It was really shocking that American Express lost their exclusive deal with Costco — on the whole the big players with co-brand cards are pretty much locked into their partners.
A deal with Costco should have been worth more to American Express than to Citibank. Amex had a big installed cardmember base already.
As a result I’ve assumed Citibank was struck by ‘the winner’s curse’ — auction winners tend to overpay, which is how they win the auction. To win the auction for Costco’s business, to pay more than American Express was willing to in order to keep it, Citibank had to be paying more than it was worth.
(Contra this, I passed on some speculation that Citibank’s tax-offsets, an asset derived from past losses, skewed incentives.)
Now some details of the deal come out. (HT: Milepoint) It suggests to me the winner’s curse idea could be in play here, unless Citibank knows a lot more than American Express about the value of the business or unless the win is worth more to the Citibank and the rest of its business than the loss hurts Amex.
Costco Wholesale Corp. has attained a goal that retailers have sought for years: near-zero expenses for credit-card payments.
In a deal with Visa Inc. and Citigroup Inc., Costco’s acceptance costs will be about zero, according to people familiar with the arrangement. That compares with the roughly 0.6 percent of each transaction the retailer pays its current partner, American Express Co. While Costco will still incur small fees on Visa cards issued by other banks, incentives from Citigroup and Visa will offset them, the people said.
…“The numbers didn’t add up,” AmEx Chief Executive Officer Kenneth I. Chenault told investors last month. “We couldn’t accept their financial terms nor their contract terms, some of which would have meant taking on more risk than we were comfortable with.”
Costco’s sales volume is $100 billion and will accept only Visa in US stores. Costco had represented 8% of total American Express spending.
Co-brand deals are complicated three-way relationships between brand, bank, and payment network (in most cases in the US American Express is both bank and payment network). This wasn’t just Citibank doing the deal at favorable terms to Costco, the interchange rate from Visa on the Costco card will be less than 0.4%, compared to an average for Visa products closer to 2%.