Anatomy of a Co-Branded Credit Card
thefinancebuff.com
thefinancebuff.com
In addition to fraud, credit card companies have to contend with the purchasing power of large companies (e.g., the Costco example ditching Amex) and also their own expenses as many people like concierge services and other "perks" that cost money and are becoming more standard on cards for people with higher credit and income.
In practice, it's fairly difficult to offer much of an incentive beyond 2% cash back (which Fidelity Amex and the Capital One Visa Spark Card offer). However; these cards are closer to being loss leaders for their institutions as they want to incentivize you to do your banking with them as well (Fidelity does this fairly well as the cash back must be deposited into a Fidelity account). Charles Schwab was the first to have a 2% cash back card many years ago and they discontinued it, likely because they lost money on it.
Travel-based rewards cards can get away with offering seemingly better incentives because of their margin. Starwood is a perfect example of this as hotels have a high fixed cost base and low variable cost base. The variable cost to stay at a high-end hotel is something like $50-60 per night if the room is vacant. So while Starwood seems to be paying out 2 cents on the dollar (e.g., 10,000 points for a $200 room), they are really only paying out 0.5 cents on the dollar. This is why the Starwood Amex is seemingly the best Credit Card. It's all about the economics of the company that brands it.
These are things that will change over time. 3DSecure is standard in Europe because the EU pushes transaction fees so low that credit card companies need to reduce fraud because they cannot afford it any more.
I find it much more annoying. My New Zealand (.co.nz) bank redirects me to a .co.uk domain with their logo (!!), where it doesn't even prompt me for any additional details, just forwards back to the original merchant.
In theory, a chip and pin solution where the user owns the reader is more secure than a transaction in the store where the vendor owns the reader. but, I guess that's too expensive and inconvenient or something.
If the risk score exceeds a certain threshold then they can then require additional security. While this may seem very weak, in practice a lot of fraud has pretty obvious signatures.
No, they can do a replay attack on this setup when not encrypted
No, card fraud rates are in the 5-20 basis point range (0.05%-0.2%).
https://www.frbservices.org/files/communications/pdf/researc...
Even the riskiest card-not-present/online merchant would rarely hit 1% or they lose their merchant account entirely.
I'd be curious to see what numbers you're looking at.
From talking to some acquiring banks, I gathered that 1%-1.5% was the maximum fraud rate they would tolerate, depending on the value of your account. With fraud rates like that, you will not see volume discounts anytime soon either.
Sounds pretty reasonable.
Both of them are and sound ridiculous. As the above comment illustrates, are pointless because either people have to do the math to understand what the hell you are saying or you have to spell it out.
Not saying anything at all about the content or merit of your post, you, your family, neighbors, cousins, dogs or cats. Just saying this "financial" language is, well, kinda silly.
Some TV news anchors would have said: "five one-hundreds of one percent to two tenths of one percent". Or "half a tenth of one percent".
Nutty.
How did we get from "zero point five percent", which is the literal value, to "one half of one percent", which imposes a cognitive load?
Or, better yet, why "one half of one percent" and not "half a percent"
It's like reading the number "1" as "one-hundredth of one hundred", or "10" as "one tenth of one hundred".
Question: Do they do the same in Europe? I must admit, I've been there tons of times but never paid attention to this (probably because I never watched enough TV while there). Of course, in Europe (and the rest of the world, as far as I know) it's "comma" not "point".
I can understand the use of basis points in some financial circles as a term of trade or convenient insider's unit. I don't understand it when used to communicate with the public. Go out there and ask a random sampling of people what a basis point is. I'll bet very few will say "0.01%", even if they own stocks.
My pet peeve is "quarter of a billion" to try to make the number sound bigger.
Depends on the "total pool" you're drawing from, and whether you're counting money, or transactions. The 5-20 basis points fits if you include, for example, all ATM withdrawals.
You get close to the 1% claimed in the parent if you count just "online card transactions", and count revenue instead of number of transactions.
For online transactions, credit card companies have -0- liability for fraud. 100% of the costs come from the merchant's pockets.
