Driven by rewards, co-branded credit cards charge ahead

A version of this article first appeared in the July BAI Executive Report: Modernizing payment methods. Find more insight within the issue on topics including consumer payment preferences, FedNow and RTP, check fraud, ISO 20022 compliance and more.

U.S. Bank, long marketing an image of strength, stability and heartland values, might seem like an improbable pairing with Harley-Davidson, whose motorcycle-riding customers like to cultivate a rugged, rebellious image.

But the U.S. Bank–issued Harley-Davidson Signature Visa Credit Card has been a winning combination for both the nation’s fifth-largest bank and the maker of America’s most iconic motorcycle.

“There are benefits for both sides,” says John Owens, general manager of U.S. Bank’s partner credit card group. “From an economic standpoint, we both share in the profits of the co-branded program.”

Users of the Harley-Davidson Signature Visa Card are incentivized to buy equipment and accessories at Harley-Davidson dealerships because they earn accelerated rewards when they charge on the co-branded card there. Regardless of where consumers use the rewards card, accrued points can be redeemed at Harley-Davidson dealerships.

Importantly for Minneapolis-based U.S. Bank, “We generally have very high levels of access to make offers to our partners’ customers,” Owens says.

“It’s an opportunity for U.S. Bank to promote our brand and our servicing capabilities to co-branded customers,” he says.

Such an opportunity has become even more valuable as banks and credit unions take stock of shifting point-of-purchase behaviors. Consumers still tap credit for a large portion of their purchases. Credit cards will remain the most popular retail payment method in dollars spent in the U.S. through at least next year, with total credit card transaction value reaching $3.8 trillion in 2025, according to data from marketing consultancy EMarketer.

And now, more consumers every day are literally “tapping” when they check out, sometimes even simply walking through sensors to tally purchases, like at select “walk-out” Amazon Fresh markets. Digital wallets, typically stored on smartphones, house credit card and debit card information, as well as competing payments apps, which require little to no contact with store devices. And ever-popular online purchases often pull from stored card information.

According to the March 2024 Banking and Payments Intelligence Report by data analyst J.D. Power, the percentage of consumers who say they used a digital wallet in the past 90 days rose 12% in the past year.

And there’s another challenge for banks. Separate research from J.D. Power reveals that when asked about the capabilities of digital wallets, consumers are more likely to connect the experience to the technology backbone, not the financial services provider.

This means that card issuers and partner banks and credit unions must be more deliberate than ever about brand awareness, loyalty programs and other value-added approaches when reaching customers.

After all, another benefit to most co-branded partnerships is that they provide banks with insights into consumer spending patterns thanks to valuable transaction data gleaned from card users.

Co-branding for all sizes

U.S. Bank also offers co-branded credit cards with leading companies, such as Kroger, Korean Airlines, State Farm Insurance and Fidelity Investments. Rewards earned through its co-branded credit cards are typically limited to one brand, although the card can be used for general purposes anywhere Visa is accepted.

Co-branded credit card deals can be complicated, Owens says, because they involve four separate parties: the card-issuing bank; the bank’s co-branded partner, such as an airline or a retailer; one of the major credit card networks like Visa, Mastercard or American Express; and the consumer.

But U.S. Bank, like the other major institutions including Chase and Citi, has the infrastructure and platform to efficiently service the cards of its branding partners. Thanks to its well-established expertise with credit cards and its economies of scale, the benefits of a co-branded program far outweigh the operational costs, according to Owens. Smaller financial services organizations typically can’t afford such a luxury on their own.

That’s not to say community banks and credit unions can’t get in the credit card game. More than 1,200 of them, in all 50 states, issue credit cards thanks to their partnership with U.S. Bank, which owns and operates Elan Financial Services. It provides turnkey credit card services for 1 in 10 of the financial services organizations in the U.S.

However, most of the customers of those financial services organizations have no idea that U.S. Bank serves as the creditor and issuer of their credit card because it reflects the logo and other branding elements of the individual institution. Elan’s name appears in small print on the back of the card. Owens likens the Elan cards to a private label/white label version of the U.S. Bank credit card.

In addition to credit cards issued with co-branded partners and through its Elan partners, U.S. Bank also offers its own credit card, the U.S. Bank Altitude Go Visa Signature Card, and a full suite of consumer and business credit cards.

“New account growth remains strong,” Owens says, adding that it is being driven by the popularity of co-branded rewards cards.

And that optimism holds even in a world of expanding contactless payments.

Paze: The next phase for bank credit cards

Sean Gelles, senior director of payments intelligence for J.D. Power, believes the fears of total replacement of physical cards are overblown, certainly for co-branded cards that offer rewards such as miles on airlines or cash back on purchases.

First, credit cards are being used in digital wallets, Gelles says. Rewards credit cards, in particular, are insulated from the demand falloff, he believes.

“To a large extent, those cards are being driven by rewards. People are using those cards because they want to accumulate rewards. That is the main value proposition,” he says. “Even if the card is in the digital wallet, you still have that relationship with the brand. The rewards act as a sort of brand protector.”

An emerging payments trend J.D. Power is monitoring is how retail banks will reinforce their brand relevance “by reinserting themselves into credit card transactions that are increasingly occurring in digital wallets,” Gelles says.

He points to Paze, a digital wallet from Early Warning Services that will be offered by banks and credit unions instead of a third-party tech company like Apple (Apple Pay) or Google (Google Pay). The digital wallet is rolling out this summer. Early Warning, a consortium of the nation’s largest banks—including U.S. Bank—introduced Zelle, a popular peer-to-peer payment system, in 2017.

Paze will allow users to access all eligible credit or debit cards in one place when making online purchases. Consumers can use Paze to manage their wallet card directly through their bank’s mobile app or website. “Imagine, instead of using Apple Pay, you are now accessing your digital wallet through a banking app,” Gelles says.

And banks may do well to remember how much consumers attach payment ease to the technology itself as banks consider how they shape messaging, rewards programs and other sweeteners for consumers. The technology may be part of the appeal.

To that end, Gelles is watching two other emerging payments trends. The first is biometric payments, a point-of-sale technology that authenticates a transaction based on a physical characteristic of the user, such as a fingerprint or facial recognition. He describes that payment trend as “very nascent.”

The other is what’s called “fast payments,” which Gelles describes as disbursements from government organizations and private employers that are transferred instantly to a consumer’s bank account.

Speed, convenience, efficiency and security will be the defining characteristics of the dynamic and competitive consumer payments space in the immediate future, Gelles says.

Edmund Lawler is a contributing writer for BAI.