Name: Why Banks Like Wells Fargo Bet Big on Co-Branded Credit-Card Partnerships
Uploaded: 2024-08-05T04:01:00Z
Duration: 8 min 3 s
Description: Nearly 30% of adults own credit cards that are partnerships between brands and banks. But several high-profile missteps reveal that the risks for banks can be high. WSJ explains how these co-branded cards work and what’s at stake.

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Nearly 30% of adults own credit cards that are partnerships between brands and banks. But several high-profile missteps reveal that the risks for banks can be high. WSJ explains how these co-branded cards work and what’s at stake. Photo Illustration: Hunter French

https://m.wsj.net/video/20240802/52e9472c-8664-4dd0-80ee-f9d5b0220a13/1/hls/manifest-hd-wifi.m3u8

Nearly 30% of adults own credit cards that are partnerships between brands and banks. But several high-profile missteps reveal that the risks for banks can be high. WSJ explains how these co-branded cards work and what’s at stake.

Why Banks Like Wells Fargo Bet Big on Co-Branded Credit-Card Partnerships

Narrator: As much as $10 million, that's how much Wells Fargo is losing every month thanks to this credit card.

Presenter: You can finally earn points on rent.

BILT got a very sweet deal, but Wells needed to win.

Narrator: Despite high-profile failures, these types of credit card partnerships make up 62% of the portfolios of the largest issuers in the US, and experts say the industry will continue to grow. Here's how these complex partnerships work and what some missteps reveal about what's at stake.

A co-branded partnership is one where a bank teams up with a company. It's as broad as that.

Narrator: Brands that have credit card partnerships run the gamut, from airlines to retailers.

It's any company that is looking to build up loyalty from their existing customers and to pull in new customers.

Narrator: In return, customers earn rewards, anything from discounts to a free hotel night.

For free. Boom.

Narrator: And the banks that team up with brands to issue the cards are looking to cash in on that loyalty.

Ultimately, it's meant to be a win-win for the bank and for the partner that they're teaming up with, where they will both see more customers and more revenue from this partnership.

Narrator: There's also a third player involved, the card network.

The card networks Visa and MasterCard basically make money when more volume goes over their networks. Generally speaking, these brand partnerships bring large numbers of high-spending consumers.

Narrator: So how do these players work together? Take the Amazon Prime Visa credit card. Amazon is the brand in the partnership and users can earn rewards on its site and elsewhere. Visa is the card network that allows customers to use this card anywhere Visa cards are accepted, and Chase is the issuing bank.

Whatever revenue is generated from these cards, whether it's just from the way that the consumer is shopping to whether they're paying their balances in full every month or not, to whether they are paying on time or not, that is money that's all up for grabs between the bank and their partner and they determine how they're going to split that.

Narrator: Those merchant partners can also make money every time someone opens a new account. And banks often pay brands for rewards like Miles offered to customers. Those reward purchases can make up the biggest chunk of payments banks make to their partners.

The rewards basically encourage the consumer to spend even more on that card.

Narrator: In 2022, banks paid merchants an average of $279 for every open account. Delta made nearly $7 billion from its Amex credit card partnership in 2023.

In general, it's been kind of a race to the top, if you will, in terms of how those payments have gone.

Narrator: These partnerships are growing in popularity. In the US, over a third of general purpose credit cards were co-branded in 2021. That's 173 million accounts in the US co-brand industry and most of them are in the travel and retail space. But for all the potential upsides for both brands and banks, some partnerships carry immense risk. Wells Fargo launched its splashy partnership with BILT, a FinTech startup, in 2022. The BILT credit card promised to...

Turn your rent payments into a dream summer vacation.

Narrator: That's a rare perk. Most landlords don't accept credit card payments because of the high fees they would need to pay card companies. With the BILT card, Wells Fargo agreed to eat much of that cost.

They started going through this sort of rationale of, well look, we're going to get access to a lot of young adults. We got tons of card holders in a short amount of time and it delivered that like, okay, like Wells is serious about being in the co-branded space.

Narrator: But according to exclusive WSJ reporting, the partnership is losing the bank millions of dollars a month. And Wells Fargo has told BILT it doesn't intend to renew the contract when it expires in 2029 unless the economics are changed more in its favor. The bank is paying BILT $200 for every new account. It's also making separate payments every time the card is used to pay rent, which is what the program is focused on.

All of this has resulted in losses as have the internal projections that Wells Fargo made as to how consumers would use this card turned out to be wrong.

Narrator: And the bank has stopped bidding on new co-brand programs altogether. In a comment, Wells Fargo said that co-brands are one modest piece of the company's credit card strategy, and the BILT card is one component. And BILT said it is committed to the partnership and that any insinuation of either party looking to exit the partnership is inaccurate. Wells Fargo isn't the only bank to make a miscalculation.

We saw an opportunity to transform another fundamental method of payment and that's the credit card.

Narrator: Apple and Goldman Sachs announced the Apple Credit Card in 2019 to great fanfare. Within the first few years, balances on the card grew to over $8 billion. But in the fall of 2023, Apple sent a proposal to Goldman Sachs to exit the contract. The proposal came after the bank decided it would leave the consumer lending space.

It comes with a lot of costs and a lot of regulatory oversight and all of that basically means a lot of expenses that resulted in the bank losing billions of dollars as it tried to become a massive consumer lender.

Narrator: Trying to distinguish itself in the consumer lending space, Goldman Sachs accepted unusual terms from Apple.

One of the risks here is working, especially when it's the big companies. You know, you wanna partner with me and you have to deal with my terms. And if you don't deal with my terms, I'm just gonna go somewhere else.

Presenter: This is Apple Card, a credit card created by Apple, not a bank.

Narrator: For Goldman, agreeing to Apple's terms like not charging late fees or selling customer data meant losing valuable income streams.

You know, another risk is when you have a merchant partner that is insisting on most of the cardholders getting approved, right? Well, what if a lot of those cardholders have low credit scores and that results in higher losses for the bank?

Narrator: That was a major sticking point in the Goldman Sachs and Apple partnership. Apple and Goldman Sachs declined to comment.

Presenter: Introducing the Capital One Walmart Rewards Card.

Narrator: In May, Walmart and Capital One ended their exclusive credit card partnership several years before the contract was slated to end. The decision came after Walmart sued Capital One in 2023, alleging that the bank didn't meet certain terms of the contract. According to people familiar with the matter, Walmart had wanted to renegotiate some terms of the contract, and Capital One wasn't willing to accept its demands. Walmart and Capital One declined to comment. Ultimately, the economics of these partnerships tend to favor the brands.

In all likelihood, you know, 2/3 or 3/4 of the total revenue that's generated by this will go to the brand partner. So it does mean that the issuer kind of has less of the overall economics and also in a somewhat residual position because the brand gets paid first. The credit card partnerships have proven to be extremely useful to the brand in terms of creating an additional revenue stream, but also creating additional loyalty.

For some companies like airlines, no rewards program, no credit card program can be the difference between being in business and not.

Narrator: And even when banks don't get a majority of the revenue made through these partnerships, these co-branded cards still provide them a key benefit.

It brings in customers who the bank might not otherwise have. All of this equals what? More customers, more purchase volume equals more revenue.

Narrator: And experts don't expect the co-branded credit card industry to stop growing anytime soon.

I think these will grow faster than the overall credit card industry 'cause you're gonna constantly have the brands trying to earn more money from them and the issuers kind of who want to have these larger portfolios of high-spending consumers.