Banks compete for co-branded credit cards

As the economy improves and consumers begin to spend more, banks that issue credit cards are vying to create co-branded cards with the retailers patronized by these consumers. Using a co-branded card allows a customer to gain rewards from the retailer of their choice, while the banks collect the processing fees from these transactions.

The customer benefits are clear, as they can also gain rewards points when using their cards outside of the selected retailer. Along with collecting these additional processing fees, banks can use their connection to a popular retailer as an incentive to gain new cardholders that have lately been difficult to recruit. According to the Wall Street Journal, most potential customers already have at least one card, younger people prefer debit cards and mail offers are rarely successful.

With these challenges, banks are eager to access the preexisting customer base of "creditworthy customers loyal to a store, airline or hotel." Card issuers compete with one another for these co-branding partnerships, and merchants are taking advantage of this. While retailers in the past generally used to stay with the same bank, a number of high-profile companies are now reassessing their available options and changing banks.

In their current position of power, merchants can negotiate favorable deals with banks, including lower processing fees. In some cases, retailers even receive a portion of the banks' card-based revenue. Banks, on the other hand, are seeing lower profit margins even when they do manage to land a coveted co-branding deal. While Reuters reports that banks are unlikely to see an improvement in this market any time soon, merchants are certainly enjoying the benefits of co-branded cards.

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