Costco’s Cobranded Portfolio Gives a Big Lift to Citi’s Credit Card Transaction Volume

By Jim Daly
@DTPaymentNews

Its first full quarter of ownership of the big Costco Wholesale Corp. cobranded credit card portfolio helped to boost Citigroup Inc.’s North American purchase volume by 57%, the giant New York City-based bank reported Friday.

Costco last year anointed Citi as its cobranded card-issuing partner to succeed 16-year incumbent American Express Co. in a deal that also made Visa Inc. the exclusive credit card brand accepted at Costco’s approximately 475 U.S. warehouse stores. The switchover began in mid-June and involved 11.4 million cards linked to 7.5 million accounts, Richard Galenti, chief financial officer of Costco, said at the Issaquah, Wash.-based retailer’s Sept. 29 earnings call.

Despite some well-publicized glitches during the conversion, more than 85% of the cards, which double as Costco membership cards, have been activated. And since June 20, 1.1 million Costco members have applied for the new Anywhere Visa card, Galenti said, according to the Seeking Alpha transcript service.

Citi’s latest financials reflect the addition of the big portfolio, which included $10.6 billion in receivables. Sales volume on what Citi calls its North American branded cards jumped 57% year over year in the third quarter to $73 billion, the bank reported. Excluding Costco, North American purchase volume rose only 7%. Worldwide purchase volume, including Costco, increased 30% to $115 billion from $89 billion in 2015’s third quarter.

What’s not apparent yet is the effect of the Costco portfolio on Citi’s long-term profitability, part of which depends on the interchange rate Costco negotiated for Visa transactions. AmEx said that, despite its size, the Costco program produced lower margins than its overall card business. But Citigroup chief executive Michael Corbat is painting an optimistic picture.

“The acquisition of the Costco portfolio and the recently announced sales of our retail operations in Argentina and Brazil are the latest examples of how we are shifting resources to the areas we believe will generate the best returns for our shareholders,” Corbat said in a statement.

The bank is still digesting expenses from the Costco acquisition. Branded cards’ revenues grew 15% in the third quarter to $2.2 billion, while North American consumer-banking operating expenses, which include those from the Costco portfolio acquisition, increased 12% to $2.6 billion.