. They bet on Apple Pay as an opportunity to broaden their client list beyond investors into everyday consumer lending. Apple Card immediately made waves when it debuted, boasting of features including no fees; no sharing of data with third parties; and monthly statements arriving consistently around the same time for everyone – but almost no credit to Goldman Sachs itself. Goldman employees reportedly found it confusing that Apple-built features had such an effect on customer service and profits at Goldman, according to The Wall Street Journal. This caused further embarrassment as these unique aspects affected both customer experience and their bottom lines. Apple Card website now reads, reportedly with some controversy: “Trusted partners for an innovative credit card experience.”) Furthermore, underwriting for this particular card was reported to have caused further issues for them. Apple was insistent that everyone be approved, the Journal reported, even at risk to Goldman Sachs of accepting applicants with lower credit scores. Riley points out that Goldman Sachs became overly accommodating, leaving its receivables vulnerable. That is, they accepted cardholders prone to delinquency or default as customers. Though no official announcement has been made yet, many expect Apple-Goldman Sachs’ partnership to end as early as next year. Is the partnership viable over the long haul? A co-brand partnership’s economic viability often depends on its products – one such being expensive Apple products which may become less appealing as part of such arrangements. But in the case of Uber and Starbucks cards, transaction amounts were likely too small to create an effective credit card partnership. According to Bloomberg Second Measure data from March 2024, average monthly spending on Uber rides averaged approximately $107 while an individual Starbucks drink could cost as little as $10 or even less. Issuers derive much of their income from interest and interchange fees; both tend to decrease when cardholders use them less frequently for transactions and carry smaller balances. “Uber has many casual users; but at the end of the day do you really bring the volume?” Riley notes:The Starbucks card presented cardholders with difficulty due to its annual fee and complicated redemption process; rewards values varied significantly and you needed an independent membership card in order to claim them. Consider, instead, the value and simplicity of Target’s store card issued by TD Bank since 2013. A trip to Target may cost over $100 in just one transaction alone and many consumers make multiple visits each month. Add in Target Card’s straightforward value proposition — offering customers an automatic upfront discount — and it becomes an especially appealing payment solution that benefits both banks and merchants. “Partner, not Bully” When co-branded card relationships go south, their separation can often be messy and contentious. American Express announced their separation from Costco after 16 years as partners due to Price’s demands of more favorable terms from American Express – terms they couldn’t accept due to AmEx being financially constrained at that point. According to reports in The Wall Street Journal and elsewhere, when American Express made this move in 2016 after 16 years together they attempted to extract more favorable terms but this request could not be approved due to AmEx’s limited resources and commitment. Costco eventually switched from Citi to Discover, yet customers reported negative reactions from this decision. Meanwhile, Capital One issued cards through Walmart were discontinued as tension between these entities rose further. Walmart filed suit against Capital One in 2023, alleging the issuer didn’t process payments or replace lost cards as promised. This wasn’t Walmart’s first move away from co-branded partnerships – before teaming with Capital One they sued Synchrony Financial as their card issuer in 2018. Walmart claimed Synchrony’s underwriting standards were too strict, restricting consumer approval of accounts. Riley noted: ‘No relationship can survive when one party seeks every nickel they can from each transaction.” Rather, an issuer needs a partner rather than bullies as partners in lending decisions.