Co-branded Cards in Europe and the US 2006

SUMMARY

Overview

Introduction

Co-branding is an increasingly popular option for both card issuers and merchants across Europe and the US. This report provides an overview of the market, examining how the partnerships work, the potential benefits and costs for both parties and trends. It also provides a detailed review of many programs in the market and concludes with a discussion on the future of co-branding.

Scope

• Introduces and discusses different models of co-branding partnerships, explaining the key motivations for entering into co-branding agreements.
• Examines recent trends in co-branding in Europe and the US.
• Several co-branding arrangements are examined in detail, segmented by the construct of the loyalty proposition.
• Provides Datamonitor's Cards and Payments team's view on the outlook for the co-branding by region.

Report Highlights

Through a co-branding relationship, customer acquisition costs can be as little as 15 per cent of what they would be through direct mail or other means. Issuing banks are also increasingly benefiting from the cross-selling opportunities that stem from these relationships.

Despite the obvious advantages of entering into a co-branding agreement, there are many pitfalls that should be avoided by both parties. From the issuer's perspective these include the risk of losing revenue from its existing customers as they switch to the new program. Both parties face reputational risk in the event of a failed program.

As a result of the success of co-branding partnerships in established areas such as airlines and hotels, issuers are now looking to different sectors to gain customers. These opportunities include web based retailers as well as other retail sectors.

Reasons to Purchase

• Discover what makes for a successful co-branding relationship, and the risks associated with them.
• Compare the product offerings of the most interesting and innovative co-branded products on the market.
• Learn Datamonitor's' Cards and Payments Team's assessment of future opportunities in co-branding in Europe and the US.

