Costco Replaces American Express With Citi For Exclusive Agreement

A few weeks ago it was announced that American Express and Costco will be terminating their relationship as of March 31, 2016:

“We are proud of the value created over many years for Costco, for our Card Members and for our shareholders,” said Kenneth I. Chenault, Chairman and Chief Executive Officer of American Express. “Taking a very disciplined approach, we began discussions on a possible renewal with Costco well in advance of the contract expiration. However, we were unable to reach terms that would have made economic sense for our Company and shareholders. Instead, we will focus on opportunities in other parts of our business where we see significant potential for growth and attractive returns over the moderate to long term.”

Co-brand credit card agreements are huge business, and that’s especially true for Costco. Not only do they exclusively have one issuer for their co-brand cards, but they only accept American Express cards in their US stores. That’s one way to create a captive audience.

While I’m not privy to the exact details of the negotiations, it does sort of amaze me that they couldn’t figure out something mutually beneficial.

Anyway, what’s interesting is that it has been announced today that Citi will be taking over the Costco contract from American Express as of April 1, 2016:

Costco Wholesale Corporation (“Costco”) (NASDAQ: COST) today announced it has entered into a new co-brand credit card program agreement with Citi and an acceptance and co-brand incentive agreement with Visa. The implementation of these agreements is subject to the purchase of the existing co-brand credit card portfolio by Citi.

Under the terms of the agreements, Citi, the world’s largest issuer of consumer credit cards, would become the exclusive issuer of Costco’s co-brand credit cards and Visa will replace American Express as the credit card network for Costco in the United States and Puerto Rico beginning April 1, 2016. Once issued, Costco’s co-brand Visa credit card would provide generous rewards to Costco members, serve as the Costco membership card, and would be accepted at Costco locations in the United States and Puerto Rico, as well as all merchants worldwide that accept Visa credit cards.

I have a few thoughts here:

  • It’s interesting that Citi will apparently be purchasing the existing co-brand credit card portfolio from American Express (so existing cards will be converted into Costco Citi Visas, as opposed to other American Express products)
  • It’ll be interesting to see what the rewards structure is like on the card, and how it compares to what American Express offered — I assume it will be similar, though at the same time Citi doesn’t have nearly as many “straight” cash back rewards credit cards as American Express
  • I can’t emphasize enough how amazed I am that Costco and American Express couldn’t make it work; I know they generally charge higher merchant fees, but is their cost structure that much higher than the competition that they couldn’t make it mutually beneficial?

I don’t have a Costco Amex and don’t shop at Costco (buying in bulk probably isn’t a good idea when you live in hotels full time), though I do find this interesting in the context of our hobby, given that this was one of the strongest partnerships out there.

How do you feel about Costco switching from American Express to Citi, and what do you think the implications are?

Comments

  1. I’d agree with one caveat. Even among businesses, Costco is concerned over a fraction of a percent in their dealings. In any negotiation one should be prepared to walk away. I have to believe AMEX lost more than Costco did by terminating this. As a Costco member for many years, I’ll also be interested on thoughts as to which AMEX card to consider.

  2. I’m tempted to give Costco the benefit of the doubt on this one. Costco has made a positive name for themselves by combining liberal consumer and labor policies with conservative finances. It makes for more satisfied customers, happier employees, and a healthier balance sheet. Basically they run their stores as though it’s an extended process to a long term goal. If they felt they could do better than whatever AMEX was offering I’m inclined to believe them. Maybe AMEX thought Costco would consider the change to much effort but Costco already kicked another card service to the curb so there was no reason to assume they wouldn’t do it again.

  3. Costco’ customers may lose out. Amex customer service is outstanding. I hope Citi steps it up.

  4. I not sad that the AMEX-Costco relationship is coming to an end, for several reasons. I’d much rather use one of my Visa cards for purchases at Costco, since I usually have many to choose from that give a variety of benefits. The Amex cashback benefits were never all that great for me. And, now that I can close my Amex Costco card, I’ll be able to open some other Amex card that will give me a good signup bonus. (Yes, I know I always could have done that.)

