February 17, 2015
Costco ends AmEx exclusivity deal
Apparently about to land another banking partner, Costco Wholesale Corp. has decided to end its 16-year deal to accept only access American Express cards in its stores.
The deal, expiring March 2016 at the end of the current contract, was a big blow to AmEx. Costco represents eight percent of AmEx’s global customer spending and 20 percent of its interest-bearing credit portfolio. Kenneth Chenault, AmEx’s CEO, told Reuters, "We were unable to reach terms that would have made economic sense for our company and shareholders."
For Costco, the move was initially seen as a chance to shift strategy and, like other retailers, start accepting many forms of card payments as a convenience to shoppers. Outside of AmEx, Costco stores accept only cash or debit cards. Among major chains, only Sam’s Club has similar restrictions, refusing to accept Visa or AmEx.
However, the Los Angeles Times reported Costco is close to reaching a deal with a new credit card company for exclusive rights.
With new payment systems arriving, the Costco change is seen as a sign of the leverage retailers may be gaining in negotiating swipe fees. Costco is seeking "significantly" lower fees than the average 2.45 percent AmEx charges merchants.
AmEx has been able to charge higher swipe fees in general because its well-heeled members spend significantly more on average than Visa and MasterCard members. Many restaurants and stores don’t accept AmEx because of those higher fees.
While the card switch could be a hassle for Costco members, the new partner might be able to purchase AmEx’s portfolio, meanig members would only have to be sent new cards, Bob Nelson, a Costco spokesperson, told the LA Times.
Some concerns were also voiced over whether the new cards would pack the same awards as the AmEx cards. TrueEarnings Card members gain three percent cash back at U.S. gas stations, two percent cash back at U.S. restaurants, two percent back on eligible travel purchases, and one percent cash back on other purchases. There’s no annual fee with a paid Costco membership.
One online commenter to a Wall Street Journal article on the change said, "Unless the new Costco branded card is an amazing deal, we’ll probably just go to debit."
Discussion Questions
What are the pros and cons of Costco’s exclusivity deals with its credit card partners? Will the switch be a signficant annoyance for Costco members?
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Given just how low the margins warehouse stores operate on, exclusive deals promise to make sense for them.
I do worry that this will not be met with the same enthusiasm by consumers. I don’t understand how the transition will work at all. Costco has some real work to do.
For most retailers, it seems the prevailing wisdom is to take whatever form of payment consumers want to use. But the reality of it is a lot harder, especially when one form of payment costs the retailer more than others.
I’m a Costco member and an AmEx cardholder. But I pretty much use debit when I’m there. As long as I can keep doing that, as a customer, I couldn’t care less what deals they ink. I can’t be the only consumer out there who finds it a hassle to try to keep track of three percent for this and two percent for that—but only if you’re paying on the night of a blue moon in July. After a while all that stuff gets ridiculous.
All the press on this one has focused on how bad this is for AmEx. Wall Street seems to have taken the same approach.
We have carried an AmEx card of some color since 1978. They are the gold standard in customer care among financial services providers. We now carry the Costco/AmEx card and love it. It gets almost all of our credit card purchases, 90 percent of which are not at Costco. But that is because it is AmEx and has the best rewards deal for us—not because it is Costco.
I love Costco and will obviously continue to shop there, and if the new card is required to shop there we’ll probably get it. But I’m counting on AmEx to offer a card for current Costco card holders that has equal or better terms and rewards. (I’ve read they already did this in Canada?) And that 90 percent of our monthly purchases will remain with AmEx—regardless of what Costco does.
Bottom line, this won’t hurt (or help) Costco much if any. And it won’t hurt AmEx nearly as much as people think it will.
Costco is going to win on this for sure. The customers will use whatever credit card company Costco goes with, as the loyalty to Costco is very, very high. Add another percent to the bottom line for Costco, with little to lose, knowing the customers will keep coming back. Other chains couldn’t pull this off, but Costco will make this smooth, and any initial promotions to get this up and running will surely be paid for by the next credit card company who signs with them. What is not to like for Costco?
The AmEx relationship at Costco is made for a card portfolio comprised of higher-spending members. That’s essentially what Costco paid for in its relationship with AmEx. The downside for Costco is that its new supplier is unlikely to deliver the same kind of value (translation: dollars) from the portfolio that AmEx did. It’s also going to hurt AmEx unless it can successfully migrate the Costco portfolio to other AmEx cards, but ultimately AmEx is a strong brand—and loyalty leader—just as Costco is. They will both continue to lead and do just fine.
Whether or not the switch will be an annoyance depends upon how it works. If a new credit card just shows up with the same credit line, a similar cash back process, and a request for verification it should not annoy the Costco members. There may be some confusion with what happens to the current card—is it still valid until the expiration date or does it just cease to work? That could be more annoying. Unless Costco is able to get better terms or a better working relationship and pass savings or benefits to their consumers from the exclusive credit card company, I am not sure I see the value for Costco.
Costco is an example of a retailer that keeps things simple. Their assortments aren’t deep or wide, they limit the number of brands in any range, and buy and package in bulk quantities. Their approach to a credit card partnership is similar, put all the eggs in one basket and expect an amazing set of terms for that exclusivity.
