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AmEx And Costco Break Up

First in Canada and then in the U.S., Costco has officially given American Express the ax. 

AmEx announced yesterday (Feb. 12) that its co-brand and merchant acceptance agreements with Costco will end March 31, 2016. Last fall, Costco said it would be cutting its ties with AmEx in Canada at the end of 2014. While Costco was once in a retail class of its own that accepted American Express, but not Visa or MasterCard, it appears the days of exclusivity have ended with the retailer — concluding a 16-year-deal between the credit card company and Costco.

“We are proud of the value created over many years for Costco, for our Card Members and for our shareholders,” AmEx CEO Kenneth Chenault wrote in a prepared company release. “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.” 

The news of Costco and AmEx severing their relationship came with bad news for the credit card company shareholders as AmEx’s stock dropped to a four-month low following the day’s announcement. AmEx held a conference call Thursday about the announcement, and according to MarketWatch, it was reported by Chenault that losing the contract would hurt earnings and revenues for 2015 and 2016. According to a Wall Street Journal report, “Costco cards account for one out of every 10 AmEx cards in circulation and 20 percent of the company’s loan portfolio.” Co-branded Costco cards make up 8 percent of AmEx’s customer spending, Chenault said. 

“It’s not easy to see a long-standing partnership end, but when the numbers no longer add up it’s the only sensible outcome,” Chenault said on the call with analysts. While he discussed the impact it will have on earnings, he also spoke about efforts the credit card company is undergoing to boost revenue in other areas of the company, citing the company’s larger investment in its prepaid credit cards as one example, WSJ reported. 

“We believe we have a number of different ways to drive growth going forward,” he said, noting that 70 percent of spending on the co-branded credit card was being done outside of Costco. 

“They are AmEx customers as much as they are Costco customers,” Chenault said. “We will invest in other opportunities that we think can generate greater returns over time.”

Lately, it’s been a tough go for AmEx, which announced in its earnings report last month that it would be cutting 4,000 jobs — citing shifting technologies that have created more financial systems as a reason for reducing workload. Chenault has offered few details other than to hint that restructuring may allow American Express to create jobs elsewhere within the company, which could partially offset some of the layoffs.

“Technology is also changing the way our card members and merchants want to interact with us,” Chenault said Jan. 21. “As a result of these changes, we have the need and the opportunity to continuously evolve our organization and cost structure to control for operating expenses while still investing in growth.”

With AmEx out, there’s one question left on the table: Which company could Costco be interested in bringing in for its co-branded card? Capital One was cited by one analyst as a possible company that could take over.

“We wouldn’t be surprised to see a winner announced very soon and we’d imagine it is competitive,” said Citigroup’s Donald Fandetti. “And we’d certainly put Capital One Financial as a potential bidder and in a strong position.”

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