  5. Costco Canada switched over to mastercard from AMEX January 1st. 2015. You can use ANY mastercard issued by any bank. It’s a big loss for AMEX in my opinion. I know of several people who just carried an AMEX because of Costco.. not no more.

  6. with these recent changes… losing retail partners and all the unfriendly customer service moves… is Amex trying to get out of credit card business?

  7. “The implementation of these agreements is subject to the purchase of the existing co-brand credit card portfolio by Citi.”

    Other than for an obscene amount of money from Citi, what incentive does have AMEX to sell their “existing co-brand credit card portfolio” to CIti? I would think that AMEX has every incentive to do all they can to not lose customers and simultaneously to muck up Costco’s transition to Citi.

  8. Costco’s non-acceptance of Visa/MC is the main reason I shop at Sam’s instead. I’m banned from Amex due to refusal of a financial review by them over points earning 🙂 If anything, I think there will big implications for Sam’s Club due to this.

  9. I actually don’t know that I could glean from the press release, but does an “acceptance agreement” with Visa imply that customers at Costco will only be able to use Visa cards for purchases? Just curious if this means that AmEx will no longer be welcomed at the register.

  10. As an Ink Visa cardholder, now I’m wondering if buying gas at Costco will be 2X (‘gas station charge’).
    Will have to try it next year…

  11. I got rid of my Costco Amex last year – a worthless card that ate up one of my critical 4 CC spots in the Amex roster. I have SPG, Surpass, Simply Cash and EVP. (sadly Simply Cash is a replacement for the much missed OBC).

    As such, the lost of Costco is of zero consequence to the MS community…

  12. Big mistake for Costco IMHO. I have a Citibank card, so I’ll just transition it to the Citibank Costco care. Citibank will get zero additional spend from me. And if they don’t comp the membership fee like Amex, we’ll dump one of the memberships (save $55/year) and instead the wife will have the Citibank Costco card and will buy me the Costco cash card, which can be used at Costco without paying for membership.

    Dumb move Costco and Citibank. For Amex, it worked because there probably wasn’t as much cannibalization / duplication of existing card members. Not true for Citibank, who is already the largest card issuer. They won’t pick up many net new customers; more likely people like me who move from one Citibank product to another.

  13. Just a guess, but my bet would be that Costco shoppers, being price and finance conscious, are more likely to either keep a zero balance or a low-balance on their card, especially from American Express, who started with charge cards instead of credit cards. Amex likely depends on the interest they get from monthly balances to make up for any overhead and probably weren’t getting it. Citi probably figures their consumers are more likely to carry revolving debt. If someone has links/numbers to prove/disprove this, I’m all ears.

  14. @Nick, in my view, I don’t think there is any question: AMEX cards will NOT be accepted after the transition (just like VISA and MC were not accepted when AMEX had the “contract”).

    A more interesting question is: Will all VISA cards be accepted or only Citi VISA cards? My guess is that VISA will make it so all VISA cards are accepted, but Citi will offer bonuses in some form (e.g., higher points or higher cash back) that induce Costco members to use the Citi card.

  15. One note as a longtime Costco member: you’ve been able to use cards other than Amex when making online purchases in the U.S. for years. Also one of those members that only bothered with Amex because I needed one for Costco—though I got a different Amex card rather than the co-branded card.

    Not sure that I will bother keeping mine after the agreement expires next year.

  16. All MasterCard are accepted at Canadian Costco when capital one won the contract.

    Having said that, what happens in Canada is no guarantee of what happens in the U.S.

