AmEx Could Take an $82 Billion Charge-Volume Hit With Loss of U.S. Costco Card

American Express Co. on Thursday disclosed that it will not renew its merchant-acceptance and cobranded credit card agreements with Costco Wholesale Corp. The card accounted for about $82 billion of AmEx’s worldwide charge volume last year.

The possible loss of the warehouse club’s 16-year AmEx card program had been rumored for months. Costco ended its AmEx cobranded card program in Canada last year, and the Bloomberg news service reported in November that Costco was considering a new U.S. card partner.

“Last year, we decided to begin early discussions with Costco about renewing our long-term U.S. relationship,” AmEx chief executive Kenneth I. Chenault said in prepared remarks for an investor call this morning. “Although we competed aggressively to renew the relationship, we were unable in the end to reach terms that would have made economic sense for our company and our shareholders. Instead, we will focus on opportunities in other parts of our business where we see significant potential for growth and more attractive returns over time.”

The contracts expire March 31, 2016. AmEx cards will continue to be accepted at Costco’s 474 U.S. warehouses until then. AmEx is the exclusive general-purpose credit card brand accepted at Costco; the retailer also accepts debit cards and has a private-label credit card.

A spokesperson for Issaquah, Wash.-based Costco was unavailable for comment Thursday morning.

AmEx chief financial officer Jeffrey C. Campbell said in his prepared remarks for the call that Costco accounted for 8% of AmEx’s worldwide card-billed business in 2014. That’s $81.8 billion out of a total of $1.02 trillion in charge volume. Costco also accounted for 10% of AmEx’s worldwide cards in force, or 11.2 million of the 112.2 million total at the end of 2014, and 10% of AmEx’s $70.4 billion in loans, according to Campbell. Another 1% of AmEx’s billings come from spending by other AmEx cardholders at Costco. The warehouse chain has 76.4 million holders of its membership cards, which means about 15% of its customer base carries the AmEx cobranded card.

While AmEx is in for a charge-volume hit, the Costco business wasn’t as profitable as some of its other card programs. AmEx’s reported worldwide discount rate, covering all card programs, was 2.48% of the sale in 2014, down from 2.51% in 2013. AmEx’s Costco cardholders do 70% of their spending outside of Costco stores.

“The end of the Costco U.S. relationship will have a positive impact on our reported discount rate as our merchant pricing at Costco U.S. is significantly lower than our overall average,” said Campbell. “This will likely result in a smaller than average decline, or perhaps even an increase, in our reported discount rate as Costco U.S. volumes roll off in 2016. Generally speaking, the revenue and profits on the spending inside Costco U.S. are much lower than on spending outside of Costco. Therefore we will focus on customers who frequently use their card at non-Costco merchants.”

AmEx could try to keep as many of the Costco cardholders as possible by offering them other AmEx cards. In addition to numerous non-cobranded charge and credit cards, AmEx has several other cobranded card programs, including ones for Delta Air Lines and Starwood hotels. “We believe there is an opportunity to offer [Costco cardholders] attractive products from our suite of proprietary offerings,” Campbell said. “We will also be making investments in other growth initiatives across the company.”

AmEx's share price as of noon Central on Thursday was down 6% from Wednesday's close.