Why You Won’t Be Able to Use American Express at Costco Anymore


A month ago, I wrote about how Citi and Visa partnered with Costco, thereby kicking American Express out in the process.

That new arrangement will begin on April 1st, 2016, at which point Amex credit cards won’t be accepted by the super warehouse store. And the Costco Amex credit card will cease to exist.

But what I didn’t touch on was why they terminated their longstanding relationship. To be honest, I wasn’t really sure at the time, but a new article from Bloomberg sheds some light.

Amex Wasn’t Able to Charge Enough

It turns out that Costco likes to keep their margins intact (there’s a reason they’re named Costco), and credit card issuers take a piece of each transaction. Additionally, payment processors like Amex, Visa, and MasterCard take a cut.

In the case of Amex, they are both the card issuer and the payment network, so apparently they weren’t able to charge enough to cover their costs and/or turn a profit.

And most people know that Amex charges merchants more than Visa and MasterCard, so partnering with Costco probably meant they couldn’t charge even close to what they do normally.

Last month, Amex CFO Kenneth I. Chenaul told investors “the numbers didn’t add up.” In other words, they couldn’t charge enough for the exclusive 16-year deal with Costco to continue making sense.

For the record, Costco customers reportedly account for 20% of Amex’s loans and eight percent of total spending.

In other words, the relationship was not insignificant and the decision to part ways must have been extremely difficult.

Why Visa and Citi Make More Sense

So you might be wondering why anyone else could come along and attempt to turn a profit if Amex doesn’t see the numbers being cost-effective.

Well, for one, Visa and Citi are two separate companies, as opposed to Amex, which as I mentioned, handled the entire payment process and issued the credit cards.

So Citi will make money from the co-branded Costco credit card and the interest that cardholders rack up, along with a cut of the interchange fee, which will apparently be close to “near-zero.”

Visa will make their money from the payment processing and some sliver of the interchange fee, with hopes of Costco cardholders using their Visa-branded credit cards elsewhere.

When used with other merchants, Visa will reap higher (more typical) interchange fees, which should make the partnership viable.

Remember, Costco customers accounted for nearly a tenth of total Amex spending, so if they use their credit cards elsewhere, both Visa and Citi will make money at the standard, higher rate.

That’s how they’re able to take near-zero in credit card fees at Costco. And that’s how Costco continues to be the most competitive company in the world.

Talk about clout.

Read more: How do credit card companies make money?

(photo: Mike Mozart)

By Colin Robertson

Colin created this blog after spending several years in a job that required him to scour credit reports on a daily basis. His goal is to help individuals better understand their credit and get the most out of credit cards.

1 comment

  1. I’m glad I don’t like AmEx. I can earn more cash back with my other credit cards.

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