    Pretty sure it’ll be all visa cards though which is our benefit since the only cards with no forex fees are Chase visa cards

  17. What makes this particularly interesting to me is that, holding both the Citibank Aadvantage and Barclay US Airways Cards, when the Barclay card is replaced with their new Aadvantage Red Card, I intend to cancel the Citibank card as Barclays offers me 10,000 Aadvantage miles awarded annually, a benefit not matched by Citibank. I was looking at what other Citibank cards I might get so as to transfer my current Aadvantage Card credit (and longevity) and the new Costco Card seems a natural. While I don’t shop at Costco stores as their parking lots are always a challenge in terms of finding a space, I do shop Costco online and they offer a pretty good travel site as well, particularly for cruises as you are dealing with full time, paid agents rather than travel agents (often working from home) whose remuneration is based on commissions.

  18. from AMEX’s stand point, they had to take into account not only the reduced revenue from costco but domino effect this will create.
    other big retailers like walmart, target, home depot and so on would have demanded reduction in fee.
    in the end, it did not make economic sense to AMEX and i think they made the wise decision.

  19. Costco may have taken a move from Chase’s playbook when Mastercard was dumped for Visa exclusivity. Amex is not accepted by most merchants outside the US. Banks, like airlines, realized that the market is not expanding anymore. Therefore, consolidation is the only way to grow profit margins.

  20. I lkked having the Costco AMEX for the cards other benefits without paying the high AMEX fees. Unless AMEX LETS ME CONTINUE without fees I will drop it in 2016. I slready have a Visa card with mileage benefits so shy get a Costco VISA? Will also drop my mdmbership level to basic sincenot getting back the AMEX card rewards to pay for membership. Might dvdn go back to cheaper Sams Club membership or BJs.

  21. If Citi is buying the portfolio should we transfer out a good chunk of Amex CL to other Amex cards before the transition so that we can preserve our Amex CL?

    Also, my Costco Amex is my oldest Amex product so will it affect my amex “age of accounts” after the portfolio acq. by citi. I’m hoping it does not make my Amex AoA decrease to my second oldest card a DL Amex!

  22. Hooray! Of course it was a burden on AMEX. They must certainly have a higher overhead than most credit card companies or they simply want more for their own pocketbook. All of their products that are revolving are costing the consumer more to use. It doesn’t matter what their credit score is, all card holders pay a high interest rate for the privilege of using and AMEX card and revolving the balance. Hooray to Costco!

  23. @Wil: Don’t revolve a balance and you’ll never pay interest. Amex offers me a much higher level of benefit and customer service vs. most other cards, so I consider it worthwhile. Won’t break my heart that Costco won’t take them – I’ll just pay with something else.

  24. I believe a serious factor had been the success of the Sam’s Plus MasterCard which gives five percent back on gasoline and three percent on travel. In our case, as executive members of both, we’ve seen our Sam’s purchases increase dramatically as our Costco purchases have declined and it’s not all gasoline. In fact, our Costco membership is up for renewal and it no longer makes sense for us to pay the fifty or so dollars extra for the executive membership since the additional rebate will not cover the fifty bucks. I suspect Costco wanted Amex to match the Sam’s card and Amex said no, hell no. I don’t even know which bank issues the Sam’s card but I do know I am about to pay for a $4000 cruise which will result in $120 cash back and a year ago I would have paid that with the Costco Amex. We’ve gotten a new Amex “everyday” card in anticipation of the Costco card becoming obsolete. I will only rent cars using Amex.

  25. For me the change will be huge. I use my Amex CITI-Advantage card at Costco which awards miles for every dollar spent. For my family, that results in award miles so I can travel with American Airlines and its partners. Does anyone know of an award VISA card that has a great miles award program?

  26. This doesn’t mean they won’t TAKE AMEX any more (I can’t see them alienating all their members) – it means their co-branded card won’t be an AMEX.

  27. No great loss for me as I only had AMX for Costco purchases. I’m sure Citi will offer just as much if not better rewards than AMX did. Costco employees have quietly confirmed this to me on the sly. I hope it’s true! Now I can close out my AMX and the old Visa so I can carry but one credit card. This will simplify a lot.

