The report: The Role of Strategic Partnerships in Consumer Credit Cards [May 2024]
Source: Elan
Why we picked it: Payments is an integrated part of banking that legacy financial institutions can’t ignore anymore. In a time when card marketing means taking on the resources and and breadth of the credit card moguls, co-branded cards represent a significant opportunity for financial institutions to differentiate their offerings, deepen customer relationships and tap into new revenue streams.
Consumer adoption of these cards revolves around their desire for more rewards programs and retail benefits. For smaller institutions in particular, partnering with local businesses or niche retailers to offer co-branded cards could provide a competitive edge against larger national banks.
Executive Summary
Co-branded credit cards are carving out a unique niche in the payments industry, offering consumers tailored benefits and retailers valuable partnerships. A recent study by PYMNTS Intelligence and Elan, the genesis of Elan’s latest report, sheds light on the current state and future potential of these specialized financial products.
Key Takeaways
- Market penetration gap: While 68% of consumers hold at least one general-purpose credit card, only 28% possess a co-branded credit card. This highlights a significant growth opportunity for co-branded cards.
- Rewards drive adoption: 38% of co-branded credit card holders cite loyalty and rewards programs as their main reason for obtaining the card, compared to just 18% for general-purpose cards. This underscores the importance of strong reward offerings for co-branded cards.
- Retail dominance: 60% of co-branded cardholders primarily use cards affiliated with major retailers like Amazon, Costco, or Target. This shows the strong appeal of cards offering rewards on everyday purchases.
- High-value travel cards: Travel-affiliated co-branded cards see significantly higher average monthly spending – $1,555 compared to $1,181 for retail-affiliated cards. This suggests that travel rewards are particularly valuable to certain consumer segments.
The State of Co-Branded Cards
Co-branded cards, while they’ve established a significant presence in the market, still generally lag behind general-purpose credit cards in terms of widespread adoption. For instance, while 68% of consumers hold at least one general-purpose credit card, only 28% possess a co-branded credit card. This gap widens further among younger consumers and those with lower incomes, highlighting a clear opportunity for growth in these demographic segments.
Specifically, among consumers earning less than $50,000 annually, only 14% hold a co-branded credit card. The adoption rate increases to 38% for those earning more than $100,000 per year. Similarly, just 16% of Generation Z consumers have a co-branded credit card, compared to 33% of baby boomers and seniors. These statistics underscore the potential for targeted marketing and product development to capture underserved segments of the market.
Despite their lower market penetration, co-branded cards have carved out a loyal user base attracted by their unique value propositions. The study uncovers several key insights that shed light on consumer preferences and usage patterns:
1. Rewards reign supreme
Unlike general-purpose cards where interest rates and fees are primary considerations, loyalty and rewards programs are the top motivator for co-branded card adoption. Over a third of co-branded credit card holders cite this as their main reason for obtaining the card, compared to just 18% for general-purpose cards.
This focus on rewards is even more pronounced when consumers are asked what would make them prefer a co-branded card over a general-purpose one. Among those who already have a co-branded card, nearly half said better loyalty or rewards programs would be the key factor, while only 26% of those without co-branded cards said the same. This suggests that once consumers experience the benefits of these tailored reward programs, they place an even higher value on them.
2. Retailer affiliations dominate
Among co-branded cardholders, 60% primarily use cards affiliated with major retailers like Amazon, Costco or Target. This preference underscores the appeal of cards offering rewards on everyday purchases. The popularity of retail-affiliated cards varies by demographic, with 66% of consumers earning less than $50,000 favoring these cards, compared to 55% of those earning over $100,000.
Interestingly, Generation Z bucks this trend, with only 41% citing a retailer-affiliated card as their most frequently used co-branded card. Instead, 25% of Gen Z co-branded cardholders prefer travel-affiliated cards, and 17% opt for technology company affiliations. This divergence suggests that younger consumers may be looking for different types of rewards and experiences from their credit cards.
3. Travel cards drive high spend
While less common overall, travel-affiliated co-branded cards see significantly higher average monthly spending — $1,555 compared to $1,181 for retail-affiliated cards. This trend is particularly pronounced among higher-income consumers, with 27% of those earning over $100,000 naming a travel card as their most frequently used co-branded card.
The higher spend on travel cards likely reflects both the typically higher costs associated with travel purchases and the perceived value of travel rewards. Many travel-affiliated cards offer perks such as free hotel nights, airline miles, and airport lounge access, which can provide substantial value to frequent travelers.
4. Different usage patterns
Co-branded cardholders are more likely to pay off their full balance each month compared to general-purpose cardholders, suggesting these cards are viewed more as a tool for earning rewards than as a credit line. Specifically, 55% of co-branded store card holders and 52% of co-branded credit card holders pay their full balances monthly, compared to 49% for general-purpose card holders.