It's really a shame, because they are the ones with the broad access to data that would enable tools to reduce it. Of course, since there's no incentive on their end, nothing is provided.
I get that you're referencing the cash part of the transaction but the card companies still have to maintain code that detects fraud early, hire staff to support customers and investigate fraudulent transactions. That's not 0 cost to them.
In addition to sticking me with the bag for every online fraudulent transaction, they also levy an additional fee, which I assume offsets some or all of that cost. In fact, if it was a low-end purchase, they may make more on the chargeback fee than the original purchase.
I see no evidence of "code that detects fraud early", at least for online transactions. Any merchants ever get a call from a cc company, or issuing bank saying "hey, you know that transaction we approved a few days ago? you might not want to ship that." ? Nope.
They definitely do do this. But when they see a likely-fraudulent transaction, they call the cardholder, not the merchant. I have received calls of this type.
Right. Which means the item gets shipped. Because...yep.
Edits: a) In the real world, the bank does not catch these things in between auth/capture. b) 3rd party companies are limited in what they can do. They don't have the full picture.
But again the banks are not in business of protecting the merchant. There are companies that are in that business however and as a merchant you have an option to use their services.
EDIT: some of these providers are either directly operated by or have very tight relations with cc networks so they do have access to enormous amount of data which they use to make their risk management decisions.
EDIT #2: at a risk of sounding like an ad - one example would be Cybersource who is owned by Visa.
Helps a little, but they are, of course, still dealing with a tiny fraction of the available data out there, and the cost is pretty high.
For small to medium sized players you're much better off just doing what you can with AVS, CVV2 match codes, known freight-forwarder addresses, ip geolocation, etc. That's all free other than a bit of dev time.
It's just a shame that the kind of improvements that could be made with access to data only the CC companies and issuing banks have aren't ever going to happen.
Who is that? There's a couple operated by credit reporting services, which is not the same thing at all.
But one other thing. Did you ever notice that there is no feedback loop where you can inform the issuer or bank that you have discovered a fraudulent charge? For what we do it's easy to spot a fraud charge. We void (or credit it) and move on (still a big pain of course). But the thing is there is no way to alert the credit card company (manually in some way or even by email) that we have figured out a card is stolen. Otoh, as a card user I've received calls from my bank from time to time when a particular purchase doesn't fit a pattern (and that pattern has never caught any fraud, only purchases that I have made).
Great point. I end up just refunding the ones I find. In many cases I can tell 100% it's fraud, but there's nobody to tell.
Which credit card companies are you referring to? If you're talking about issuing banks then liability for the fraudulent transaction is shifted towards the bank vs the merchant in some cases including card not present txs.
Edit:
a) In the US, currently, 3DS would reduce your conversion to the point it would useless if mandatory. If optional, use would be abysmally low.
b) "payment facilitator entity handling fraud liability on merchant's behalf" Never heard of this. Certainly, Stripe and their ilk don't do this.
They also de-value the points/miles on a regular basis and often expire them as well.
The company's koolaid anecdotes included stories about people who would literally default on their mortgages before failing to make the minimums on their Dale Earnhardt card, and who were consistently indifferent to interest rates or annual fees relative to competing, non-affiliate cards they might have.
They use these non-arbitration clauses, and they are always right.
What do the clauses look like? What does it mean that they are "always right"? What is the consequence of this rightness?
NYTimes is doing some great reporting on the topic - start here: http://www.nytimes.com/2015/11/01/business/dealbook/arbitrat...
I've heard that called a "arbitration clause", but never a "non-arbitration clause", as the person I was responding to put it.
Are there any Credit Card companies, for that matter, are there any large companies at all without those clauses?
Telling people to avoid those companies is pointless - they can't.
This needs to be a matter for state law or the entire class action concept will no longer exist.
An idea I had: Mandatory arbitration clauses are null and void unless the contract was individually negotiated between the parties. Burden of proof on the party demanding mandatory arbitration. Automatic defenses: A lawyer was involved by both parties, or the contact is a singleton purpose written for that negotiation and not used with anyone else.
