The co-brand credit card business changed when Citibank stole Costco from American Express. It was the biggest most expensive deal in history, and it set off a chain reaction. American Express agreed to pay Delta over $2 billion a year for its business to lock in the partnership.
That set a benchmark for the United. American managed to put together something with two banks to claw their way up to similar levels (Citi after all was tapped out). Southwest and Starwood re-upped at record levels.
American Express would only let go of the Costco business when there was no way to make a profit at the numbers Citi was talking about. It’s the perfect example of winner’s curse. Everyone knows what the business is worth, the one who wins the auction is the one that overpays.
Citi got a huge portfolio — over 11 million American Express cards across more than 7 million accounts. But they didn’t get the same card exclusivity Amex had, Costco will accept any Visa — even those of competitors.
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Citi was never going to make money with the accounts it bought from American Express. And they paid a big premium to service those and issue new cards. The only way to make the deal work was to grow at a fast pace. But they didn’t get the changeover done until last June.
And you have to be a Costco member to get the Costco card but over a year later they still haven’t made it possible to complete both tasks via the online card application.
The bank said that it had $1.2 billion in losses at its consumer lending business in North America, mostly driven up by unpaid credit-card balances. Worse, the bank put aside another $500 million in its loan-loss reserve account mostly for cards, an acknowledgement that improvement in the segment could be further off than expected. Overall, revenue in the card business was down just 1 percent.
…Its biggest move came a year ago when it undercut American Express Co. and took over Costco Wholesale Corp.’s card business. Citi executives have warned that the expansion would boost costs and losses for a time. But they have repeatedly said that investors would see an improvement starting in the second half of 2017. In the third quarter, at least, the payoff wasn’t evident. Credit-card loans were up just 1 percent from the quarter before. Credit-card margins, as a percentage of loans, dropped to 7.3 percent, down from 8.7 percent a year ago. And credit-card losses were up 36 percent, to $611 million, from a year ago.