How Bad Will it Get for American Express?

by Alex Johnson 0

Close up of credit card forming background

It’s a great question and this article from Bloomberg does a great job covering recent struggles at American Express including, most prominently, the loss of their partnership with Costco.

“In conference calls with investors, Chenault has said Amex ended the Costco deal for purely economic reasons. “The numbers didn’t add up,” he said in March. “We couldn’t accept their financial terms nor their contractual terms, some of which would have meant taking on more risk than we were comfortable with.” But the decision was also partially emotional”

The article elaborates on some of the cultural differences between Costco and American Express that may have contributed to the split.

“Costco had a similar co-branded affinity card with Amex in Canada. As its contract neared expiration in 2014, Costco solicited bids from other financial institutions to see if it could get a better deal. It did, and chose Capital One and MasterCard. Chenault went all out to hold on to the discounter in the U.S. Costco’s costs to accept credit cards as part of its deal with Amex was about 0.6 percent of every purchase, people familiar with the arrangements say, which was pretty cheap for any retailer, but Chenault offered to cut them further. Still, Jelinek insisted on putting the U.S. business up for grabs, too.

Amex wasn’t happy about competing with global banks such as Citigroup and JPMorgan Chase and its archrivals Visa and MasterCard. But Chenault fought for the deal—even though his company might actually lose money in some cases when Costco customers swiped the card. As the negotiations dragged into January 2015, however, he became agitated and called his counterpart to remind him that Amex hadn’t only furnished Costco with its prestigious card; it had been Costco’s “trusted partner.” Jelinek interrupted, according to people who were briefed by Chenault about the call, and told him that as far as he was concerned, Amex was another vendor, just like the one that sold Costco ketchup. “If I can get cheaper ketchup somewhere else, I will,” he said. As rumors about the call spread, the rank and file who heard about it couldn’t believe someone from Costco had the nerve to insult Amex like that. Ketchup! Chenault called Jelinek a few weeks later to say Amex was pulling out.”

The article is a fascinating read and I encourage you to read it in its entirety.

Overview by Alex Johnson, Sr. Analyst, Credit Advisory Service at Mercator Advisory Group

Read the full story here

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