The Economics of Co-Branded Credit Cards

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Somebody recently asked me why an organization would opt for its own credit card. There are a few rewards programs out there that have done deals with large banks for their own co-branded cards. Many of you are familiar with co-branded cards in the form of a Visa or MasterCard for a favorite sports team, charity, alumni association, or large consumer rewards programs like Upromise and SchoolPop. The economics are pretty simple. An issuing bank (e.g. Bank of America, Citibank, Chase etc.) make money on a credit card usually around 2-3% of each purchase by a consumer. With a co-branded card deal, the bank usually shares part of the discount rate (usually around 1%) with the consumer organization. The banks also normally provide some money up-front for purposes of promoting the card to the organization’s membership. With these economics, that’s why many of you will see a 1% reward on your Upromise or SchoolPop credit card on every purchase you make. This is in fact the revenue shared back with the organization by the issuing bank. With charities and alumni associations, the 1% usually accrues to the organization, whereas with other types of cards, the rewards on the card can be in the form of points and redeemed for merchandise etc. Hopefully that helps shed some light on the dynamics of the co-branded card market.

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