Curious what others think of this idea.
http://www.bloomberg.com/news/articles/2015-04-17/costco-see...
e.g. I've got an assortment of cards on my - including some snazzy ones. Yet given a choice I use a british airways amex because there is a direct quantifiable link to something I can use (points for flights). Sure I know on a logical level those points are worth uhm not much but still the effect is strong.
>It means that Costco will also accept other Visa cards.
They didn't before?
Much rarer now that Costco is switching to Visa.
Since my dad mostly has high volume purchase (and only one or two a day) the 1.5% can mean a lot. He also says doing business with AMEX is hard (if there was an error) because he gets ridiculously few purchase and they don't consider him valuable enough. And everybody who has a AMEX CC in Europa has a Visa or master card as well.
That does seem to be true mostly. Shop near has the opposite though - Amex card use is free but for Visa & Mastercard there is a surcharge. Thought that was a bit weird.
Are those "worth" the $10,000-$20,000 fare difference? Surely not, but to me they're worth more than the ~$2,000 I'd get from the best cash back cards.
These partner cards really are marketing genius, and a great way to capture more attention, dollars & loyalty from your best customers.
Any suggestions?
It can vary per card type (pre-paid, debit or credit), card level (basic or signature/elite, etc.), type of transaction (CNP or present), Merchant type (supermarket, airlines, etc.) and some other rules, depending on the scheme and the region (US, Europe, etc.).
For instance the Interchange (to be paid to the Issuer) when a US issued MasterCard Debit Card is used in Gas Station is 0.70% US$ + 0.17 with a cap of US$ 0.95, but when used in a Restaurant is 1.19% + US$ 0.10 without caps.
Visa: https://usa.visa.com/dam/VCOM/download/about-visa/visa-rules...
MasterCard: https://www.mastercard.us/content/dam/mccom/en-us/documents/...
What can vary from issuer to issuer is the processor/network costs.
The thought is, create a reward card specifically for high-value/vips that has the best rewards/cashback program on the market. Currently the best card is the SPG card from Amex which gives points that can be transferred to a plethora of partners and are among the most valuable points of all cards (around 2.9cents per point). What surprising is the cards currently for high-worth users have terrible rewards programs, ie the amex black card.
If you created a new card, the hope would be that you could offer more rewards to transfer partners by upselling 'these are vips' you should compete to get them.
The challenge is in figuring out how to make it all work. Credit cards make money 2 ways as far as I can tell- The 2.9% + 30cents on every transaction, as well as the interest paid on their bill.
So you should ideally have at least 3% of every transaction to give back to the user in rewards while living off of the 30 cents per transaction. Hopefully the interest paid on debts breaks even with the defaults.
There's a big assumption built into your idea here.. what if the high-worth people don't care about the rewards programs? I assume (no data) that their net worth is high enough that a few percent on the little (in their mind) on their card isn't worth shopping around or even thinking about it.
> Hopefully the interest paid on debts breaks even with the defaults.
Well, fundamentally it must do otherwise the business model for CC companies is pot. Actually, the core for any CC is, of course, the data scientists who build the risk models to work out that red line.
> So you should ideally have at least 3% of every transaction to give back to the user in rewards while living off of the 30 cents per transaction.
From that you have to pay the bills, and of course MC/VISA take a cut too. Don't get me wrong; it's totally fine to work with that 3% but...
a) it's a fixed part of any transaction, which is a pretty dependable to get in your coffers (as opposed to, some money each month for your customer which you might not get depending on their circumstances)
b) it would be very easy for this fee to get regulated (as in the EU) and thus kill your business model. Lots of risk there.
Not to put you off. I think there is definitely innovation worth doing in that space.
> I have been contemplating creating a new credit card the last few years.
Takes an insane amount of money (because; you have to front a lot of "cash" to your customers in the form of credit, obviously). I'd be super interested if you do this because (having recently started working at a CC company) there is a lot of innovation to do in this space!
Thank goodness. I only hope we can do this in the US. The amount of time, money, and human creativity that goes into complicating what should be a simple business--transferring money--is absurd.
