An Inside Account of How Amex Lost the Costco Deal, and What it Means Going Forward

Bloomberg ran a long piece purporting to tell the story of how American Express came to lose to Costco co-brand deal, and along the way details the challenges American Express faces to its business model.

It begins with narrating the cultural differences between American Express and Costco.

When Chenault made the reverse trip to Issaquah, the Costco guys were tickled by how meticulously Amex choreographed his movements. “Ken Chenault would have an advance team come to our office before he visited,” says Paul Latham, Costco’s vice president for membership and marketing. “They planned everything—where he would enter the building, the route to the boardroom, where he’d sit at the table.” After breakfast, Chenault would often give an elaborate presentation about the performance of Amex’s Costco affinity card, using PowerPoint decks that looked like they took weeks, maybe months, to prepare. Costco just jotted down some notes for their CEO, Craig Jelinek, to talk about.

The Amex people, most of whom had MBAs, sometimes found it amusing to deal with Costco veterans who spoke about starting out stocking warehouse shelves. Less endearing was the habit Costco executives had of referring to Amex as a “vendor.” That made the Amex people seethe. After all, they represented one of America’s oldest corporations. But they smiled and said nothing, and the corporate marriage endured for 16 years.

And then suggests that an insult may have caused American Express to lose the deal:

Amex wasn’t happy about competing with global banks such as Citigroup and JPMorgan Chase and its archrivals Visa and MasterCard. But Chenault fought for the deal—even though his company might actually lose money in some cases when Costco customers swiped the card. As the negotiations dragged into January 2015, however, he became agitated and called his counterpart to remind him that Amex hadn’t only furnished Costco with its prestigious card; it had been Costco’s “trusted partner.” Jelinek interrupted, according to people who were briefed by Chenault about the call, and told him that as far as he was concerned, Amex was another vendor, just like the one that sold Costco ketchup. “If I can get cheaper ketchup somewhere else, I will,” he said. As rumors about the call spread, the rank and file who heard about it couldn’t believe someone from Costco had the nerve to insult Amex like that. Ketchup! Chenault called Jelinek a few weeks later to say Amex was pulling out.

The account of who pulled out of negotiations is disputed, and indeed whether or not American Express was ever compared to ketchup. I’m not sure it mattered either way for the ultimate outcome.

American Express says the deal ended for purely economic reasons, and I suspect that’s right. I’ve suggested that as costly as it was for American Express to lose Costco, it would have been more costly to retain Costco. As big a win as Costco is for Citibank and Visa, it’s a deal afflicted by the winner’s curse because Citi/Visa had to overpay to secure it.

Nonetheless, losing the deal is a big blow: 10% of American Express cards were co-brand Costco products (23% of Amex cards are co-brands overall, including Delta, Starwood, Hilton, etc.).

It’s been reported that current Costco American Express cardmembers will automatically receive Citibank-issued Costco cards. Bloomberg notes, “As part of Costco’s new agreement, Amex must sell the loan portfolio to Citigroup, a deal that the two banks are still negotiating.”

Fidelity is considering switching payment networks for their 2% rebate card. American Express lost the JetBlue co-brand to Barclays though it’s small and they will actually manage the backend for Barclays through their LoyaltyEdge business.

The Bloomberg piece suggests that there are nearly as many Discover Cards as American Express cards, and that more merchants accept Discover. I find that surprising.

It also notes that the economics of the original Amex-Costco deal were based on referral marketing.

According to House, Amex didn’t have to lower its swipe fee to get the transaction done. Instead, he says, it agreed to pay Costco a bounty for every new cardholder it brought in.

American Express’ Serve product, which came out of the 2010 acquisition of Revolution Money — together with Walmart (Bluebird) and Target (Redcard) branded cards — represent a huge growth area for the company in light of the damage caused by the Durbin Amendment which didn’t just kill lucrative mileage-earning debit cards, it

has resulted in a decrease in the availability of free checking accounts, higher checking account fees, higher minimum balance requirements and the elimination of debit rewards.