This pattern holds across income levels, but the gap is most pronounced among higher earners. For consumers making over $100,000 annually, 58% pay off their co-branded credit card balances in full each month, compared to 54% for general-purpose cards. This suggests that affluent consumers are strategically using co-branded cards to maximize rewards on purchases they can afford to pay off immediately.
The Challenges and Opportunities of Co-Branded
Despite the loyal user base and high engagement among certain demographics, co-branded cards face several challenges in expanding their market share. The report highlights that among consumers who don’t have co-branded cards, 35% say their current cards already meet their needs, while 21% say they don’t want too many credit cards.
Another 14% said that co-branded credit cards never crossed their minds.
These statistics point to a significant opportunity for education and marketing. Many consumers may not be aware of the unique benefits co-branded cards can offer or may not understand how these cards can complement rather than complicate their existing credit card strategy.
Based on the insights from the report, several strategies emerge for co-branded card issuers and their retail partners to drive growth and increase market share:
1. Emphasize value proposition
Many consumers who don’t have co-branded cards simply haven’t considered them or don’t see a clear benefit. Issuers need to more effectively communicate the unique advantages these cards offer. This could involve targeted marketing campaigns that highlight specific use cases and potential rewards, demonstrating how co-branded cards can provide value in ways that general-purpose cards cannot.
2. Target younger consumers
With only 16% of Gen Z holding co-branded credit cards, there’s significant potential to tailor offerings that appeal to this demographic’s preferences and spending habits. This could involve partnering with brands popular among younger consumers, offering rewards aligned with their interests (such as streaming services or sustainable products), or providing educational resources on responsible credit use.
3. Enhance reward structures
Given that rewards are the primary draw, developing innovative and generous loyalty programs could help co-branded cards compete more effectively with general-purpose cards. This might include offering accelerated earn rates on certain categories of spending, providing unique experiences or access to exclusive events, or allowing for flexible redemption options that appeal to a wide range of consumers.
4. Broaden affiliate partnerships
While retail-affiliated cards are most popular, there’s room for growth in other sectors. The success of travel cards among high-income consumers suggests potential for other niche partnerships. Issuers could explore collaborations with technology companies, entertainment brands, or even local businesses to create cards that cater to specific lifestyles or interests.
5. Educate on credit building
Positioning co-branded cards as effective tools for building credit while earning rewards could attract consumers who are wary of traditional credit products. This approach could be particularly effective for reaching younger consumers or those with limited credit history who might be intimidated by general-purpose credit cards.
6. Leverage the technology
Integrating co-branded cards with mobile wallets, offering real-time reward tracking, and providing personalized spending insights could enhance the user experience and increase card usage. Some issuers are already exploring augmented reality features that allow cardholders to visualize their rewards or virtual card designs that change based on spending patterns.
7. Focus on customer retention
While attracting new cardholders is important, retaining existing ones is equally crucial. Issuers could implement loyalty tiers that offer increasing benefits for long-term cardholders or provide targeted offers based on a customer’s spending history to encourage continued use of the card.
The Future of Co-Branded Cards
As the credit card landscape continues to evolve, co-branded cards occupy a unique position at the intersection of retail loyalty and financial services. By focusing on their strengths – targeted rewards, seamless integration with popular brands, and appeal to specific consumer segments – these cards have the potential to significantly increase their market share and become an even more integral part of consumers’ financial lives.
The future of co-branded credit cards will likely be shaped by several key factors:
1. Personalization: As data analytics capabilities improve, issuers will be able to offer increasingly personalized rewards and experiences tailored to individual cardholder preferences and spending patterns.
2. Digital integration: The line between physical and digital shopping experiences continues to blur, and successful co-branded cards will need to offer seamless integration across all channels.
3. Sustainability: With growing consumer interest in environmental and social responsibility, co-branded cards that align with these values could gain a competitive edge.
4. Flexibility: As consumer preferences and spending habits evolve, particularly in response to economic uncertainties, co-branded cards that offer flexible rewards and redemption options may be better positioned to retain cardholders.
5. Partnerships beyond retail: While retail partnerships dominate the current co-branded landscape, there’s potential for growth in other sectors such as healthcare, education, or even virtual goods and services.
In conclusion, co-branded credit cards represent a significant opportunity for both financial institutions and their retail partners. By addressing current challenges and leveraging emerging trends, these specialized financial products have the potential to capture a larger share of the credit card market and provide unique value to consumers across various demographic segments. The key to success will lie in creating compelling value propositions, effectively communicating these benefits to potential cardholders, and continuously innovating to meet evolving consumer needs and preferences.
Editor’s note: This article was prepared with AI language software and edited for clarity and accuracy by The Financial Brand editorial team.