Monday, October 7

Co-Branded Cards: Balancing Risk, Rewards, and Regulatory Compliance, 2024

Introduction

Co-branded credit cards have emerged as a significant trend in the financial landscape, with banks increasingly partnering with well-known brands to offer exciting rewards, exclusive features, and enticing cashbacks. These cards extend beyond traditional segments like fuel and travel, now encompassing areas such as food, movies, fashion, and more. As the popularity of co-branded credit cards soars, banks face critical questions: How profitable is this business? What should they do amidst regulatory scrutiny? And most importantly, how can they ensure compliance while choosing the right partners?


What Are Co-Branded Credit Cards?

A co-branded credit card is a hybrid card issued through a collaboration between a credit card company and a specific brand. These cards reward users with exclusive cashback, points, discounts, and benefits related to their favorite brand. Typically, a financial institution (such as a bank, credit union, or fintech company) partners with another organization or brand to create these cards. Currently, there are approximately 70 variants of co-branded cards in the market, accounting for 10-12% of the total credit cards in circulation1.


Why Co-Branded Cards Matter

  1. Incremental Customer Segments: Co-branded credit cards open up new customer segments for credit card companies. By collaborating with brands that have a different customer base, banks can diversify their portfolios.
  2. Engaged Customers: Co-brands often have high affinity with partner brands, resulting in more engaged cardholders. Activation rates improve, and customers find value in using these cards.

The Regulatory Landscape

The Reserve Bank of India (RBI) has closely monitored the growth of credit cards in India. Between 2017 and 2020, the country witnessed a robust compound annual growth rate of 17.2% in credit card issuance. Innovative products, co-branded partnerships, e-commerce tie-ups, cashback programs, and technological advancements contributed to this surge1.


Choosing the Right Co-Brands

Banks must carefully select co-brand partners to ensure success:

  1. Diversification: Co-brands should have a customer franchise distinct from the bank’s core base. This diversification helps banks manage risk and expand their reach.
  2. Affinity: Partner brands with high affinity lead to more active cardholders. Banks benefit from engaged customers who appreciate the brand association.

Audit-Ready Partners

Amidst increased regulatory scrutiny, banks must prioritize compliance. To stay fully compliant, they need co-brand partners who are not only compliant but also “audit ready.” This means partners who maintain meticulous records, adhere to regulations, and are prepared for audits. By choosing such partners, banks safeguard themselves from regulatory challenges and ensure a smooth co-branded card business.


Conclusion

Co-branded credit cards continue to shape the payments landscape, offering unique benefits to consumers and strategic advantages to banks. As the industry evolves, banks must strike a balance between innovation, customer engagement, and regulatory compliance. By partnering with audit-ready brands, they can navigate the complexities and build a successful co-branded card ecosystem.


Disclaimer: The information provided in this article is based on industry insights and publicly available data. Readers are encouraged to consult official sources for specific guidelines and regulations.


Read More on: Co-branded Credit Cards: Amidst regulatory scrutiny, banks look for ‘audit ready’ partners for co-branded cards biz

Also Read: Axis Bank Credit Card Fraud: 5 Actions to Take Immediately


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