…these changes hit members of society who can least afford it. By raising the cost of a checking account, Zywicki argues, the Durbin amendment deserves much of the blame for forcing an additional one million households to become “unbanked” since 2009. And according to Zywicki, the net result of the Durbin amendment is a transfer of roughly $1 to $3 billion each year from low-income households to large retailers.

I love this vignette: Chenault tried to sell the judge a Centurion card during the Justice Department’s anti-trust suit:

Even in this moment of public self-pity, the 64-year-old CEO showed off his Amex invitation-only Centurion Card, better known as the Black Card, to white-haired U.S. District Court Judge Nicholas Garaufis, who was born in 1948. “I’ve never actually seen one of those,” Garaufis confessed.

“Your honor, if you would permit me,” Chenault said, producing his own. “This is a Black Card. It’s made out of titanium. And what it has is a set of very specialized services, so concierge type of services. So you can almost think of it as your personal aide.”

“I see,” Garaufis said. “I’m going to need a personal aide at some point.”

“Well, after the trial and everything’s done,” Chenault said.

“I don’t want to know,” Garaufis said.

“Part of my job is to persuade,” Chenault said. Never mind that even the Black Card no longer has the same mystique with the young moneyed set that Amex desperately needs to attract. In 2004, Kanye West boasted about his, memorably referring to it in a song as the “African American Express card.” But last year, Young Thug, the rap icon and influencer of the moment, rhymed in the hedonistic hit Lifestyle about having a $1.5 million spending limit on his Visa card.

The question at this point for American Express isn’t whether they are a strong, profitable business — it’s whether they remain a growth business. They certainly have huge markets to tackle through their Walmart and Target co-brand offerings. The Amex Everyday product line is focused on non-traditional customers for American Express.

  • It is called ‘Amex’ and not even ‘American Express’
  • It lacks the ‘Centurion’ logo
  • It’s pitched at and incentivizes use for everyday spend.

They’re pitching it at ‘multi-tasker’ females, rather than older male business travelers.

The point is they have markets to grow into leveraging their core capabilities. Whether or not they’re successful may ultimately be within their control.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I’m quite surprise that Citi/Visa won the Costco deal since Citi is moving most of its products to Mastercard.

  2. Gary, what does this mean for a credit report/inquiry/limit for the existing card holders? I imagine there are difference means of due diligence for determining how much credit to extend and how to manage that process. Is there another example of this where we know what the existing interbank and regulatory hurdles are for such a portfolio transfer.

  3. If the rumors are true and my sockdrawered Costco card will become a Citi product, should I do anything proactively? I’m considering asking AmEx for a product change to preserve the account age and credit line.

  4. @ Jonathan – that’s a good point. I’ve had the Costco Amex card for about 15 years – I wouldn’t want the change to Citi to look like a new product on my credit report and therefore wipe away 15 years of history.

  5. I really like Amex and their customer service has been so far amazing every time I needed them. However, it has been a long time that Amex sits on some old premises of their business model and did not evolve to where the industry is today. First, they are still not a truly global card. What I mean is that there are still several places that just do not accept Amex cards. I just paid for a tour in Europe and although I had the option to pay with my Amex card it would cost me 3% more than paying with Visa or Mastercard. As for the article above, it is amazing that in a 16 years of relationship Amex has not learned how Costco works. Yes, they are simply another vendor and if the combination of quality/cost is not there they will disappear from Costco’s shelves. I also do not understand the Citi/Visa deal since 95% of Citi cards available today are Mastercard (data given to me by a manager at Citi cards when I asked if my Prestige card could have the Visa brand). Thus, not sure how the relationship Citi/Mastercard will be when Citi starts at Costco.

  6. @ Jonathan – call American Express Customer Service and let the representative know your concerns. I did and they had some conversion offers at the time which were not attractive to me (the TrueEarnings Business card I have has no annual fee, but it is an Open card and you get a 5% discount at Hyatt – a favorite place for @Gary to use an SPG Business Card!).

