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By David Henry
NEW YORK, Feb 13 (Reuters) - U.S. banks are finding that"co-branded" credit cards they offer with retailers, airlines,hotels and other consumer companies are increasingly a lousybusiness, one not likely to get better soon, industry executivessaid.
Stiff competition is resulting in margins that are so lowthey are barely there, analysts said. On Wednesday, AmericanExpress Co said it would stop offering a co-brandedcredit card with Costco when its contract with theretailer ends in March 2016. It cited greater competition.
These products are big business for companies such as American Express - nearly a third of the company's purchasevolume is on co-branded cards. In recent years, banks includingCapital One Financial Corp and Wells Fargo & Co have increased their offerings of these cards, and Citigroup and JPMorgan Chase & Co have also sought thesedeals.
Retailers are cashing in. Historically, companies rarelyswitched from one bank to another. But in the last year severalbig retailers have done so, including Midwest department storeDillard's Inc, which in April switched from what was then a unitof General Electric Co to Wells Fargo & Co.Privately held BJ's Wholesale Club moved its co-branded cardsfrom Barclays to Alliance Data Systems Corp.
One bank official said competition for co-branded cards isheating up but is not necessarily worrisome. "Things haven'tgone crazy yet," the official said.
The official noted that banks that issue Visa or Mastercardcredit cards may have more opportunities to generate revenuethan American Express does, allowing them to share more moneywith Costco. For example, card issuers collect fees whenever aconsumer uses plastic to pay for something. Because Visa andMastercard are accepted at more merchants than American Express,a conventional bank might be able to generate more revenue witha co-branded Costco credit card than American Express can.
But it is unclear how much more revenue banks can wring fromCostco cards than has American Express. That card issuer'scustomers tend to be wealthier than Visa's or Mastercard's, andtheir higher spending can generate more fees, an AmericanExpress spokeswoman said.
Co-branded cards offer benefits to retailers and banksalike. Customers who, for example, shop often at a departmentstore will spend more there if their credit card gives themdiscounts, allowing a retailer to reward loyal consumers. Thesecustomers will also spend more outside of the store than theymight on a regular card, in an effort to earn more discounts.That higher spending translates into higher revenue for banksfor processing transactions.
With greater competition among banks for this business, moreand more of the fees from consumer spending are going toretailers, analysts said. Retailers are increasingly alsosharing profits from loans with banks, said Credit Suisseresearch analyst Moshe Orenbuch in a note on Friday, which couldresult in lower profits for issuers. Sharing of profitshistorically has not been common with co-branded cards.
"At some point, the competition here should ease," saidMichael Taiano, a research analyst covering credit cards atbrokerage Burke & Quick Partners. But it is hard to say how longit will take, and that point could be years away, he added. (Reporting by David Henry, additional reporting by PeterRudegeair and Dan Wilchins, Editing by Dan Wilchins and SteveOrlofsky)
