New Merchant practices threaten Co-Brand Card Rewards


Why customer loyalty is best managed on an enterprise basis

Co-brand credit cards are central to many customer loyalty offerings. The product was introduced first by the airlines and quickly became a popular tool among hotels and retailers to achieve multiple objectives within a loyalty marketing strategy. Credit cards offer convenience for consumers by allowing them to complete a purchase without having to carry copious amounts of cash. Because of the inherent economics of the cards, they can also serve as an accelerator for earning in a loyalty program.

The benefits are attractive to consumers, and the popularity of co-brand cards is unquestioned. But there’s one big caveat to remember. Carrying a revolving balance on the card quickly wipes out all the loyalty program benefits. The US Federal Reserve reported that as of November 2023, the average annual percentage rate (APR) for credit cards was 22.75%. That number will offset the value of points earned, whether they are double, triple, or quadruple.

That’s some “bad math” hiding in plain sight for consumers, but it has not deterred people from eagerly signing up for co-brand reward cards from their favorite retailer or airline.

Now, there’s a potentially bigger threat to payment-based loyalty programs, and it’s one that is more likely to trigger consumer backlash. There are several reports citing the growth in credit card surcharges being imposed by merchants, and estimates say that anywhere from 5 – 23% of merchants in the US are now charging an extra fee to customers who pay using a credit card. Discounts for settling the tab at restaurants, coffee shops, and other retailers with cash are now on the menu as merchants search for ways to manage and reduce rising credit card transaction fees.

Like the story of the frog being cooked to his demise in a pot where the temperature rose slowly enough to escape his attention, merchants are gradually introducing these fees through the cooperation of their point-of-sale providers who enable a mysterious, often unidentified, “surcharge” added to a restaurant or retail invoice. The charges average three percent, and if you have the courage to ask your server, they will tell you that it is a credit card surcharge. According to this Visa guideline, surcharges are legal but are suggested to be applied with caution so as not to impact customer satisfaction.

Clever business owners are attempting to rivet consumer attention on the “discount for cash” rather than a “payment card surcharge.” Most include the surcharge by default and add a message on the receipt saying “if you choose to pay by card, the discount will be removed.”

With many loyalty programs offering a 1-2 percent effective rebate, the offer of a three percent “discount” for paying with cash is suddenly a competitor for a co-brand rewards program. As an example, outdoor retailer L.L. Bean offers a Mastercard product awarding 4% back on purchases at L.L. Bean, 2% at restaurants and gas stations, and 1% for all other purchases. The choice when using that card while dining out is to earn 2% while suffering a 3-4% surcharge.

Savvy consumers can easily do this “loyalty math” and may find higher perceived value in cash discounts, further eroding the perceived value of using rewards cards or the entire category of loyalty programs in the restaurant and other sectors.

Consider these additional factors:

  • Regulations state that credit card surcharges can’t exceed the cost of accepting the card or four percent, whichever is the lower amount. Few merchants pay more than a 4% processing fee, so the surcharge is clearly a “money-maker” rather than simply a cost management tool.
  • Surcharges that we have seen apply to all payment cards, debit or credit. Considering that as of 2024, Debit card processing costs averaged 0.74% or $0.34 per transaction, there should be a tiered system in place to not overly punish Debit card users.

Here are the most important takeaways based on where these new payment card surcharges and loyalty marketing intersect:

  • Loyalty Marketing is all about behavior change. The behavior of people using a credit card for payments has long been established by a majority of US consumers and it is unlikely to change. The surcharges are a clear message to consumers that “we don’t care” about your co-brand card or what value customer you are to our business.
  • Retailers realized long ago that a multi-tender approach to loyalty was the right strategy to grow wallet share with their most valuable customers. The surcharges are an effective dampener to that proven strategy. Suddenly, it does matter how you pay.
  • It is good news that credit card surcharges are not legal in the European Union (EU). The UK passed its own legislation prior to BREXIT, so the ban still applies. US merchants should consider the impact of their new policies as it may invite regulation that will ban the practice entirely as in the EU.

This entire discussion reminds me of the importance of creating a customer-centric strategy at the enterprise level. When one part of the organization is busy building value propositions to create customer loyalty, and another is setting pricing policy and managing card acceptance, the conflict we see in the market today can be the result.

That’s one reason that we recommend establishing a Customer Loyalty Steering committee to manage the entire customer-centric strategy from the top down. Are you there yet?

Editor’s Note: This article was originally written for the membership of the European Loyalty Association.


Leave a Reply

Your email address will not be published. Required fields are marked *