    I would not be surprised if Amex is continuing to work on retention options…

  7. Amex customer service is light years better than citi. Amex is Singapore Airlines. Citi is united Airlines.

  8. @Win – Thanks for the tip. Just got off the phone with retention. At first, the rep said that on March 31, 2016, the card would stop functioning and the account would be closed. I pressed further, he put me on hold, and eventually came back with AmEx’s plans to issue every Costco holder a Blue Cash card by January.

  9. @credit you must be living on a different planet. Amex’s customer service is Spirit Airlines… Citi is United. Chase is Singapore. I happen to like United 🙂

    I just wasted 2 hours of my life on the phone with Amex to link my BA account number to MR (because of an error with their website). Last week, I was accused by them of “ripping off” amex for asking for my points to be accelerated (they should not have to be accelerated in the first place). Also, their executive office does not respond to emails. They over charge for their cards… God help them if they send me a blue card replacing my costco card. I want nothing more than to be done with this terrible company.

    Comparing Amex to a knock off ketchup is a step above my opinions of that company.

  10. Hilarious that Amex doesn’t understand that they are little more than a ketchup vendor as far as Costco (or the average consumer like me) is concerned. Nice to see their egos taken down. They are simply a payment processor, nothing more. They bring nothing to the Costco relationship except a way for customer to pay – and can easily be replaced by any other bank that issues cards.

  11. @Boraxo

    Always a thrill to see a DYKWIA get taken down a peg, and when it’s a multi-billion dollar corporation, even better.

  12. Costco won’t lose members because of the conversion. They will likely gain members now. Amex will of course lose cardmembers so the ball was always in Costco’s court and Amex was honestly just a servant or vendor, whatever.

  13. I found it interesting that no one has spoken about revenue dilution. I don’t know the term length of the Costco/Citibank relationship. But, if Citibank makes very little money from this deal, it will negotiate differently for the next agreement. That could have been what Amex wanted all along. My company does this tactic very frequently. Bid the business down as low as you can suffer and then let the competitor bid so much lower that they can’t make any money on the deal. Which is what Citibank will suffer with. A huge, major international merchant that they service and make no money. The even worse part of this Costco/Citibank agreement is that Costco will accept any bank’s Visa card. Hello, I would rather use my Sapphire Preferred or any other Visa card, than the Costco/Citibank Visa card. I might need some UR points more than anything and going to Costco might give me, just the amount I might need!

  14. The Citi/Visa deal is pretty crazy from what I have read: They will be charging 0% to Costco and Visa is going force issuers (Chase, etc.) to cap the charge to 0.4%, which Citi and Visa would reimburse to Costco.

  15. Yet another Gary “kitchen sink” post. The first 50% was interesting and just when I thought it was going to end it went on and on and on and on….omg.

  16. Good post. I was under the foolish impression that me costco amex card was going to have platinum benefits when I signed up about 12 years ago. I’ve been disappointed in it and will love using a reward card there.

  17. In Canada, Costco switched to a Capital One MC (Citi has not issued cards in Canada for a number of years), but cardholders were not transferred. Rather, AmEx created a new “Simply Cash” card to replace the Costco card and everyone had to reapply to Capital One.

  18. @Gary – I missed your post on the Hyatt Open discount ending. That makes Amex biz cards less attractive to me. Thanks for the heads-up.

  19. Not sure what we will do in March. We haven’t done business with Citi since the early 2000’s, when they cancelled my wife’s CitiMiles card, which she had carried as “first out of the wallet” since the 1980’s, earned one mile per dollar of spend, and allowed redemptions for airline tickets at a rate of one mile per actual mile of air itinerary. Citi tried to forfeit the accumulated 4000+ actual miles, and tried to replace it with a Thank You Miles card with no carryover. We eventually (after 3-4 days on the phone with Citi), were able to use about 3000 miles, and lost about 1000.

    So we’re not fans of Citi, whether linked to Costco or not.

  20. Forgive this rant. Long time Costco fan. Own a “Love Costco” robust T Shirt given to me when I made a modest charity donation. I get it about Amex. We’ll show our membership card and use existing Visa, our main card. We have a CitiMortgage. Because CitI allegedly had at their offices hundreds of feds hovering over Citi employees processing our refi the result was pure hell. BofA told me it would have been no better there. CitiBank (among others, I admit) is tainted. I think Costco and therefore us, their customers deserve “top of the line” financial VENDOR. Citi’s rep is, IMHO, subpar. We shall see what Citi can learn from Costco’s culture.