    It did surprise me that AMX wouldn’t bend. I mean, Costco does everything right. Right?

  28. @ Mike, Costco will NO LONGER accept AMX starting April of 2016. In advance time Costco will offer their new visa of choice with all the benefits (plus more so I’m told). You can take it, or leave it and pay with a different card but…you may not get the cash back $$$ you had with AMX.

  29. Costco patterning with Citi is very disheartening. Citi is ruthless and unforgiving. I opened an Citi BestBuy account to make three purchases. BestBuy made some errors crediting returns to my card and Citi said that’s my problem to resolve. American Express would not have taken that position from my past five years experience.
    I may decide not to make that jump.

  30. Costco parterning with Citi is very disheartening. Citi is ruthless and unforgiving. I recently opened an Citi BestBuy account to make three purchases. BestBuy made some errors crediting returns to my card and Citi said that’s my problem to resolve and charged interest while it was resolved by BestBuy who stepped up to the plate in a responsible manner. Citi managers would not recognize a return stating that ‘a statement was already mailed so you must make a payment regardless of returning the merchandise’ and all of that was before the 22 day grace period. American Express would not have taken that position from my past five years experience.
    I will not open another CitiBank Card based on my experience. They seem to want their 24ish% interest at all cost.

  31. I think that Amex has a great Customer Service. Citi is a ruthless bank that not only overturns its customers for payment and they charge for everything. I (for one) am disappointed at this move.

  32. Does anyone know what kind of rewards citi card is offering? I wonder if it’s worth opening one.

  33. I’ve been getting the following e-mail offer that I assume, many, most, or all other current Costco Amex-holders are getting. I wonder what Lucky and other experts think of this offer…

    We expect that you will no longer be able to use your current American Express® Card for any purchases beginning in mid-2016 because it will be discontinued. You can keep using your Card and earning rewards as you do today until the end of the Card program. Please visit americanexpress.com/programupdate to learn about what may happen to your card account at the end of the partnership. If you would like to still have an American Express Card when the program ends, take advantage of this special offer to apply for the Blue Cash Everyday Card.

    American Express Bank, FSB invites you to apply for the no annual fee1 Blue Cash Everyday® Card, issued by our affiliate American Express Centurion Bank. You can get cash back on your everyday purchases, including 3% Cash Back at US Supermarkets on up to $6,000 per year in purchases. Terms and limitations apply.2

    Apply today, and you could enjoy the following features:

    Welcome bonus Get $100 Back after you spend $1,000 in purchases on the Card in the first 3 months of Card Membership. You will receive $100 back in the form of a statement credit.3 Apply by March 31, 2016.
    Get more on everyday spending
    • 3% Cash Back at US supermarkets, up to $6,000 per year in purchases (then 1%)
    • 2% Cash Back at US gas stations
    • 2% Cash Back at select US department stores
    • 1% Cash Back on other purchases

    Cash Back is received in the form of Reward Dollars that can be redeemed as a statement credit.2 Cash back cannot be used to pay your Minimum Due.
    Start with a 0% Intro APR Enjoy a 0% introductory APR for 15 months on purchases and balance transfers, then a variable APR, currently equal to 13.24%.1 Balances may accrue interest charges.
    No annual fee Plus, experience all the benefits of Card Membership with no annual fee.1

  34. I just called citi card 800 number as I have been a member since 2007, altho’ I haven’t been using it for quite a while. First, they couldn’t switch my mastercard credit card to the costco visa card. I have to apply for a new visa card exclusive for costco. Then, nobody could help me open an account through the phone. Then they tried to find out if I can do it online and they are not ready for that either. They said that their online application for the costco citi card will not be ready till June. Does anybody know what’s happening? Can we still use the Amex costco card until the citi costco visa card is ready to accept an application? This is confusing.

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