Visa International and Citigroup will elbow aside American Express next year as Costco Wholesale Corp.'s exclusive credit card supplier, the giant discount retailer said, leaving customers to worry over potential changes in the rewards they earn on their Costco AmEx cards.
The membership-based company, which announced the change Monday, also said the deal wouldn’t close until Citi and Visa negotiate final details with each other. But Costco delivered some reassuring news for shoppers along with the uncertainties, saying that replacing their current cards with Visa plastic was expected to be as easy as opening the mail.
AmEx and Costco said in February that they had been unable to agree on terms of a new partnership, so their alliance would end in March 2016 after 16 years. The discount warehouse chain was offering too little financial upside for AmEx, traditionally a premium-service company with more affluent clients than other card brands, AmEx said at the time.
Costco executives said then that AmEx might continue to handle Costco accounts that were being closed out, collecting payments even as the customers were forced to reapply for new Costco branded cards.
When that process was tried in Canada, where Costco replaced AmEx with a Mastercard from Capital One last year, the result was “disastrous,” said John O’Brien, a member from Parksville, British Columbia.
O’Brien complained he had to “scramble to make the switch-over by lining up with crowds at my local warehouse store,” then “wait again in line for new photos and wait for the card to be mailed.”
But Costco spokesman Bob Nelson said Monday that Citi was expected to buy AmEx’s portfolio of Costco accounts outright, meaning cardholders would simply receive new Visa cards, issued by Citibank, to replace the AmEx cards when the switch occurs in a year.
Citi is to issue the cards and carry the credit accounts while Visa, which is a financial transaction specialist and not a bank, would process payments. American Express now handles both functions.
The deal would be called off if Visa and Citi don’t reach a final deal, but that is unlikely, Nelson said: “I don’t think we would announce the agreement if we didn’t think it would occur.”
He said the new card would “provide generous rewards” in an arena filled with mileage and cash-back cards but had no details about what its features would be. “Hopefully,” he said, “the offering we will have at the end of the day will be very compelling.”
The lack of clarity on the new card features rankled Doris Turner, a Costco AmEx cardholder leaving the Costco in Los Feliz. She said she had one question for her cashier: What would her rewards look like when the change happens?
“That’s all I want to know,” she said, nibbling pretzels as her husband packed their BMW sedan with groceries.
The cashier — like Costco executives — didn’t have details. Turner said she wouldn’t mind switching to her Visa or getting a new Costco card in the mail. She just wants to know what rewards she will have waiting for her after the change.
“It’s nice to have some money back at the end of the year from AmEx,” she said.
Costco’s basic $55 annual fee enables members to apply for an Amex card that rebates 3% of most gasoline purchases, 2% on most travel and restaurant spending, and 1% on other purchases. By doubling the membership fee to $110, members can apply for a Costco AmEx card that provides them the same rewards plus an annual check for 2% of most Costco purchases (gasoline, alcoholic beverages and tobacco are among the exclusions).
Members can pay with any AmEx card, not just Costco’s, and after the change will be able to pay with any Visa card. But they otherwise are limited to cash, checks or debit cards — an indication of the power wielded by Costco, which has 50 million members worldwide.
Wal-Mart, the world’s largest retailer, switched last year from Discover to Mastercard as its credit card partner but allows shoppers to use other credit cards.
Costco’s influence affected David Bruton in Los Feliz, who obtained his first AmEx card from Costco two years ago. He rarely uses it now, opting instead for another AmEx card through his bank that he said gives higher rewards for gas and other purchases. The 25-year-old engineer said the change means he will end up using more of his Visa cards since AmEx is already accepted by so few merchants.
He hopes Costco’s plan to accept Visa cards translates to more competition among card plans.
“When there is more competition, there might be better rewards,” he said.
Analyst Joseph Feldman at Telsey Advisory Group said Costco plays hardball to get the deals it wants. In years past, it stopped selling Coca-Cola and Apple products for a time after failing to come to a satisfactory agreement.
“If you can’t hit Costco’s price, they’ll move onto something else,” Feldman said, adding that Costco’s size makes it an attractive partner nevertheless.
David Strasser, an analyst at Janney Montgomery Scott, said Costco almost certainly will reach a better financial deal than is available to smaller retailers, including paying lower “swipe” fees when shoppers use the credit card.
Since there are more Visa cardholders than AmEx ones, Strasser said more shoppers will probably benefit from the switch.
Nonetheless, he said, AmEx and Costco had “a great overlap demographically,” because Costco has many affluent customers who enjoyed the high level of AmEx customer service.
“Some people are better off,” Strasser said. “Others are going to be a little annoyed.”