Costco’s Switch From American Express to Visa and Citi Set for This Weekend

One of the biggest changeovers in the history of general-purpose credit cards is set for this weekend when warehouse retailer Costco Wholesale Corp. stops accepting American Express Co. cards and begins taking Visa Inc. cards.

In an email to its customer-members this week, Issaquah, Wash.-based Costco said to “mark your calendar for the beginning of a new chapter in the Costco story.” Sunday marks the end of Costco’s 17-year relationship with AmEx, when Costco will no longer accept AmEx cards, including its AmEx TrueEarnings cobranded card. On Monday, Costco will begin accepting all Visa cards, including the new Costco Anywhere Visa Card issued by Citigroup Inc.

The coming changeover, first disclosed in February 2015, left AmEx scrambling to replace its biggest single cobranded program, one that generated an estimated $82 billion in annual charge volume in 2014, much of which undoubtedly will move to Visa. And cost-conscious Costco could save more than $100 million in card-acceptance costs annually by going with Visa rather than AmEx, according to an analyst.

AmEx in recent financial filings reported the Costco cobrand accounted for 10% of its worldwide cards in force, or about 11.9 million out of the 118.6 million total as of March 31. AmEx said the Costco card generated 7% of its worldwide card-billed business in the first quarter, which works out to $17.8 billion, though volume has been slowing in the run-up to the changeover. AmEx said approximately 70% of the card’s spending volume occurs outside Costco warehouses.

According to a spokesperson for New York City-based Citi, existing AmEx cardholders do not need to apply for the new Costco cobrand. “They would have automatically received new Visa credit cards from Citi to replace their cards,” she tells Digital Transactions News by email. Both the old AmEx card and the new Citi-Visa card double as Costco membership cards.

“Only a small percentage of members who received the new Costco Anywhere Visa card have indicated that they do not want the cards,” a Costco spokesperson tells Digital Transactions News in an email.

Mailings for the new Citibank Visa began in mid-May. AmEx in late February struck a deal to sell the Costco portfolio’s credit card receivables to Citi for a gain of approximately $1 billion.

New York-based AmEx is now aggressively trying to retain as many Costco cardholders as possible by promoting other cards to them, according to reports in the financial press. AmEx is offering its Blue Cash Everyday Card, which has no annual fee and charges no interest in the first 15 months. AmEx also will give a $250 statement credit to cardholders who charge $1,000 in the first three months.

Costco could save $110 million to $220 million annually through lower acceptance costs with Visa, according to a February report from Toronto-based BMO Capital Markets Corp.

The report by analyst Kelly Bania says the typical AmEx acceptance cost is 190 to 200 basis points (100 basis points equals 1%), “while we expect Visa/Citi will likely charge closer to 130-140 bps on average.” Costco could be saving 30 to 60 basis points in interchange with each card transaction, which works out to savings of $110 million to $220 million a year based on estimated 40% of sales being on credit cards.

Going with Visa as its accepted credit card network might broaden Costco’s appeal to more consumers, according to the report.

“We assume Costco was willing to pay a higher interchange fee historically with AmEx given that AmEx cardholders have tended to skew to higher incomes,” the report says. “However, with more than 80-plus million global members currently (about 60 million of which we assume are in the U.S.), we believe Costco is now at a stage in its growth that it may be looking to cast a wider net in terms of the demographics of potential members that it can attract, particularly as the company is focused on attracting millennials as new members.”

In addition to Visa, Costco’s U.S. stores accept PIN-debit cards, its private-label prepaid cards, and electronic benefits transfer cards.