The co-branded card approval stalemate awaits a breakthrough: JPMorgan Chase (JPM.US) reportedly plans a "second review" scheme, intending to introduce private credit to handle rejected applications.

According to Zhitong Finance APP, JPMorgan Chase (JPM.US) has recently developed a plan aiming to resolve long-standing conflicts with co-branded credit card partners such as airlines and retailers. If this plan is implemented, private credit will gain a new opportunity to enter the consumer credit sector.

It is reported that co-branded credit cards used daily by millions of consumers have long been a focal point of the love-hate relationship between large merchants and banks. Airlines, department stores, and various merchants rely on co-branded card programs to attract new customers, increase user stickiness, and boost revenue; while banks bear most of the risk of cardholders defaulting on their credit cards.

However, there is often tension between the two sides: merchants hope banks will relax standards and approve more applicants who do not meet the bank’s credit review and other requirements.

According to sources, JPMorgan Chase, the largest credit card issuer in the US by transaction volume, recently began exploring whether it could bring in other funding channels to assume some of the credit card applications rejected by the bank. It is reported that JPMorgan Chase has reached out to more than ten institutions to inquire whether they are willing to participate in the so-called "second-look" business—where these institutions take on the credit risk of applications rejected by JPMorgan.

Such institutions usually build the credit card program behind the scenes and are not part of large banking systems. They are responsible for customer service and raising funds, enabling credit card issuance to proceed.

Some of these institutions have already approached private credit firms to gauge their willingness to fund this batch of credit from JPMorgan. Private credit institutions raise funds from investors and lend externally, mainly targeting borrowers below investment grade; however, in recent years, they have increasingly moved into the consumer credit market.

Sources indicate that executives from lending institutions such as Blue Owl (OWL.US), Blackstone (BX.US), KKR (KKR.US), and Sixth Street (TSLX.US) have been approached regarding JPMorgan’s plan. Sources state that relevant documents have already been shared with at least some of these institutions.

Should cooperation with JPMorgan Chase materialize, it would mean further mainstream financial market recognition for private credit. JPMorgan holds several heavyweight co-branded card projects, including United Airlines (UAL.US), Amazon (AMZN.US), Marriott (MAR.US), and the Apple (AAPL.US) credit card, which JPMorgan is set to take over.

Multiple sources reveal that the potential deal has already sparked heated discussions in the private credit industry.

However, insiders caution that JPMorgan’s idea is still at an early stage, and even if advanced, implementation would take considerable time; the bank may ultimately abandon this plan. A JPMorgan spokesperson stated that the bank currently has no related plans to launch a "second-look" program.

It is understood that the kind of tension JPMorgan is attempting to alleviate is common throughout the credit card industry.

Walmart (WMT.US) ended its nearly 20-year partnership with Synchrony Financial (SYF.US) in 2018, partly due to approval rate issues—after an unstable stint with Capital One (COF.US), Walmart returned to Synchrony. Sometimes, banks choose to compromise by loosening approval standards, but this can create other issues: Apple once asked Goldman Sachs (GS.US) to approve as many Apple credit card applicants as possible, resulting in high subprime loan exposure for the card. This eventually ended the partnership, with the project subsequently taken over by JPMorgan.

Some sources say JPMorgan’s rejection rate has long been a source of tension with its key partner United Airlines, one of JPMorgan’s largest co-branded card projects. A person familiar with the United project stated that both parties have worked to address this issue.

Sources indicate that JPMorgan is interested in discussing United Airlines credit card underwriting cooperation. A person familiar with the project said United is aware of JPMorgan’s consideration of such a plan and views it as a positive sign.

Sources further explained that United had previously expressed the desire to find another lending institution to approve applicants rejected by JPMorgan. The vast majority of co-branded card agreements are exclusive, meaning that unless the existing banking partner agrees, the partner cannot introduce another bank to issue credit cards.

The specific operational method of JPMorgan’s potential system remains unclear, including whether consumers would know they had entered a private credit channel, which lender’s name would appear on the physical card, and whether the private credit would hold these loans or sell them after securitization—these details have yet to be determined.

Over the past decade, the private credit industry has grown by absorbing loans as banks pulled back following the 2008-09 financial crisis. As private credit has expanded, it has become an important funding source for fintech lending platforms with no balance sheet and a constant need for capital, supporting financial activities from credit cards, “buy now pay later” loans, to Harley-Davidson motorcycle financing at dealerships.

Private credit has also purchased outstanding consumer debt from banks that do not want such debt on their books.

For banks with massive balance sheets like JPMorgan, private credit firms can provide an opportunity to expand credit coverage by approving applicants with lower credit scores or other traits that would normally result in rejection. About 85% of JPMorgan’s credit card balances are from consumers with FICO scores (ranging from 300 to 850) of at least 660.

Private credit can also help prevent competitor banks from siphoning off JPMorgan’s largest partnership projects. Most private credit companies operate in the background, do not interact with consumers, nor do they put their brand on credit cards. However, co-branded card partnerships involving multiple banks can become highly competitive, with one bank trying to lure away another’s customers.

"Second-look" transactions typically result in only a small number of credit cards being approved, partly because many applicants have blemished or no credit history at all. If JPMorgan’s project materializes and involves private credit, the credit cards issued through this second-look process would represent only a very small portion of the approvals the bank itself grants.