Were it in my power, I'd also make consumer loans and money transfer two entirely separate businesses. If somebody wants to buy stuff without hauling around cash, great. And if somebody wants to consciously go out and get a consumer loan, also great. But conflating these functions takes advantage of cognitive biases to trap people in debt.
There's a reason that the highest value cards don't generally offer more than around ~2.3%. You do not receive 2.9% on every transaction, and you need some of that margin to cover your expenses.
It seems like your business model is somehow trying to market your customers to transfer partners in exchange for better rewards, but that's just not how it works. The merchants are generally the ones in the driver's seat. As the article points out, they have relationships with customers and they're the ones actually offering compelling high-end rewards. All you are is a random other issuer—you have to compete to get them, not the other way around. (AmEx just lost that competition to Citi.)
If you're targeting higher end purchases, the 30 cents is meaningless.
Besides, people who want to maximize rewards will specialize. BCP for 6% back on groceries, Sallie Mae for 5% on Amazon and Gas (discontinued), Prestige for 5% back on travel, Ink for 5% back on utilities, Discover and Freedom for their rotating 5% categories and great online cashback, and finally something like Citi DoubleCash for 2% on everything else. A single general-purpose card can't compete with a stable of specialists. And if somebody lacks the spending to support ROI on several cards including some with annual fees, that person is not the lucrative VIP you're after.
Also, I simply can't figure out how amex makes money on the bcp. I hit the full $6k of groceries and just use it for groceries and gas.
Edit: also, anyone using a credit card should have autopayments set up. Unless you're extremely organized and have a good reason to do otherwise.
Or just have them send emails for new statements, and don't archive/delete the email until you've looked through the transactions.
Setting up autopayments to pay the minimum on the day before it's due is definitely worth doing just in case anything slips your mind.
I imagine that brand loyalty will be worth it for Amex in the long run, but i'm certainly coming out ahead for now.
There's the flaw in this idea.
The merchant's bank collects 2.9% + 30 cents (in this example). A portion of this is transferred to the issuing bank.
The amount transferred is called the Interchange Fee, and it is significantly lower than that amount. There are different fees depending on the card type, credit/debit, rewards, business cards, etc.. and they are set by Visa/MasterCard/etc. Discover and Amex have more latitude here, since they are both the issuing and acquiring bank... but if they raise fees too high, merchants will just stop accepting their cards.
Interest from the card balance is kept by the issuing bank.
So you see, revenue from credit cards is divided between multiple parties...
The money for rewards comes from interest on debt. Capital One made ~10x more on debt than interchange for instance.
On the other hand, if you're spending enough money to get a black card, futzing with points is probably unproductive.
(Source: http://www.travelcodex.com/2016/02/how-much-manufactured-spe...)
Edit: the comments talk about it more and it looks like those people were probably using multiple cards spread across multiple family members, or also using smurfs.
Learn how to avoid flags.
The cards by safety nets are to control where it can be used, I thought.
That was a major breakdown in Amex's risk management.
Far be it from me to criticize anyone's hobby. With good credit, it does make sense to have a few credit cards that provide incentives lined up with your needs and spending patterns--especially if you do a lot work-related spend. But beyond that, I can't personally be bothered.
The benefit to the co-brander is "many folds"? I'm not familiar with this term and nothing in the dictionary made sense. Is this industry lingo or the author's inability to bother editing and reviewing the piece?
(It still doesn't read very sensibly, but it isn't a huge leap from many folds->many fold->there are several)
I believe the author speaks English as a second language. Googling his name brings up a page describing him as an immigrant and his writing supports this theory in certain places.
I suspect you could have pointed the mistake out in a more tactful way. He knew what he wanted to say and he used two valid words, he just didn't know to make it a compound word and this would be easy to miss when self editing.
Most of our spending is on cards that earn cash (or cash-redeemable) rewards but I love to take advantage of big bonuses on co-branded cards. We also earned 250k AA miles, 100k from a bonus on a new card, and the rest from US Airways cards that Barclays was giving away to burn thru their cache of prepaid miles ahead of the AA merger. I cancel the card the following year before the annual fee hits -- or not, because often it's waived for a second year. Don't get crazy and it doesn't impact your credit.