The economics of co-brand credit cards used to favor banks much more than airlines, though they’ve been lucrative for the airlines for years. The first airline co-brand launched in 1986 – the Continental TravelBank Mastercard from Marine Midland Bank (now HSBC).
By the time of United Airlines’ bankruptcy in 2002 the airline in some sense continued flying to support the underlying credit card business. Bankruptcy documents revealed that Mileage Plus (there was a space in the name then) was the only profitable part of the company. Executives at United would call then-BankOne CEO Jamie Dimon immediately following each meeting with the judge.
The cost to banks of airline credit card deals has gone up as we’ve seen:
- Industry consolidation. There are fewer airlines to do deals with.
- Airlines are stronger financially. During the Great Recession banks were lending money to airlines, providing liquidity in exchange for deep discounts on the purchase of miles. Airlines no longer need to price their miles at fire sale levels to obtain cash.
- Costco set off a run of more expensive negotiations. When American Express lost Costco to Citi in what was the most expensive co-brand deal in history, they re-negotiated their second largest co-brand (Delta) early to lock it in. That set a higher pricing bar for future deals that other airlines did. They also locked in hiring pricing on their Starwood co-brand and bid up Marriott to keep a piece of that book when Marriott bought Starwood.
When miles were cheap airlines began to give them away to consumers at a faster rate than before. We saw the beginning of huge acquisition bonuses during the Great Recession when banks were buying miles cheap.
At the same time we’ve seen a real competition driving up the cost of rewards for banks now that those rewards are more costly to offer, and that’s not something I would have expected. However as American Express lost Costco they also have been committed to building their own proprietary rewards portfolio (Membership Rewards cards). As the cost of co-brand deals have gone up generally other banks have tried to build their own competitive offerings.
Big banks don’t really need co-brand cards to attract consumers – if, that is, they’re willing to spend bigger money rewarding cardmembers with transferable currencies and faster rates of earning. That’s the lesson of Chase Ultimate Rewards and to a lesser extent Citi ThankYou Rewards.
Chase really drove the aggressive expansion of proprietary rewards with the launch of Ultimate Rewards a decade ago. And they’ve uniquely been in a position to spend money encouraging consumers to push transactions through their products.
In 2013 they signed a 10 year deal to lease Visa’s network, paying Visa a fixed amount rather than a piece of each charge placed on their cards. They turned variable costs into fixed costs. As a result the more charges on their cards, the more Chase makes. And they started spending more at the margin on rewards to encourage that spend.
It’s been an open question what the rewards world would look like after the end of that deal with Visa. However I missed that during Visa’s earnings call in July they announced the deal had been extended through the end of 2029. (HT: rasheed)
In the United States, we’re pleased to announce that we have extended our long-standing partnership with JPMorgan Chase through the end of 2029. This long-term extension will enable us to work together to accelerate the growth of electronic payments, deliver enhanced payment experiences such as our recent collaborations to enable tap-to-pay in the New York City subway system. Additionally, we work together to support and innovate our world-class co-brand partners and to further expand into the commercial space with B2B solutions.
With banks spending more on their co-brand partnerships and more to reward consumers they’ve gone looking for ways to trim costs. We’ve seen things like,
- A greater focus on limiting up front consumer bonuses to customers they don’t believe will keep the products long-term.
- Elimination of ancillary benefits such as Citi cutting nearly all insurance bundled with its cards, and several issuers cutting price protection which has gotten more expensive to offer with the advent of automated tracking and claim submission.
- Chase limiting the number of Priority Pass lounge guests for Sapphire Reserve cardholders, preventing customers from getting two $300 travel credits in their first year and no longer awarding triple points on travel spend that’s rebated.
- American Express cutting airport restaurant credits from the Priority Pass cards it issues, and implementing restrictions on their airline fee credits.
- Citi placing limits on fourth night free hotel bookings with its Prestige card, requiring bookings that will earn it higher commission and limiting the number of annual uses of the benefit.
- Annual fees creeping higher.
We should expect a continuation of the nips and tucks issuers have been making, but not a major upending of the rewards landscape — although there are risks.
In the long run change would come if each transaction became worth less to banks, and therefore they spend less to attract those transactions. There are three ways this could happen.
- Merchant leverage. Costco pays almost nothing to accept credit cards. Amazon is in a position to extract a great deal. Retailers generally are pushing for lower swipe fees, and American Express has been lowering fees to attract more small businesses to their platform.
- Government regulation. That’s what killed debit card rewards in the US (Durbin amendment to Dodd Frank financial reform) and it’s transformed the rewards card landscape in Europe in Australia. It’s far less likely in the U.S. under the current administration but becomes a threat again if Democrats re-take power.
- New technology. New ways of processing payments compete against traditional Visa, Mastercard, and American Express networks and compete down the price those networks can charge and what the banks are able to keep. Over time this seems like the biggest threat to rewards.
Of course suggesting that ‘in the long run things could change’ is hardly controversial. In the long run things have already changed from a world where you earned just one mile per dollar on all spend and initial bonus offers were just 5000 miles.