During a recent earnings call, Starbucks announced the company is partnering with J.P. Morgan Chase and Visa to launch a co-branded credit card. According to Starbucks CEO, Kevin Johnson, the card is expected to launch later this year and will "[enable] customers to receive Starbucks Rewards with their purchases both in and out of Starbucks stores."
Although this will be the first credit product launched by Starbucks, the news wasn't all that shocking. Co-branded credit cards have become immensely popular. They've long been a staple of airlines and hotels, and even retailers like Amazon, Apple, Wal-Mart Inc. and Uber now have their own such products. (Full disclosure: Chase and Barclaycard both have an affiliate partnership with ValuePenguin.)
The reasons for a company to launch a co-branded credit card aren't always obvious. While many reasons exist, we'll take you through four of the most impactful ones.
1. Revenue Sharing on Credit Card Fees
Reports from the Federal Reserve reveal that credit cards continue to be highly profitable products. Banks receive revenue from multiple sources -- interest charges, membership fees, foreign transaction fees and more -- from both their cardmembers and the merchants who accept the bank’s cards as payment. We all tend to be more familiar with the first revenue source. Less known, but just as significant, are the fees from merchants. On average, the issuing bank collects 2% of each transaction in which their card is used.
With co-branded credit cards, the banks and the brands are able to design various monetization schemes to split the revenue sources described above. For example, J.P. Morgan Chase, whom Starbucks partnered with, writes that they "[make] incentive payments to the partners based on new account originations, sales volumes and the cost of the partners’ marketing activities and awards."
2. Strengthening Loyalty Programs
A 2016 report by The Nielsen Company found that "67% of consumers shop more frequently and spend more at retailers with loyalty programs." Co-branded credit cards supercharge these loyalty programs by extending them beyond the store. Not only can customers earn points for shopping with the issuing brand but anywhere else they take their card.
This arrangement has the power to benefit both the company and its customers. The brand involved is encouraging their users to be return customers. In turn, so long as they have a point balance, cardholders will be incentivized to come back; it's a form of positive reinforcement.
3. Access To Better Customer Data
The programs also allow brands access to troves of cardmember shopping data, which issuers are allowed to share with affiliates and nonaffiliated third parties, provided the credit card user doesn't opt out of that disclosure (a right provided to them by the Gramm-Leach-Bliley Act of 1999). For the business, the additional information can provide invaluable insight into how, and how much, their customers are spending. Intimate knowledge of your customer can provide insights into potential new products, services or pricing structures.
In the Starbucks example, the company says it was already examining credit card data as part of its market research. "We look at a lot of different sources of data [including a] variety of industry studies, credit card data, and other research to track comps in the away-from-home restaurant industry," Johnson said. With a co-branded credit card, they can potentially begin looking at more targeted data from their customers.
4. Marketing/Branding
The final benefit of launching a credit card is perhaps the most subtle — that of better branding. Having a credit card, especially one with allure to those who own it, can make your brand a bigger part of a customer's life. In today's competitive credit card market, there’s a constant effort to be the top-of-wallet card. We found that the best cards offer consumers between $250 and $700 in rewards per year and serve to further promote your brand, sometimes even before anyone even uses the card. A case in point was Uber’s launch of its first credit card with Barclaycard late last month. The card’s benefits were so good that multiple media outlets wrote about it, including CNN, USA Today and Forbes -- a week before the card was actually available.
