The possible terms of Costco’s new co-branded deal with Visa and Citigroup gives good indication of just why the partnership with American Express didn’t work out.
Costco has secured terms for its new cards that provide the retailer with everything it could wish for, Bloomberg reported. The deal, according to Bloomberg, which cited anonymous sources said to be close to the matter, will allow Costco’s acceptance costs to be close to zero. Currently in its deal with AmEx, those costs are about 0.6 percent per transaction that Costco shells out. In its new deal, when the AmEx partnership expires, the fees for the Visa and Citigroup deal will be offset by incentives, the sources indicated.
Visa and Citigroup were able to secure the Costco deal because the companies were willing to agree to terms that AmEx said were not economically feasible for the company. In its new deal, Costo was able to gain control over its own terms — something AmEx CEO Kenneth Chenault made it very clear that his company could not agree to.
“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,” Chenault said in February when it announced the two entities were ending their 16-year relationship. “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.”
Although Visa and Citigroup won’t get the same transactional revenue fees that AmEx was able to collect on Costco co-branded cards, Bloomberg pointed out that Visa/Citigroup benefit when consumers carry balances over on the cards or use the cards outside of the retailer. That incentive, however, wasn’t enough for AmEx.
“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 in February.