Co-branded credit cards have quite been the flavour of 2024, as banks started to increasingly partner with good, popular brands offering exciting rewards, specific features and benefits alongwith cashbacks. Co-branded credit cards have now gone beyond fuel and travel, into segments like food, movies, fashion and more.
Co-brand credit cards will most certainly form a decent part of all credit card books. Depending on priorities this would range between 15-30 per cent of the total book for a sustained period of time.Rajan Pental, Executive Director, YES Bank
The Reserve Bank of India (RBI), in its Benchmarking India’s Payment Systems – Follow-on Exercise Report, said in terms of credit card issuance, India saw a strong compound annual growth rate of 17.2 per cent between 2017 and 2020. The growth in credit cards can be attributed to innovative products, co-branded partnerships — like those of NBFCs or fintechs with banks — e-commerce, cashback programmes and technology.
What are co-branded credit cards?
A co-branded credit card is a hybrid credit card issued by a credit card company through a tie-up with a particular brand. This type of credit cards are extremely popular, rewarding cardholders with exclusive cash back or points, discounts and benefits with their favorite brand.
Co-branded credit cards are issued by a financial institution — usually a bank, but it can also be a credit union or fintech company — along with another company, organization or brand.
“Industry estimates suggest that 1 in 3 new credit cards issued today are of the co-branded variety. Currently, there are 70-odd variants of co-branded cards in the market, accounting for 10-12 per cent of the total credit cards in circulation,” revealed data from The Captable.
Co-branded credit card opens incremental customer segments for credit card companies.
How do banks choose their co-brands for cards?
“Usually, banks choose co-brand partners who have a customer franchise which is different from the banks’ core ETB base thus help banks diversify their book,” said Rajan Pental, Executive Director, YES Bank.
Co-brands also have high affinity with partner brand and results in more engaged customers at a time when there is so much focus on activation of cards. A good large credit card portfolio should have the right mix of co-brands.
“The choice of the co-brand partner is done keeping in mind the bank’s need for customer segments and what is available in the franchise of the co-brand partner,” he added.
However, finding like-minded partners with an aligned vision on what the cobrand is expected to deliver and in what time frame is the biggest challenge, Rajan highlighted.
How to save co-brand biz from the regulatory glare?
The Reserve Bank of India has increased its scrutiny on co-branded credit cards. Recently, the RBI has issued notices to Federal Bank and South Indian Bank to stop issuing new co-branded cards.
The Apex bank reiterated that co-branding partners of credit cards cannot access customer data or be involved in any of the processes after the initial issuance of the cards.
Amidst such increased regulatory tightening in the segment, for banks to stay fully compliant and save themselves from the regulatory scrutiny, Rajan asserted that banks need to ensure that the partners they choose to co-brand their cards with are compliant and ‘audit ready’.
The reputation and track record of the partner on compliance and customer service standards goes a long way in choosing the right partner. Given the stringent regulations these days, you would prefer to have partners who are “audit ready”.Rajan Pental, Executive Director, YES Bank
“Above all, the commercials have to work for both the partners, we have seen many good cobrand partnership deals fall apart because of very differential expectations on commercials,” the banker added.
How profitable is the co-branded credit cards business?
Co-brands are a profitable segment for the banks given the choice of partners and the resulting incoming quality of customers is correct, said Rajan.
A bank’s portfolio needs to have the right mix of transactors, revolvers, right mix on geography, right mix on customer profiles (Salaried vs Self-employed, Millennials, digital natives etc.).
“A well-managed cobrand portfolio is very profitable,” Rajan asserted.
Credit card is a very competitive market, the top banks with large customer franchise have already issued credit cards to a large part of their base, for expansion they have to look for cobrands. The mid-sized Banks have to look for co-brands to achieve scale.
“Every bank irrespective of size of customer franchise has a used case to look at co-brands as a strategy,” he added.
Rajan also revealed that there is no fixed rate of interest on co-branded credit cards.
“Rate of interest is decided basis the expected target segment that is likely to come through the channel. A co-brand partnership can be with a wealth management company for example, in which the expectation will be a very low risk, low revolve, high spend profile, in this case the rate of interest could be about 24 per cent,” he said.
“If a co-brand is done with more mass market brand the expected book would be higher revolve rates, lower limits and higher credit losses; such cobrands may be priced higher,” he added.
What is the future of co-branded credit cards?
“With co-branded cards being a beneficial mode of payment for customers, companies as well as banks, they are likely to witness more innovation in the form of more unique tie-ups between banks and brands in order to maximize the benefits derived from their co-branded cards”, highlighted Murali Nair, President- Banking, Zeta.
“As these cards continue to provide a convenient and secure solution to a range of needs from everyday spending to specific payment use cases, customers who are focused on getting instant returns from their purchase may even ditch their usual credit and debit cards to opt for co-branded cards instead,” he elaborated.
Rajan revealed that co-brand credit cards would most certainly form a decent part of all credit card books. Depending on priorities this would range between 15-30 per cent of the total book for a sustained period of time.
Amongst all, travel still continues to be the star segment for co-branded credit cards business. Rajan believes that any co-brands with large travel related benefits would be good value for the customer.
