Costco’s co-branded card is a tale of cities: New York City versus San Fransisco. To be more specific, it’s a tale of two payments networks: American Express and Visa.
American Express CEO Kenneth Chenault seemed ready to put the conversations about its soon-to-be shuttered 16-year relationship with Costco behind him during the company’s earnings call earlier this month. Visa’s CEO — who recently picked up that partnership with Citi and the wholesale retailer — told a much different story during the company’s second quarter earnings call yesterday (April 30).
“We’re very confident that we’ll be able to do a better job for Costco than the incumbent,” Visa CEO Charlie Scharf said. “And that will start Day 1 as we work extremely closely with Citi and Costco. And that work has begun already.”
Economically speaking, Chenault said Amex was “unable to reach terms [with Costco] that would have made economic sense for our Company and shareholders.” When questioned by an analyst about the economics of co-branded deals and the competitiveness of the space, Scharf was vague about deal economics but touted some brief benefits that Visa sees in teaming up with the major wholesaler.
“We view Costco as something extremely unique. …I’m guessing what issuers were willing to do for Costco is very specific to a unique opportunity to gain the kind of credit acceptance that we’ve talked about and the kind of co-brand that we talked about for a partner that didn’t accept our products in the past of this size,” Scharf said. “We view it as a unique opportunity to capture that volume. And to use the ability to have that acceptance to grow our products elsewhere, regardless of whether they are co-brand or not c0-brand. Obviously with the co-brands here, it will bring us extraordinary benefits. Costco to us stands on its own in terms of the way we think economically about what we should be willing to do.”
When pressed, Scharf didn’t have a definitive answer whether the co-branded space was truly as competitive as the analyst industry chatter suggests, but said the issuing side of the payments industry certainly is.
“In terms of whether the co-branded space is getting more competitive economically, I’m not sure,” Scharf said. “It’s very, very competitive — as is the issuing business. I think when people lose relationships like this they need to figure out where they need to look. So we assume they’ll continue to be competitive. And as we think about our future and we think about our ability to deliver the type of growth I think you’re all expecting from us, we’ve factored that into our assumptions along the way.”
Scharf was also asked about Citi’s ability to purchase the existing co-brand credit card portfolio from Amex; Scharf said Visa was not privy to those conversations. Scharf did say from what he’s heard, it suggests “confidence” that that deal will be able to be made. When asked about interchange rates on the Costco volume, Scharf was non-committal.
He did, however, remind analysts about the payments volume that Visa will be able to reap from the co-branded partnership.
“There were more issuers than Citi who wanted to win the co-brand. And whoever certainly was involved in the process understands the competitive dynamic and what would exist. And again, from our perspective the conversation is exactly what I’ve said here. It’s a unique and strategic opportunity to get access to an extraordinary amount of volume that we and our clients weren’t going to have access to,” Scharf said. “And if you think about if we didn’t win the kind of conversation that we were going to have, and the kind of conversation we would have to have with our issuers and their clients about not being able to participate in the opening of one of potentially the biggest retailers in the world, is not a conversation that we would have relished.”
During his opening remarks of yesterday’s call, Scharf was pretty direct in reminding analysts of the value that he perceives Costco will gain working with Visa.
“All the benefits I’ve outlined, plus what our issuers bring to the table create more value than others — specifically, and quite simple, we and our issuing partners and the co-brand partner can make more and provide greater value to our clients than smaller, close-looped networks,” Scharf said.
Payments Growth And The Chinese Market
Outside of the Costco conversations, Visa’s Q2 earnings gave Visa execs a solid platform from which to speak as the company posted a double-digit growth in payments volume of 11 percent, year over year, to $1.2 trillion. Cross-border volume growth grew 8 percent for the quarter, and total processed transactions — or transactions processed by VisaNet — hit 17 billion. Revenue for the quarter was $3.4 billion, an 8 percent increase, year over year; net profit growth remained flat at $1.6 billion.
“It continues to be a very exciting time in payments and at Visa. There are trillions of dollars of cash to disintermediate and our work in digital payments will allow us to capture more than we could have contemplated a few years ago,” Scharf said in the company’s earnings statement.
With the recent announcement that China has taken the first steps to break down the barriers for the U.S. payments networks, Scharf also shared his perspective about how Visa will continue to grow in China. Visa, he noted, already has a strong relationship in the country with its relationships with banks and merchants — highlighting that Visa is the “market share leader versus non-Chinese providers” in the country.
“Clearly this is a significant and positive step. The facts, as we’ve read them thus far, are consistent with our expectations. And we’re very excited to see more specifics, which obviously will be important,” Scharf said about the Chinese payments network expansion. “We do intend to apply for a license. As I’ve said, we have a strong relationship and great local relationships, which have only become stronger over the past several years. It’s important to participate in one of the most important markets in the world and for Visa to help in the growth of the domestic Chinese marketplace, working with Chinese companies and the Chinese government. To be clear — we are not pursuing this for the short-term profit opportunity. This is a long-term commitment, which will pay off over the long-term. We intend to prove our value as a partner within China and our value-added capabilities to help grow the Chinese economy will come above revenue and profit for quite some time. Regardless of when we start to participate in China, we do not expect this to be a meaningful contributor toward our growth for many years to come.”
In wrapping up his initial comments, Scharf didn’t let another hot button topic in payments slide by: tokenization. He was quick to tout Visa’s role in helping the platform move forward and explained how Visa’s digital payments platform has kept consistent with the payments innovations in the space, which he said will continue to grow because of Visa’s involvement.
“When we launched tokenization, we told you it was more than a set of just security standards. We said it was a platform to enable new commerce experiences. Then came Apple Pay. When we participated in the Apple Pay launch we said it was just beginning and there will be more solutions that will leverage our digital platforms,” Scharf commented. “Since then, Samsung has announced the new Galaxy S6 payments experience, and Google’s Android operating system supporting Host-Card Emulation. ..As an industry partner, Visa gives the chance for these experiences to be successful because of our technology, our scale and our leadership.”