Costco Amex Breakup

by Raymond Pucci 0

Breaking up is hard to do—at least according to the old ditty. Ask Costco and Amex. With much anticipation, Visa and Citi wait in the wings to launch the new exclusive card at the warehouse club store. This has not been an express lane transaction for Costco, but the June 20 changeover date is now within sight, as the following article describes.

Costco Wholesale Corp. has started to issue new Visa cards to its customers, who after June 20 will no longer be able to use their former Costco cards from American Express.

A Citi spokeswoman said all existing Costco card members should receive new credit cards in the mail in May or early June.

When Costco COST, -0.47% and American Express AXP, +0.48% announced a year ago they would be ending their exclusive partnership of 16 years, investors and consumers were worried. Just after the news about the severed relationship, the credit-card company’s stock fell 6.4%, its largest one-day percentage decline since August 2011.

And cardholders were concerned. There are a lot of bargains to be had at Costco, but the average transaction can be pretty steep (giant packs of paper towels, huge bottles of lotion, big-screen television sets and brontosaurus-sized steaks add up) and paying with a credit card offers shoppers more convenience and flexibility than cash or debit cards.

Costco later announced Visa V, +0.11% would replace American Express, starting in spring of 2016, and Citigroup would be the exclusive issuer of Costco co-branded credit cards, leading to a bump in share prices of both Visa and Citigroup C,+0.37% .

The timeline was later extended slightly, and June 20 is the first date when Costco will only accept Visa cards, cash, checks, debit and ATM cards, Electronic benefit transfer (EBT) and Costco Cash cards. Citi has said new Costco customers who are hoping to apply for the Costco Anywhere Visa card won’t receive more information on the application process until June.

American Express’s Chief Executive Ken Chenault has said losing the partnership with Costco will impact one in 10 AmEx cards in circulation and would likely eat into the company’s earnings in 2015 and 2016.

The Amex to Visa transition at Costco has dragged on for more than a year since the initial announcement. All parties involved would probably admit now that they underestimated the complexity of working out the details of the deal. Negotiations had to hammer out specifics including rights to the cardholder database, existing balances, and new card account logistics. Once the dust settles, expect Costco to be the winner, given the highly favorable terms presented to them by Visa and Citi.

Overview by Raymond Pucci, Associate Director, Research Service at Mercator Advisory Group

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