Risks associated with co-branded credit cards

A co-branded credit card includes partnerships between a credit card issuer (usually a bank or financial institution) and a brand (such as a retail chain, airline, hotel, or e-commerce platform). These cards offer unique benefits to cardholders such as discounts, reward points or cashbacks associated with partner brands. While this card can be very beneficial, there are also risks associated with it.

The bank

Credit Risk: The card issuing bank accepts the risk of the cardholder defaulting. If a large number of cardholders neglect to pay, the bank may have to suffer huge losses.

Managerial risks: Managing co-branded card programs requires a strong infrastructure for customer services, reward management, and protecting frauds. Any managerial failure can lead to reputation loss and financial loss.

Regulatory risks: Issuing banks need to ensure compliance with legal requirements, which may vary from region to region. Failure to comply with this could lead to a fine, legal action and respectable compensation.

Co-branding Partner

Established risks: If the provider experiences issues such as bank data breaches, poor customer service, or aggressive debt collection practices, the reputation of the co-branding partner may also be affected. This may result in a decrease in customer trust and brand loyalty.

Financial risks: A co-branding partner can share the costs of customer acquisition, rewards, and marketing. If the card program does not meet the expectations, the brand may suffer financial losses.

Risk of dependence: Excessive reliance on co-branded credit card programs for customer engagement or revenue can be risky if the program performs poorly or ends up partnering with the issuing bank.

Cardholder

Risk of overload: Co-branded credit cards often come with attractive rewards that encourage cardholders to spend beyond their capacity. This can lead to debt and financial stress.

Interest rate risk: Co-branded cards have higher interest rates than regular credit cards, especially if the reward is generous. Cardholders who have a balance can pay interest more than the value of the award received.

Risks of reducing the value of rewards: The co-branding partner or bank that offers the reward may change the terms of the reward program, such as increasing or reducing the number of points needed to reduce the value of the reward. This will reduce the perceived cost of the card to the cardholder.

Investors

Market risk: If the co-branded credit card program does not perform as expected, the investors of the issuing bank or the co-branding partner for them may face risks. Poor performance can affect the financial health of the company, leading to a fall in stock prices or dividends.

Strategic risk: If the co-branded card program is an essential part of the company's strategy, any problem in the program can affect the overall business strategy, which can lead to long-term negative effects.

Regulatory Authority

Systemic risks: Authorities are concerned about the overall stability of the financial system. If the co-branded credit card programme provides large consumer loans, or if the issuing banks suffer substantial losses, it could pose a systemic risk to the financial sector.

Consumer protection risks: Regulators should ensure that consumers are not misled by aggressive marketing of co-branded credit cards and are fully aware of the circumstances and risks associated with these products.

In short, risks associated with the credit card co-branding programme are shared among issuing banks, co-branding partners, cardholders, investors and regulators. Each team needs to manage these risks carefully to ensure the long-term success and sustainability of the programme.