Costco - American Express, Partnership to End in 2016

2/20/15 - For years, American Express was the exclusive credit card of Costco shopping centers throughout North America. Costco's most recent contract with American Express is set to expire in March 2016, and the companies have been unable to come to a mutually beneficial agreement for renewal of that contract. Costco Wholesale Corporation has since announced the upcoming split, and according to an article by E. Scott Reckard and Dean Starkman, of the L.A Times, Costco is close to finding a replacement as their sole credit card provider.

Since Costco only accepts one type of credit card, customers are forced to either pay via cash/check or use that type of credit card. This gives that credit card company a huge amount of business, since shoppers at Costco generally buy products in bulk and don't usually carry enough cash to pay for such a large quantity of goods. One of the big reasons for Costco's break with American Express, according to Reckard and Starkman, is a desire for lower swipe fees. If Costco, or any other company for that matter, is able to get cheaper rates from one credit card company versus another, they will almost always choose the one with lower prices.

Even though the partnership with Costco accounted for about $94 billion in revenue for AmEx, analysts state that based on Costco's new terms, the economics did not make a renewal the sensible move. Some of that money comes from interest on pending credit card balances, but the vast majority comes from actual spending by credit card holders.

Over the years, in an attempt to keep up with other companies, AmEx has offered rewards, special deals, and even lower fees, which has kept it relatively competitive. Unfortunately, AmEx's stock has been on a decline recently, a trend which has not been helped by the upcoming break with Costco. On the plus side, American Express claims that it has plans to reinvest in other companies, as well as to focus on its current partnerships.

The split is having a far worse effect on American Express than it is on Costco. Costco pretty much has the ability to choose its own rates, since the company that gets the partnership will be gaining much more business. A year ago, Costco switched to the Capital One Master Card in its Canadian branches, and has felt little ill effect from it. The only issue seems to be customers' reactions. How difficult will it be to change cards? Would it become easier for shoppers to simply pay in cash, which might reduce the benefit to the new credit card company? Only time will tell.

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