Merchant-Funded vs Bank-Funded Offers: Who Should Pay?
Funding decides whether an offer programme scales or stalls. A plain comparison of merchant-funded, bank-funded and co-funded offers, and when each makes sense.
Every card-linked offer has a cost: the discount, cashback or extra points the customer receives. Someone has to pay it. The answer to "who pays?" shapes almost everything about an offers programme: how many offers it can run, which merchants take part, how banks measure success and whether the programme is still running in three years.
There are three basic models. This article compares them plainly.
Model 1: merchant-funded offers
In a merchant-funded offer, the merchant pays for the reward. A restaurant offers a discount to a bank's cardholders; when a customer redeems it, the discount comes out of the restaurant's margin, either at the till or through a settlement after the fact.
Why merchants agree
For merchants, a card-linked offer is performance marketing. They reach a defined audience, the bank's cardholders, and pay only when a customer actually comes in and spends. Compared with advertising that is paid up front whether or not anyone visits, that is attractive, especially for small and medium businesses.
Merchants also value:
- new customers, particularly those who have never visited before;
- filling quiet periods, such as weekday afternoons or off-season months;
- the bank's trust and reach, which a small business could not buy on its own.
Why banks like it
For the bank, merchant funding means rewards at little or no direct cost. It can offer cardholders a rich, varied catalogue without funding every discount from its own budget.
The risks
- Quality control: merchants may offer weak or restrictive deals. The bank needs standards for minimum value, clear terms and fair conditions.
- Merchant fatigue: if offers do not bring the right customers, merchants leave. Targeting and reporting matter.
- Limited strategic control: the bank cannot always choose which categories get strong offers.
Model 2: bank-funded offers
In a bank-funded offer, the bank pays the reward. The merchant may simply be the place where it applies, sometimes without its active involvement, such as cashback on all spend at a given supermarket chain.
When it makes sense
Bank funding gives the bank full control. It is useful when the bank wants to:
- drive a specific behaviour, such as activating new cards or adding a card to a phone wallet;
- compete in a strategic category, such as groceries or fuel, where its card is often not the default;
- launch a programme before enough merchants have joined;
- reward a premium segment with experiences no single merchant would fund.
The risks
Bank-funded offers pay the reward on every redemption, including customers who would have made the purchase anyway. Unless they are carefully targeted, much of the cost subsidises existing spend. They can also become expensive habits: customers come to expect them, and removing them feels like a loss.
Model 3: co-funded offers
Co-funding splits the cost. A merchant might offer a 10% discount and the bank adds a further 5% for its premium cardholders. Or the bank might fund the reward for the first visit and the merchant for repeat visits.
Co-funding is useful when:
- a merchant is strategically important but cannot fund a strong enough offer alone;
- the bank wants to make a merchant offer more visible or more generous for a target segment;
- both parties want a joint campaign, such as a seasonal promotion.
It needs clear agreements about who pays what, how redemptions are settled and how results are shared.
A side-by-side comparison
| Merchant-funded | Bank-funded | Co-funded | |
|---|---|---|---|
| Who pays the reward | Merchant | Bank | Both, by agreement |
| Cost to bank per redemption | None or very low | Full reward | Partial |
| Bank control over offer | Moderate | High | Shared |
| Best for | Scale and variety | Strategic behaviours | Flagship campaigns |
| Main risk | Weak offers, merchant churn | Subsidising existing spend | Complex settlement |
How to mix them
Most mature programmes use all three models, in different proportions:
- Merchant-funded as the base. A broad catalogue of merchant-funded offers keeps the programme fresh and relevant at low cost.
- Bank-funded as the spear. Targeted bank-funded rewards focus on specific, high-value behaviours and segments, with strict budgets.
- Co-funded for the moments that matter. Joint campaigns around key seasons or partnerships give the programme headline offers.
The right mix depends on the bank's goals, its market and the maturity of its merchant network. Early programmes often lean on bank funding to prove value, then shift towards merchant funding as the network grows.
Making merchant funding work
Because merchant funding is the engine of a scalable programme, banks should invest in making it easy and worthwhile for merchants:
- Fast onboarding with digital sign-up and contracts.
- Simple validation at the till, whether automatic through card data or through a code or QR scan.
- Clear reporting so merchants can see new customers, visits and spend.
- Fair targeting so offers reach people who are likely to become regular customers, not just bargain hunters.
The takeaway
There is no single right answer to who should pay. Merchant funding gives scale and sustainability, bank funding gives control and focus, and co-funding creates flagship moments. The strongest programmes use merchant-funded offers as their foundation and spend bank budgets where they change behaviour most.
