In a recent analysis of the Apple Card for a group of credit union issuers, I emphasized the importance of shifting roles in co-branded card relationship. (KEENonPayments members get access to my complete presenation). Historically, the bank issuer took on the underwriting, card issuance, chargesbacks, repayments, and risk management roles while the brand partner handled account acquisition marketing, front line customer service, and payments in store. Brand partners could influence the underwriting by agreeing to less favorable terms for approving lower FICO bands, but generally, roles were clearly delineated between those that are bank functions and those that are brand functions.
The divergence from this model is an important shift in the dynamics of co-brand card issuance. Take a close look at the Apple Card and you'll see that Apple (brand partner) essentially took control of:
- Card Design
- Risk Management
One key catalyst for this relationship is Apple's stated purpose of putting a card in every Apple Wallet. Something that can't be done under traditional underwriting protocols. The second key catalyst is Apple maintaining control over the user experience and establishing its device and its app as the centralizing agent to its users. One can see that these functions push on the borders of a typical co-branded card relationship. This week, Brex/Bank of the West co-branded deal was announced Brex is corporate card designed on a fintech platform and marketed to start-ups. You can learn more about it here.
From the Forbes article we're told..."In a bit of a twist, Bank of the West will rely on Brex and its algorithms to underwrite customers for the new corporate credit card, not the other way around." The key catalyst is to give any start-up access to the card; requiring no credit history or security deposit. Additionally, Brex is going to offer card controls, rewards, expense management, and other features that will be organized in the Brex app. Again, Brex as a centralizing agent to its user.
Therefore, the strategy for both Apple and Brex is to enable as broad a distribution of its card as possible and then provide enough feature functionality to keep the cardholder within its branded solution. In order to overcome the constraints of traditional underwriting, they simply took the issue off the table by finding a bank issuer willing to put aside norms for a potential account windfall. This is not an unreasonable risk and I don't profess to be privy to the liability terms of these relationships, but in order to offer a credit card that makes sense to a very wide market, a necessary step. Once the distribution nut is cracked, controlling the design and delivery of other features, like rewards, come along.
I believe these new co-branded relationships signal a shift in the dynamic between issuer and brand partner, where traditional roles are being upended. These new brand partners are not your average retailer or airline, they have to compete on a entirely different level where market segmentation isn't black and white and the user experience is the competitive advantage. This means bank issuers that want access to these new markets have to re-engineer their approach to underwriting, risk management, and account servicing.
As long as special purpose bank charters are blocked for fintechs in the US, the opportunity exists for banks to leverage their charters and processing capabilities to support new credit, debit, and virtual payment products. Issuers that want in have to be comfortable giving up some level of control and this may be why we're not seeing the usual co-brand issuers show up. In a mature market like the US, where greenfields are elusive, watch for more deals like this coming soon.