What do customers actually want in a store credit card? More importantly, what are retailers willing to give them? While the days of consumers falling prey to closed-loop programs and high interest rates might be coming to an end or, at least, dialing itself back on the overt predatory financing, that doesn’t necessarily mean that merchants have found it in their hearts to pump up cash-back offers and erase blackout dates solely for shoppers’ benefits.
So, why is it that Costco’s new Citi-backed credit card is being talked up like the second coming of cash-back rewards?
The story starts with a report from The Wall Street Journal indicating that Costco’s new store card — though that may be a misnomer now — issued by Citi will ship to members on June 20, and they’ll be in store for several new perks they didn’t have before. While the old American Express-Costco store card offered 3 percent cash back on gas (up to $4,000 annually), 2 percent back on restaurants and eligible travel and 1 percent on purchases made outside of the wholesale retailer, the new Citi-Costco card ups the ante: Members will now enjoy 4 percent back on gas (up to $7,000 annually), 3 percent on restaurants and travel, 2 percent on all purchases made at Costco and 1 percent everywhere else.
And since Costco only requires a $55 membership fee to apply for the “Costco Anywhere Visa Card by Citi,” the move has some analysts at NerdWallet calling it a masterstroke of new consumer acquisition tools.
“We believe the improved rewards program has strong potential to drive this card to top of wallet for many consumers, which should also benefit Costco,” Robert Drbul, analyst at Nomura Securities, explained in a research note via Fortune.
Costco will have to wait until June 20 to see if the rewards attached to its new “store card” will actually drive more sales or even attract new customers, but now that the details of the rewards are public, consumer finance experts are digging into just what kind of Costco shopper will see the maximum benefit from the switch to Citi — and which should steer clear.
ValuePenguin compared the projected annual savings that a family operating on an average household budget — or $63,784 — would see under Costco’s new rewards program against what they might enjoy if they signed up for another of Citi’s Double Cash cards (1 percent cash back on all purchases, plus an additional 1 percent when those are paid off) instead. Costco comes up big in savings on gas ($96 annually to the Double Cash card’s $48) and restaurant purchases ($83 to $55), but both tie at $79 for groceries if Costco shoppers do all their food shopping there.
Up to this point, the Costco card seems like the much better deal, but when it comes to purchases made outside of Costco, it can’t stack up. Annually, the Citi Double Cash card will return $161 in savings — $1 more than double the Citi-Costco card. For diehard Costco shoppers, this isn’t likely to make much of a difference, but if the goal of the new program is to attract the non-converts who have resisted the pull of the wholesale retail craze thus far, it seems there’s still a ways to go before a store card can boast that kind of attraction.
Moreover, if flexibility and convenience are the hallmarks of any consumer-centric rewards program, Costco may have missed the mark on redemption. Cardholders can only redeem their due rewards once a year, and that comes in the form of a physical coupon mailed to shoppers’ homes every February — not exactly the model of convenience in a digital, omnichannel space that most consumers are already fluent in.
Costco has thrived on its closed membership business model throughout the years, and while the base $55 fee will let anyone join the club, the razzle-dazzle surrounding its new card may not be as industry-changing as first thought.
And if it is, it’ll likely be for members only.