TABLE OF CONTENTS

• INTRODUCTION
  • Who is the target reader?
  • Scope of the briefing
  • How to use this briefing
• MARKET CONTEXT
  • Introduction
    • Co-branding was first introduced in the US in the 1980s
  • Co-branding brings together the strength of an issuer and merchant partner
    • Co-branded cards are issued in partnership between an issuer and merchant
    • These partnerships leverage the assets and resources of each player to create a strong value proposition, frequently including a loyalty offering
      • On the product side, the key input from the merchant is loyalty
    • Co-branded card programs are formed through either straight partnerships, self issuance or the conversion of a private label portfolio
      • Straight partnerships are the most common form of co-branding
      • Private label conversions are on the increase
      • Self-issued cards are quite uncommon
  • Co-branding offers significant benefits to both parties
    • Issuers benefit from higher spending levels, access to a customer base, lower acquisition costs, cross-selling opportunities and added value in a competitive market
      • Access to the merchant's customer base is the primary benefit
      • Issuers can leverage the merchant's customer base and distribution network
      • Lower acquisition costs compared to mass marketing is strong motivation
      • Co-branding adds value in a competitive market
      • Higher spending levels relative to other payment cards generates additional revenue
      • Co-branding allows issuers to operate on a greater scale
    • The primary benefits for merchants are additional revenue and sales
      • Co-branding can lead to stronger brand attachment and loyalty from customers
      • A deepened relationship with cardholders increases customer loyalty
      • Customer data can be used for marketing purposes
      • The secondary benefit is revenue sharing
    • The potential costs for both partners are considerable
      • The issuer risks losing its own customers and reputation.
      • The merchant risks losing revenue and reputation
• TRENDS IN CO-BRANDING
  • Due to a combination of competition and the potential benefits, co-branding is growing in importance
    • Intense competition in many markets has forced issuers to look more closely at co-branding partnerships
      • Consumers expect more from their credit cards
    • The proportion of co-branded cards in the market place has grown
      • Co-branded cards are increasing in number relative to the rest of the market in the UK
      • This growth has played a role in the decline of the private label card in this market
    • Co-branding is now prevalent in many merchant sectors, leading issuers to look beyond this "traditional" list
      • The size of new co-branded card schemes has fallen as issuers search for suitable partners
    • Relationships between card issuers and their partners have evolved
      • Merchants are becoming more involved in the distribution of other financial products
• PRODUCT FOCUS
  • Club models
    • Basic Club models are the simplest form of loyalty program
      • UK - The Jeep MasterCard is a typical automotive co-branded payment card
      • France- The Carrefour Carte pass is a typical department store payment card
    • Advanced Club Programs give cardholders a greater range of benefits
      • Germany - The Porsche Card offers cardholders a wide range of benefits
      • Spain - The Champions league Card allows supporters to access exclusive football based offers
  • Points based models
    • Basic points based programs
      • United States - The Toys "R" us Visa card is aimed at young families
      • UK - The Amazon Card aims to generate loyalty in a price competitive market
    • Advanced points programs
      • Canada - The President's Choice MasterCard is an example of a self-issued card
      • UK - The Tesco Clubcard credit card is attached to one of the UK's largest loyalty programs
  • Multi-retailer programs
    • UK - The Nectar American Express Card is part of the most popular multi-retailer scheme in the UK
    • Germany - The Web.de Barclaycard is part of a web-based multi-retailer program
• FUTURE FOCUS
  • The market outlook varies by region
    • Co-branding will provide an opportunity for growth in slow growing markets
      • Co-branding will provide product differentiation
      • Competition for merchant partners is likely to increase
      • Co-branding relationships will continue to evolve
    • Co-branding will allow issuers to increase market share in growing markets
      • Co-branding will only occur when it is profitable
      • In the longer term, growing markets will mature
    • However, co-branding will not be the answer for all issuers and merchants
      • The costs are high
      • For issuers, margins will get tighter
      • For merchants, the value of loyalty programs is contentious
      • Both parties face reputational risk
      • Ultimately, there are other ways for issuers and merchants to achieve their aims
• APPENDIX
  • Research methodology
    • Cards and Payments database
  • Future Readings
  • Cards & Payments Team contact details
  • How to contact experts in your industry
  • List of Tables
    • Table 1: Presidents Choice points awarded by PC Financial Services, 2006
    • Table 2: President's Choice, cinema redemptions, 2006
    • Table 3: Datamonitor's forecast for pay later card numbers across five markets, 2005 - 2010
    • Table 4: The number of co-branded revolving cards in the UK, 2001-2005
    • Table 5: The proportion of co-branded revolving credit cards in the UK, 2001-2005
    • Table 6: The number of co-branded and private label payment cards in the UK, 2001-2005
    • Table 7: Current relevant Datamonitor publications, 2006
    • Table 8: Future relevant Datamonitor publications, 2007
  • List of Figures
    • Figure 1: Defining card partnership models, 2006
    • Figure 2: Combining brand and expertise in a co-branding relationship, 2006
    • Figure 3: The average co-branded card has twice the average annual spend levels, USA 2004
    • Figure 4: Payment cards offering rewards have increased in popularity, USA, 2004-2005
    • Figure 5: The proportion of co-branded cards being issued has grown, USA, 2003 - 2005
    • Figure 6: The proportion of co-branded cards in the market place has more than doubled, UK, 2001 - 2005
    • Figure 7: In the UK, co-branded cards have tripled in number, whilst private label cards have declined, 2001 - 2005
    • Figure 8: The Travelocity credit card rewards consumers for staying loyal to the brand.
    • Figure 9: Datamonitor's classification of co-branded card loyalty programs
    • Figure 10: The Jeep MasterCard, essential statistics, 2006
    • Figure 11: The Carrefour Carte Pass - essential statistics, 2006
    • Figure 12: The Porsche Card - essential statistics, 2006
    • Figure 13: The Champions League Card, essential statistics 2006
    • Figure 14: Toys "R" Us Visa card - essential statistics, 2006
    • Figure 15: Amazon.co.uk MasterCard - essential statistics, 2006
    • Figure 16: President's Choice MasterCard, essential statistics, 2006
    • Figure 17: Tesco Clubcard credit card, essential statistics, 2006
    • Figure 18: Nectar Credit Card, essential statistics 2006
    • Figure 19: Nectar Card holder can redeem their points for a variety of goods online
    • Figure 20: The Web.de Barclaycard, Essential statistics, 2006
    • Figure 21: Datamonitor's core consulting capabilities