Airlines and hotels seeking to expand their co-branded credit card programs to other countries are faced with regulatory, competitive and cultural challenges that need to be navigated before market entry. These challenges can be so overwhelming that two critical factors for negotiating a successful co-brand overseas are often overlooked:
- Definition of reasonable objectives for what the co-brand program should achieve.
- Grasp of market-specific credit card economics that would impact the commercial terms and structure of a partnership agreement.
Objectives for foreign co-brands should be realistically driven by size of target market and local presence. For example, large U.S.-based airlines and hotels that partner with top U.S. card issuers generally define revenue as their key objective because they can. Issuers aspire to have these co-brands and are willing to pay (within the constraints of the new card legislation and deteriorating card economics) because airlines and hotels deliver a sizable group of loyal, high-spending customers.
These same airlines and hotels arriving in foreign countries will not be greeted with equal enthusiasm by local issuers since they cannot leverage a large customer base or market presence. Issuers will be interested in the co-brand as an elite niche program. For this reason, it is important for the airline or hotel to manage its expectations regarding the creation of a strong revenue stream from a customer base and market presence that will always be more limited than it is at home. A more realistic objective for an overseas co-brand is to fill seats or increase occupancy, even if the program only breaks even. This is best accomplished by partnering with a large, aggressive local issuer that has a broad reach to cross-market the travel services to its entire customer base.
In addition to specifying reasonable objectives for a foreign co-brand, it is crucial to understand how in-market credit card economics will impact the commercial terms and ultimately, achievement of the objectives. An airline or hotel will quickly determine the interchange rate in an overseas credit card market, but will often fail to understand the total picture of how credit card issuers make money, and subsequently, how co-brand agreements are structured in a particular market. For example, there are countries in which the interchange is so low that profit-sharing agreements are market practice. This is characteristic of more developed regions such as Western Europe. On the other hand, in less developed geographies such as Eastern Europe, Latin America and some parts of Asia, certain revenue streams are so rich that they can supplement the interchange rate to make a co-brand quite profitable. If an airline or hotel insists on applying its home country commercial terms and contract structure, both parties may lose out on the opportunity.
This is not to say that international co-brands are not successful. On the contrary, foreign airline co-brands in the U.S. generate significantly more spending per account than co-brands in non-travel sectors. Hotel co-brands overseas are known to boost profitability, if not on a standalone basis, then by driving cardholders to in-country properties.
In sum, an airline or hotel seeking to expand its co-branded credit card program internationally should never assume that the business development objectives and negotiation strategies that it employs at home ought to be applied overseas. Recognition of the differences between being a top player at home and a niche player abroad, and all that these differences entail, will help drive success.
These same airlines and hotels arriving in foreign countries will not be greeted with equal enthusiasm by local issuers since they cannot leverage a large customer base or market presence. Issuers will be interested in the co-brand as an elite niche program. For this reason, it is important for the airline or hotel to manage its expectations regarding the creation of a strong revenue stream from a customer base and market presence that will always be more limited than it is at home. A more realistic objective for an overseas co-brand is to fill seats or increase occupancy, even if the program only breaks even. This is best accomplished by partnering with a large, aggressive local issuer that has a broad reach to cross-market the travel services to its entire customer base.
In addition to specifying reasonable objectives for a foreign co-brand, it is crucial to understand how in-market credit card economics will impact the commercial terms and ultimately, achievement of the objectives. An airline or hotel will quickly determine the interchange rate in an overseas credit card market, but will often fail to understand the total picture of how credit card issuers make money, and subsequently, how co-brand agreements are structured in a particular market. For example, there are countries in which the interchange is so low that profit-sharing agreements are market practice. This is characteristic of more developed regions such as Western Europe. On the other hand, in less developed geographies such as Eastern Europe, Latin America and some parts of Asia, certain revenue streams are so rich that they can supplement the interchange rate to make a co-brand quite profitable. If an airline or hotel insists on applying its home country commercial terms and contract structure, both parties may lose out on the opportunity.
This is not to say that international co-brands are not successful. On the contrary, foreign airline co-brands in the U.S. generate significantly more spending per account than co-brands in non-travel sectors. Hotel co-brands overseas are known to boost profitability, if not on a standalone basis, then by driving cardholders to in-country properties.
In sum, an airline or hotel seeking to expand its co-branded credit card program internationally should never assume that the business development objectives and negotiation strategies that it employs at home ought to be applied overseas. Recognition of the differences between being a top player at home and a niche player abroad, and all that these differences entail, will help drive success.