Co-branded Credit Cards – Understanding the Regulatory Nuances

The credit card business in India has been growing rapidly with every passing year. The reasons for this growth are:

• Banks’ aggressive credit card issuing policies due to their vast customer data
• Increasing public financial awareness
• Building strong bases of customer creditworthiness
• Increase in consumer spending
• Growing acceptance of credit in society to keep up with the supply in the market

These factors have led to the availability of a new credit product in the credit market – a co-branded card. Co-branded credit cards are credit cards issued to customers by a merchant in partnership with a bank or NBFC.

Under a co-branded credit card arrangement, a company—like an airline, hotel, or retail store—will partner with a bank to offer credit cards bearing their name or loyalty program. In turn, the bank will offer those credit cards to individuals, with the additional perk of earning rewards every time they use the card. A co-branded credit card displays the name of both the issuer bank and the co-branding company. 

Co-branded credit cards are similar to common credit cards. They offer revolving short-term credit facilities in association with the card issuer. Revolving credit allows cardholders to withdraw and repay money multiple times.

Amazon Pay ICICI Credit Card and Flipkart Axis Bank Credit Card are the most popular co-branded credit cards. Co-branded credit cards offer several benefits to merchants, like increasing sales, attracting new customers, and delivering value to their most loyal customers. At the same time, banks increase their customer base through such partnerships. 

However, it is important to regulate co-branded credit cards. Unclear credit underwriting policy because of market competition, constantly increasing credit limits, and credit high-risk credit portfolios can significantly deteriorate credit standards and pose a threat to the financial market. Therefore, the Reserve Bank of India (RBI) has imposed mandatory guidelines on banks and entities that issue credit cards. 

The issue of credit cards is governed through ‘Master Direction – Credit Card and Debit Card – Issuance and Conduct Directions, 2022. These Directions guide banks/NBFCs on their credit card, debit card, and co-branded card operations and the systems and helps manage the risks in the credit card business. Any company, including a non-deposit-taking company (a company that cannot accept deposits from the public) intending to issue co-branded credit cards, requires a Certificate of Registration and prior permission from RBI to enter into this business. Such companies must have a minimum net owned fund of Rs 100 crore to obtain a Certificate of Registration; They will also have to follow such terms and conditions as the Reserve Bank may specify from time to time.

Since banks have an authorized payment system, they do not need RBI’s permission to issue credit cards to customers. However, NBFCs registered with RBI cannot issue credit/debit, charge cards, or similar products virtually or physically without RBI’s permission, as they pose a greater risk of default in the payment systems. 

RBI Guidelines on Co-branded Credit Cards:

Issue of Co-branded Cards

• Banks do not need prior approval from RBI to issue co-branded debit cards/prepaid cards/credit cards without RBI’s permission. Similarly, card issuers can also issue co-branded credit cards without RBI’s prior approval. However, Urban Cooperative Banks (UCBs) and the likes of Small Finance Banks (SFB)  can issue debit/credit cards in tie-up with other non-bank entities. 
• The co-branded credit/debit card should clearly mention that the card has been issued under a co-branding arrangement. The co-branding partner cannot advertise or market the co-branded card as its own product. The branding of the card issuer should be prominent on the co-branded card.

Board Approved Policy

Card-issuers will enter into co-branding arrangements per the policy approved by their Boards. The policy must address issues related to various risks, including reputation risks associated with such arrangements. The policy must also contain measures to reduce risks. Card issuers must also display information on its website.

Due Diligence

Card issuers must do due diligence regarding the co-branding partner entity they want to enter in. It is to protect themselves against reputation risk. Suppose the co-branding partner is a financial entity. Card issuers must ensure that the co-branding partner has obtained the necessary approvals from its regulator to enter into the co-branding arrangement.

Outsourcing

Card issuers will be liable for the acts of the co-branding partner, including delay or non-delivery of the co-branded card to the cardholder. They must adhere to guidelines on ‘Managing Risks and Code of Conduct in Outsourcing of Financial Services by Banks,’ as amended from time to time. Card Issuers will also have to ensure that cardholders have timely access to cashback, discounts, and other offers advertised by a co-branding partner. 

Arrangement Between Banks and NBFCs to Issue Co-branded Credit Cards

Guidelines on the issue of Co-Branded Credit Cards contained in the respective Master Directions applicable to NBFCs, as amended from time to time, shall apply to NBFCs that want to enter into a co-branding arrangement to issue.

Role of Co-branding Partner Entity

• Once the co-branded card is issued to the customer, the co-branding partner will not be involved in any process related to the card. However, they will receive any complaints related to the co-branded card from the cardholders. The co-branding partner will also not have information about transactions through a co-branded credit card. 
• Unlike the previous guidelines issued in 2015, the role of a co-branding partner in the current guidelines is limited. The co-branding partner entity will only be responsible for the marketing/distribution of the co-branded cards. They will also provide access to the cardholder to the goods/services offered. 

Would the role of Co-brand partners diminish to just a marketing/ distributing company or will we see an additional layer of TSPs emerging to manage the tech integration, customer experiencing for the Banks issuing the co-brands. A space to watch!