Chase is facing tension between its Sapphire and United cards (JPM, UAL)

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Two of the bank’s flagship credit cards — its ultra-premium Sapphire Reserve card and its suite of United Airlines cobrands — are jockeying for share as Sapphire Reserve begins to cannibalize United’s business, according to a new report from The Wall Street Journal.

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Both product sets are designed for frequent travelers, but Sapphire Reserve’s rewards options offer better points in some categories and more flexibility in redemption, per The WSJ, which could be pushing some customers to ditch their cobrands in favor of the more flexible card.

This is something airline executives are wary of because cards build loyalty with travelers, and miles sales to issuers comprise such a large share of airlines’ revenue.

Here’s what it means: Ultra-premium cards have been a boon to issuers, but they’re expensive — and their popularity over cobrands could exacerbate costs.

Ultra-premium cards come as banks try to use rewards to woo customers. Seventy-nine percent of customers cite rewards as the top reason they lean on their most-used credit card, per TSYS, which has been pushing issuers across the space to invest in hefty rewards offerings to try to draw in customers as credit appetite hits post-recession highs.
But these cards are expensive to an extent that could override the revenue they bring in — and cobrand tension might be making it worse. Rewards spending at top issuers continues to surge: Chase, for example, is a top rewards spender and lost $900 million from "card-related expenses" in Sapphire Reserve’s first calendar year alone. These expenses have led the bank to undergo massive cost-cutting in its card unit, in part by trimming benefits, like price protection and unlimited priority pass access, and reducing startup bonuses. Cobrand tension could exacerbate these challenges, since consumers are shifting all of their spend to some of banks’ most expensive offerings.

The bigger picture: If ultra-premium offerings put relationships with other key partners at risk, the value they bring to issuers could come into question.

Losing cobrands can devastate an issuer’s business. United is a key Chase partner, and their contract extends another six years. But if cobrands continue to be squeezed by their proprietary peers, airlines, hotels, or retailers could seek out other partnerships where they get more bang for their buck. This can severely harm an issuer’s business: As a worst-case scenario, Amex’s sale of the $80 billion Costco portfolio, which represented 8% of its billings, impacted business for years.
Bolstering the value proposition of cobrand cards to customers could help stave off the competition from ultra-premium cards at the same issuer.It isn’t impossible for cobrands and travel-focused ultra-premium offerings to coexist: Amex’s Delta cobrand’s performance is expected to surge rather than shrink, even as the firm’s premium segment expands, per The WSJ. But the partnership includes a full suite of value-added services that likely exceed those offered by other issuers with travel cobrands, and which make them top-ranked airline cards. Other issuers should follow suit, and invest in services that set their cobranded cards apart from ultra-premiums, to create more differentiation and value and limit the potential risk of losing their partnerships down the road.

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