Costco will be replacing American Express with co-branded
Visa cards from Citi.
) breaking up with
) last month
wasn't a surprise
, but it still raises the question of what took the big-box
warehouse operator so long to part ways.
On Monday, Costco announced it signed an exclusive agreement
) to provide warehouse club members with Costco-branded
) credit cards starting on April 1, 2016. Like their AmEx
predecessor, the credit cards will also serve as the discount
club's membership card while also providing members with
significant reward opportunities. The exact nature of those
benefits, however, weren't revealed.
A lopsided relationship
It's obvious what the benefits were to American Express for
having an exclusive arrangement with Costco -- Costco cards
account for 20% of the credit card processor's loans and 10% of
its cards, according to
what's not so clear is why the warehouse club was
willing to seemingly limit itself by not previously having an
agreement with either Visa or
With some 281.4 million cards in circulation, Visa has more
than five times as many cards circulating than AmEx, which has
less than 55 million cards outstanding.
Data: Figures as of 2013, except where indicated. Visa 2014
annual SEC filing; The Nilson Report.
Pinpointing a difference
While Costco does accept debit cards issued by Visa and
MasterCard, they were of the sort that require a PIN number to
be entered at the time of the transaction, versus signature
debit cards that would have allowed members to sign for their
purchases. Signature debit cards, however, far outnumber PIN
cards by almost two to one.
Discover sued Visa last November for anti-competitive
practices, alleging the payment processor is offering financial
incentives to merchants that generate a lot of debit card sales
to send all of their transactions to its Visa transaction
In reality, there were several benefits for Costco from
having AmEx as its co-branding partner:
- Bounties paid to Costco for every new customer signed
- Fee rebates from AmEx.
- Revenue sharing for purchases made with the card outside
of the warehouse.
- Increased spending benefits.
The breakup of the 16-year partnership occurred because
Costco wanted even sweeter terms than AmEx was willing to
The benefits of affluence
The typical Costco customer is more affluent than the one who
(WMT), and the increased sales were probably an attractive lure
to keeping the partnership together for so long.
Membership has its privileges at warehouse membership club
Costco, though what they'll actually be under its new agreement
remains to be seen.
It had 42.5 million member households as of the end of
November, but 77.5 million cardholders at the end of its fiscal
first quarter. Executive members, Costco's highest level of
membership, grew to 15.2 million, and although they represent a
little more than a third of its membership base, they account
for over two-thirds of its sales and operations.
Costco's average shopper has an average annual income of
$85,000 compared to the medium- to low-wage income earned by
Wal-Mart's customers, which is reflected in how much each
retailer pays it employees: The average Costco employee earns
around $20 per hour versus the $12.83 per hour paid by
Wal-Mart, and even the $12.20 per hour national average for
Bigger, faster, stronger, better
Volume may trump size at this point. Sales at Costco have
doubled over the past decade, growing from $52.9 billion in
2005 to $112.6 billion last year, an 8.75% compounded growth
rate. Over more recent periods, however, the growth rate has
been slightly below that average.
In its fiscal 2015 first-quarter report issued in December,
net sales grew 5% year over year, but analysts are looking for
6% growth this year and 7% over the next two years. The new
deal with Visa and Citi could allow Costco to cast its net more
broadly and attract even new members.
The new co-branding agreement means any Visa card will be
accepted at Costco, but Citi, which has most of its cards
processed through MasterCard's network, may not make out as
well since most of those cards won't be accepted at the
Maybe the end of the American Express relationship should
have occurred sooner, but now that it's here, investors should
see the new agreement pay dividends very soon.
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What Took Costco So Long to Dump AmEx and
originally appeared on Fool.com.
has no position in any stocks mentioned. The Motley Fool
recommends American Express, Costco Wholesale, MasterCard, and
Visa. The Motley Fool owns shares of Citigroup Inc, Costco
Wholesale, Discover Financial Services, MasterCard, and Visa.
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