Guide 08 · Partners
Should you launch a co-brand credit card?
Launch a co-brand credit card only if enough of your members would use it every day, an issuer will pay more for the points it buys than they cost you to honor, and the contract keeps control of your currency and your member data with you. A card can bring steady revenue and engagement, but it also makes your program depend on a bank and adds points you must redeem.
A co-brand credit card puts your brand and your loyalty currency on a bank’s card. Every purchase anywhere earns your points, so members collect far more often than they would through you alone. For a few large programs, the card becomes one of the biggest sources of revenue. For many others, it adds liability and complexity without enough use to pay for them. This guide explains how the arrangement works, who earns what, and the tests that tell you whether a card fits your program.
How the card works
How does a co-brand credit card work?
Three parties share the card. The issuing bank provides the credit, takes the credit risk and runs the account. Your program supplies the currency and the brand. The cardholder earns your points on spending and redeems them with you.
According to the US Consumer Financial Protection Bureau (CFPB), once a co-brand contract is awarded the issuer typically buys rewards from the brand in bulk, which gives the brand a steady revenue stream from its program. The brand then typically controls what the points are worth at redemption and which rewards are available. The CFPB also notes that airline and hotel programs may have many partners but typically only one domestic co-brand card issuer, sometimes under an exclusive arrangement. In practice, choosing an issuer is a long commitment.
Who earns what
How is the money divided between the brand and the issuer?
The issuer earns interchange on card spending, annual fees and interest on balances. Out of that, it pays the brand for the points it awards and sometimes for new accounts, marketing and other items. The CFPB reported that major banks paid more than $28 billion to merchant partners in their top co-brand partnerships in 2022, 34% more than in 2019, with payments for rewards making up the vast majority at 1.53% of the purchase volume of those portfolios. Across major issuers’ general purpose cards, consumers earned an average of 1.6 cents in rewards per dollar spent in 2022.
| Party | Main income | Main cost | Main risk |
|---|---|---|---|
| Issuing bank | Interchange, annual fees, interest | Points bought from the brand, servicing, credit losses | Credit losses, a contract priced too high |
| Brand and program | Payments for points sold, account fees | Honoring redemptions, program operations | Liability growth, dependence on one bank |
| Cardholder | Points, card benefits | Annual fee, interest if carrying a balance | Devaluation of points already earned |
A sound default is a fixed price per point, with any account-level payments on top, and the issuer keeping the card economics. A profit share sounds generous, but it ties your income to credit results you do not control. Price per point is the line to negotiate hardest; see selling points to partners and issuers.
What it costs you
What does a card cost your program?
First, liability. Every point the issuer buys is a point you must honor later. If the price per point is below what a redemption costs you, each card purchase moves margin from your program to the bank. Second, control. Once a large share of your points comes from the card, changes to earn rates, reward prices or tiers affect the bank’s product, and the contract may limit what you can change. Third, reputation. The CFPB received over 1,200 complaints about credit card rewards in 2023, and consumers said issuers do not protect them from partner decisions to remove benefits or change status requirements. Cardholders blame both brands.
There is also an opportunity cost in not launching: you give up the revenue and the daily contact with members. The question is whether that is worth more than the liability and dependence you take on.
Count the internal work as well. A card needs people to manage the bank relationship, reconcile points bought against points issued, handle cardholder questions that reach your service team, and coordinate marketing with the issuer. Settlement files, audits and joint campaigns take time from the same team that runs the rest of the program. Budget for that before you compare offers, not after the contract is signed.
Sources for this section
Credit Card Rewards, Issue Spotlight, May 2024 (consumerfinance.gov) F-G4-07
Fit tests
Is a co-brand card a good fit for your program?
Apply these tests before you approach a bank:
- Scale and use. Do you have a large base of active members who would put everyday spending on your card? A card that sits in a drawer pays nobody.
- Price above cost. Will the issuer pay more per point than your fully loaded cost of honoring it, after expected breakage? Run the numbers at low, typical and high cardholder spend.
- Stable liability. Can your finance team forecast redemptions well enough to absorb a large new stream of points?
- Wanted rewards. Are your rewards valuable enough that people would choose your card over a cash back card?
If you fail the first two, consider lighter options first, such as earn partners or card-linked offers.
Choose the issuer
How should you choose an issuing partner?
Compare offers on more than the headline price. Ask each bank for its price per point, account payments and minimum guarantees; who carries the liability for unredeemed points; what cardholder and transaction data you will receive and how often; marketing commitments; and the terms for renewal and exit. A slightly lower price from an issuer that shares detailed data and commits to marketing can be worth more than the highest bid. Write down in the issuer agreement what happens to cardholders and their points if the contract ends.
When the card takes over
What happens when the card becomes the program?
In some programs, most points end up coming from the card rather than from purchases with the brand. At that point the card is effectively the program: changes to rewards are negotiated with the bank, and a large part of the program’s revenue depends on one contract. Watch the share of points issued through the card each year. If it keeps rising, protect your own earn and redemption rules in the contract, keep the member record in your own system, and plan for renewal well before the contract ends. A program that can still stand on its own negotiates from strength.
More answers
Frequently asked questions
How does a brand make money from a co-brand credit card?
Mainly by selling its points or miles to the issuing bank, which awards them to cardholders. According to the CFPB, issuers typically buy rewards from the co-brand partner in bulk, giving the merchant a steady revenue stream. Contracts can also include payments for new accounts and other fees.
Who pays for the rewards on a co-brand card?
The issuer pays the brand for the points it awards, and recovers the cost from interchange, annual fees and lending income. The brand then carries the obligation to honor the points when members redeem them.
Is a co-brand card right for a small loyalty program?
Usually not. Issuers look for large, engaged customer bases, and the card needs enough members using it every day to cover its fixed costs. Smaller programs often get more from partner earn deals or card-linked offers.
How many issuing partners can a program have?
Usually one per market for the main card. The CFPB notes that airline and hotel programs may have many partners but typically have only one domestic credit card issuer, sometimes under an exclusive arrangement.
What are the risks of a co-brand credit card?
Dependence on one bank for a large revenue line, a growing points liability, less freedom to change your program, and complaints if benefits change. The CFPB has reported consumer complaints that issuers do not protect cardholders from partner decisions to remove benefits.
What should a co-brand contract protect?
The price per point and how it changes, the brand's control over earn and redemption rules, access to cardholder data, marketing commitments, and what happens to members and their points if the contract ends.
Sources
- F-G4-04Credit Card Rewards, Issue Spotlight, May 2024 (consumerfinance.gov)
- F-G4-05Credit Card Rewards, Issue Spotlight, May 2024 (consumerfinance.gov)
- F-G4-06Credit Card Rewards, Issue Spotlight, May 2024 (consumerfinance.gov)
- F-G4-07Credit Card Rewards, Issue Spotlight, May 2024 (consumerfinance.gov)
- F-G4-08Credit Card Rewards, Issue Spotlight, May 2024 (consumerfinance.gov)