The Wall Street Journal reports that Chase has re-signed Amazon.com as a co-brand partner. If you can’t access the article Google “Amazon Renews Co-Brand Credit-Card Deal With J.P. Morgan Chase” and open the link in an incognito window. (HT: Doctor of Credit)
Chase has issued the Amazon Visa since 2002. I believe it’s Chase’s largest co-brand card portfolio. Amazon is bigger product for Chase than United Explorer — even though in my view it’s not in my view a top rewards product with 3% cash back at Amazon, 2% at gas stations, drugstores and restaurants, and 1% everywhere else.
While the Journal reports that at least one other card issuer was interested in a deal with Amazon, the re-signing is a good reminder that big co-brand relationships are very very hard to dislodge.
Travel Providers and Banks Don’t Break Up Very Often Anymore, Outside of Mergers
For the most part large credit card partnerships are locked in, except in the case of a merger (and there aren’t that many big travel providers left to merge).
The lock-in comes from:
- Installed cardmember base. An incumbent card issuer already has a huge number of customers. That means the card franchise starts off worth a lot more to the incumebnt issuer than to a potential competitor.
- Big financial deals would have to be undone. When a billion dollars worth of miles are prepurchased, a competitor bank would have to front that billion dollars just to bring the travel provider even — and then the competitor bank needs to offer a better deal, but see the first constraint it’s hard to offer a better deal when the incumbent has the revenue advantage.
Citibank and American re-signed a 5 year deal in 2013. And in American’s third quarter earnings call, airline President Scott Kirby lamented that competitor airlines had a year-over-year boost to their revenue for the third quarter that American did not as a result of those new credit card deals.
Smaller Relationships are More Competitive
Amtrak moved from Chase to Bank of America. JetBlue from American Express to Barclaycard. Fidelity from a Bank of America subsidiary to a US Bancorp subsidiary.
Meanwhile the only really competitive large co-brand relationship is likely to be American’s. The American-Citi deal comes up in 2018. Citibank obviously will want to re-sign the airline again. Barclaycard will be a real competitor this time, though — not only do they have an already-installed cardmember base in former US Airways co-brand cardholders who now carry “AAdvantage Aviator” cards issued by the bank, Barclaycard even bought the ‘back book’ of legacy US Airways card accounts that had been serviced by Bank of America. They wouldn’t have done that if they weren’t serious about winning back the concession.
Market Dynamics Make it Harder for Small Issuers to Compete
It’s gotten even harder than before for a new bank to come in and oust an incumbent issuer in a co-brand relationship.
- Deals are Getting More Expensive. The price of airline miles to banks has been on the rise with these new deals. Back in 2008 and 2009 banks were buying miles super cheap, closer to one cent apiece rather than two, when the airlines were short of cash during the recession. Now with airlines in a stronger position financially, with fewer airlines to do deals with and banks in a healthier position to compete for those deals, the price of miles has swung up closer to two cents than one. It’s harder for smaller banks to break into this line of business.
- Merchant processing deals are designed to reward high volume with lower costs. I still have hard time understanding how Chase lost Amtrak, if they wanted to retain it, considering that Chase now has a huge cost advantage with Visa. They basically pay Visa a fixed amount, so incremental charges through a marginal co-brand partner aren’t going to be a cost driver.
It will be interesting to see how long this situation lasts — how far banks are willing to go bidding up the cost of the products, especially with new technologies that may compete down interchange rates and large retailers like Walmart, Costco, and Sam’s Club able to drive down interchange rates as well. Add in economic uncertainty and I wonder if this is a high water mark for these sorts of deals.