Why Banks Bet Big on Risky Credit Card Partnerships | WSJ

Summary

Wells Fargo's partnership with BILT, a FinTech startup, has resulted in significant monthly losses due to the high costs of processing credit card payments for rent. Despite such setbacks, co-branded credit card partnerships are on the rise, making up 62% of portfolios for major US issuers. These alliances, ranging from airlines to retailers, aim to boost customer loyalty and revenue. Banks and partners share profits, while card networks like Visa and MasterCard benefit from increased transaction volume. However, these partnerships carry risks, as seen with Wells Fargo's miscalculation and Apple's proposal to exit its contract with Goldman Sachs. Despite the challenges, the industry is expected to continue growing.

Takeaways

• 🏦 Wells Fargo is experiencing significant losses, estimated at $10 million per month, due to its credit card partnership with BILT.
• 📈 Co-branded credit card partnerships are prevalent, constituting 62% of the portfolios of the largest issuers in the US, and are expected to grow.
• 🤝 These partnerships typically involve a bank, a brand, and a card network, aiming to increase customer loyalty and revenue for all parties.
• 💳 Customers are incentivized with rewards such as discounts or free hotel nights, encouraging them to use the co-branded cards more frequently.
• 💵 Banks and partner brands share the revenue generated from card usage, with the bank often paying the brand for rewards offered to customers.
• 🔍 The Amazon Prime Visa credit card serves as an example of how these partnerships work, with Amazon as the brand, Visa as the network, and Chase as the issuing bank.
• 📉 Wells Fargo's partnership with BILT has not met internal projections, leading to financial losses and a decision not to renew the contract unless terms improve.
• 📊 The financial success of these partnerships can be uneven, with some banks like Goldman Sachs experiencing significant losses in their co-branded ventures.
• ✅ Despite risks, co-branded credit cards are beneficial for banks as they attract new customers and increase purchase volume, which can lead to more revenue.
• 🌐 The co-branded credit card industry is anticipated to continue expanding, driven by brands seeking additional revenue streams and issuers looking to build portfolios of high-spending consumers.

Q & A

How much is Wells Fargo reportedly losing every month due to its credit card partnership with BILT?

Wells Fargo is reportedly losing as much as $10 million every month due to its credit card partnership with BILT.

What unique feature does the BILT credit card offer that is mentioned in the script?

The BILT credit card offers the unique feature of allowing users to earn points on rent payments.

What percentage of the portfolios of the largest issuers in the US are made up of credit card partnerships?

62% of the portfolios of the largest issuers in the US are made up of credit card partnerships.

What are the potential rewards customers can earn from co-branded credit card partnerships?

Customers can earn rewards such as discounts, free hotel nights, or other perks from co-branded credit card partnerships.

What is the role of the card network in credit card partnerships?

The card network, such as Visa and MasterCard, makes money when more volume goes over their networks, and they provide the infrastructure for the cards to be used widely.

How does the Amazon Prime Visa credit card partnership work as an example?

In the Amazon Prime Visa credit card partnership, Amazon is the brand, Visa is the card network, and Chase is the issuing bank. Users earn rewards on Amazon and elsewhere, and the revenue generated is split between the bank and Amazon.

What are the potential risks for banks in co-branded credit card partnerships?

Potential risks for banks include miscalculations in consumer behavior, high costs associated with the partnership, and the possibility of not recouping the investment in rewards and other incentives.

Why did Apple propose to Goldman Sachs to exit their credit card contract?

Apple proposed to exit the contract with Goldman Sachs because the bank decided to leave the consumer lending space due to high costs and regulatory oversight.

What was one of the major sticking points in the Goldman Sachs and Apple partnership?

One of the major sticking points was Apple's terms, which included not charging late fees or selling customer data, leading to lost income streams for Goldman Sachs.

Why did Walmart and Capital One end their credit card partnership early?

Walmart and Capital One ended their partnership early after Walmart sued Capital One, alleging that the bank didn't meet certain terms of the contract and disagreements over contract renegotiation.

How do co-branded credit card partnerships benefit the brands involved?

Co-branded credit card partnerships benefit the brands by creating an additional revenue stream and fostering customer loyalty, which can be crucial for businesses like airlines.