In the case of Costco, the cons to exclusivity are minimal—from the deal side it’s managing future uncertainties, from the customer side it’s about meeting the expectations formed after 16 years with AmEx.
At the end of the day, people don’t shop at Costco because of their payment partners, but it’s a nice-to-have.
Exclusivity allows Costco to drive a hard bargain with potential credit card partners. For years Costco/Price Club partnered with Discover. The only reward consumers received was the regular one percent that was offered to all Discover card users. AmEx significantly upped the rewards. We didn’t consider an American Express card until Costco forced the switch. Now we will probably switch to whichever card Costco chooses to carry. My hope is that whichever card Costco chooses will buy the AmEx portfolio, making it easy for loyal Costco customers to switch as well, otherwise it could become quite a hassle, costing Costco significant goodwill.
Gotta tell you, went to Costco the morning after the story broke and AmEx had a table out front trying to secure new customers! Lots of people asking “Why are you here? Costco is getting rid of you!” Poor AmEx guy was not aware of the news.
I am a Costco dedicated shopper and eater (love the pizza). Whatever way Costco goes I am with them.
We got a Costco AmEx card several months ago. It seemed to be a good thing when we did it. Then I got home and started thinking about how much we would have to spend to make it worth the cost. I did not like what the numbers told me. The nearest Costco is a distance away from our house. So purchasing gas there is not a good thing because we have lost all the savings on the ride home. We do go there on occasion, and that occasion is coming soon. But what we spend is small considering the time involved to get there and back. I will say that the value of what we purchase is good compared to other places we would normally shop.
Costco changing cards will not affect us in any way other than having their AmEx card which we will probably not renew.
Whatever the reason for the switch it must have made great economic sense to Costco and hopefully they will continue to pass those saving on to their members.
Interesting to note that one of the major stockholders in both Costco and American Express is Berkshire Hathaway. They own more AMX than Costco but two of the board members on the Costco board are also employees of Berkshire Hathaway.
The exclusivity makes sense for Costco and Costco card holders. But what about people like me? If and when I shop at Costco (or similar), I like the flexibility of using whichever card I please for any of my purchases, and have felt uncomfortable when visiting countries or stores that say, “we don’t take that card.” Doesn’t it increase the number of shoppers and sales if you aren’t limited to a particular card?
Costco has partnered with AmEx for many years and both companies have benefited. Unless the replacement card gives Costco a significantly better rate the customers who are loyal to AmEx may offset the gains made by the new arrangement. I personally am disappointed in the switch but will wait to see how they replace the AmEx card. Those consumers and business owners who carry only one or two cards will have to make a choice between cash back and the dilution of their loyalty points versus the other advantages of shopping Costco. Is this the time for Sam’s and/or BJ’s to lure some customers away by changing their policies and card arrangements?
I think we have to look at this from the broadest customer perspective and that means it’s wisest to err on the side of expanded choice in payment options.
There are—or should be—pluses to every exclusivity agreement, but they should never be allowed to overshadow consumer convenience.
I liked the Costco/AmEx relationship—the Costco AmEx card included my member ID, so if I don’t switch to the new card, I’ll need to carry two pieces of plastic—that’s not going to happen. So I’m switching.
As for AmEx, I’ve been with AmEx since 1970 and will keep my regular AmEx card as well. Is it a loss for either? In my opinion, Costco will cut a great deal with the new exclusive card and that will be good, but I fear the new card issuer will only be better for Costco on paper and the service/protection to Costco members will not be as good as AmEx—nobody beats AmEx at the credit card business. I’m a bit sad for AmEx because they lose a huge chunk of their business. For sure they will survive this but it seems unnecessary and I believe Costco didn’t place enough value on cardmember services when their accountants crunched the numbers and that Costco pushed for a deal that was too aggressive. And in the end, we the cardholders essentially lose the most.
I personally prefer AmEx over debit but this will probably not affect my use of Costco.
The real question here is whether Costco will embrace Visa or Mastercard. There has to be a long lead time to ensure that Costco members are aware of the transition and have sufficient time to prepare to use another card. It will be a bonanza for whomever wins the business…..
It concerns me when a retailer forces me to do do anything. I am the customer and I have the money and I decide where to spend it. I have been a COSTCO member for over 10 years and use my non Costco branded AMEX when I shop at Costco. Due to the excellent service I receive from Amazon.com, I am not making nearly as many trips to Costco now as in the past. Should I be dissatisfied with their new card partner, I will probably just quit using them all together.
The best thing Costco has going for them is their gas and tires and since their nearest unit is 50+ miles from me, I haven’t developed an addiction. I enjoy their stores, the meat, the wine and an occasional small appliance—but I can live without them. I wonder how many others are like me and can just switch to Amazon and might.
We will just have to see what Costco comes up with, but even though I have MC, & Visa, I prefer AMEX due to the “no hassle” customer protection. When a merchant screws something up, I expect the merchant to fix the problem and that is the attitude AMEX takes. My experience with MC and Visa is that they expect the consumer to straighten out the merchants mistakes. American Express has earned my business; I don’t think I can say the same for Costco, MC or Visa.
The cons are that it is very unlikely that Costco will partner with a credit card provider that was a leader in NPS the way AMEX and Costco are.
If Costco partners with Capital One, then they are partnering with an NPS laggard that could hurt their brand and their NPS.