Tomorrow is the last day that American Express cards will be accepted at Costco stores. Amex lost the co-brand relationship to Citibank and Visa in a deal that has Citi overpaying. Citi isn’t even gaining exclusivity over Costco payments (starting tomorrow you can use any Visa at Costco, regardless of the issuing bank).

American Express couldn’t match the money-losing deal that Citi was offering. Some have argued that it’s tax losses that subsidize the deal. The change meant American Express losing 10% of cardmembers.

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Co-Brand Deals Have Gotten Too Expensive

Citi-Costco underscored just how competitive co-brand credit card deals were becoming. American Express re-signed Delta at $2 billion a year. They re-signed Starwood, their next biggest co-brand, as well.

This set off a string of high-priced deals with Chase re-upping United and Southwest as well as its US relationship with British Airways.

And quarter after quarter American Airlines President Scott Kirby reminds investors in earnings calls that their main competitors have new co-brand credit card deals bolstering their revenue (to the tune of as much as 9 figures per quarter) while American still has a couple of years to go on theirs.

American’s Citibank relationship dates to 1987. But Barclaycard has the legacy US Airways cardholders on their books (and even bought out Bank of America’s US Airways Visa portfolio from before the US Airways merger with America West). Those two banks are fighting to become the sole issuer of American AAdvantage credit cards.

American’s next co-brand deal, and Marriott’s (given the hotel chain’s acquisition of Starwood, which leaves the future of the American Express Starwood portfolio in doubt), should continue to get done at stratospheric levels.

W Union Square Hotel

Banks Need New Business Models for Payments

The high cost of these deals, combined with the changing economics of processing payments — with new technologies driving down the cost move funds — mean that issuing banks will need to adjust their models. Air France shares in the interest paid by cardmembers with American Express rather than simply selling miles to Amex.

The businesses that ‘win’ will be the ones that engage in creative destruction. They need to destroy their own income streams by dominating in the arena of new payment technologies. They need to become low cost, convenient payment processing providers. And they need to develop new revenue streams such as monetizing data from customer purchases.

Last month I wrote about how the Thanks Again loyalty program lets airports track their customers. They use beacon technology through their mobile app even track passengers through the airport and market to them in real-time based on data about their purchase patterns.

If that’s a microcosm of permission-based marketing in an airport, which could easily be replicated in a shopping mall, consider that scope expanded not to one venue but all venues, everywhere.

American Express, with its closed loop — issuing cards and processing payments — has tremendous data on its customers. That data lets them evaluate the creditworthiness of a consumer for a given purchase in real time. It could also let them predict a consumer’s purchase patterns. And then market to those consumers in advance.

Combining knowledge of a consumer’s ability to spend, and propensity to spend, with behavior data — what spending they’ve just done, where they are (via location-based data from a mobile app) — they can not only capture a consumer’s spend but direct that spend. They have better financial data on high value consumers than anyone else.

Which Way Forward for American Express?

Instead of creative destruction we see American Express trying to make inroads into small business where most spend is still done by check. There’s upside there, driving more charges through the existing network, but it doesn’t build a new business for the future. It only treads water as the percent they take from each transaction gets eroded.

Prepaid products aren’t driving the hoped-for growth. And American Express Plenti, a coalition rewards program that lets you earn points for doing business with a variety of merchants, hasn’t picked up many new participants since it launched.

The alternative of course is to sell the company to another institution that can leverage its assets. Both American Express and Wells Fargo were started by the same individuals. The single largest shareholder in each by a large margin is Warren Buffet via Berkshire Hathaway. That was the speculation back in March.

The challenges that American Express faces are hardly unique. While credit card earnings have been a bright spot for banks the business is ripe for disruption. And the extent to which these businesses are regulated, especially in a post-Dodd Frank world, makes it that much more difficult for incumbent players to be the sources of innovation.

Meanwhile I remain an enthusiastic customer. I get Hilton elite status thanks to my Platinum card and I get into Centurion lounges as well, though it’s been nearly a year since we’ve seen a new one announced.

American Express Centurion Lounge Dallas