  21. @ Kent C: I may be old school, but Costco WILL be losing my business after this move. I have not used Visa for over 10 years. I use Amex only and find their reward points and customer service the best. Just recently started using their travel service, which after a lot of cross-checking, offers me the best deals and prices!

  22. “Amex customer service is light years better than citi. Amex is Singapore Airlines. Citi is united Airlines.”

    And Costco is ‘Next Hound Out” service from Greyhound.

  23. I’ve always had excellent service from AmExp, and never a problem.
    Also Costco has a great return/exchange policy (except the line-ups) and I have no serious complaints about either corporation.

  24. It would be great if we could get details on what Citi and Visa paid to get the business. My guess 10’s of millions (if not hundreds) were offered in incentives, marketing dollars, rebates, etc. As public companies, is it possible to get these details? Small businesses will be shocked to see where their interchange dollars go.

  25. So here it is 8 weeks before the change I have have not heard or read anything solid from Costco or AMX as to what exactly is going to happen.
    Does anyone have written confirmation as to the exact process that will happen in this changeover to Citicard?

  26. Obviously Costco has not experienced doing business with Citi-Bank.
    I went through several years of sheer torture when they handled my retirement account. The final blow was when I was told “they couldn’t find my account; was I sure I had the right bank.”
    I shall greatly miss American Express. Not one error in all the years I have done business with them.

  27. I have several Visa cards by chase and I cannot appreciate their service enough. Ditto with American Express. Fantastic customer service I have no complaints about. COSTCO is a great store, saved me thousands of dollars over the years. I have to pay for the membership but it is really pittance compared to all the money I saved. I had some issues with Citi a while ago. In my many years of experience with credit cards, capital one is the worst of the breed. That gave me so much grief several years ago. They had this menu which did not have the option to speak to any love rep, and simply switch you back to the main menu of you pressed ‘0’. Amex is a stellar company and I am going to miss my COSTCO/Amex executive card.

  28. Us at Sea Jay Yachts only like American Express and their superior personal service.
    Please think of reinstating their service at Costco.
    Thank You Jay N. Oppenheimer

  29. American Express is the best credit card, hands down! I have had every credit card for my business in the last 30 years and by far, American Express has the best customer service and rewards. If you ever have problems they are ready to help resolve them without hassle. I am heart broken that Costco couldn’t work something out with them and will not renew my membership because of this. My loyalty is to the only credit card company that has always had my back, American Express!

  30. Costco’s decision had two consequences for me: I didn’t renew my Costco membership for the first time since 1988, and I ended up going to work for Amex.

  31. I just got off the phone with Amex. On June 20, 2016 my Costco Amex will self-destruct. Everything, including any existing balance, current interest rate, credit limit and length of account will transfer to the Citi Visa account. It will not show as a new account but have the same length of account as did my Costco Amex. I’ll do nothing. I have an Amex Platinum business card and I’m happy with that.

  32. I forget, who is CITI? For some reason I still remember what this terrible company did to the country I can’t believe the BOD of Costco hired anyone from CITI to do anything but scrub urinals. What were you people thinking?

  33. Thanks for the article, and the comments. While both Amex and Costco are known for their customer service, I never quite saw the marriage of an “upscale businessman’s card” with an “everyday warehouse shopping club”. As longtime Costco shoppers, we’ve never had a reason to use an American Express card, and are perfectly fine with Discover and Visa. Both will contact our family if they see an unexpected charge, and I’ve set up alerts to my email address whenever a merchant charges our card. That’s certainly not the personalized service of an upscale card, but it’s enough to provide me the peace of mind that no one’ stolen my cc number.

  34. Hi Everyone, well like referenced in the article, Ito am a successful Rapper, with a black Centurian Card. I go by Peace Brother Ron. While I don’t shop in Costco ( those store brands and long lines are not for me!i it is inexcusable that Ken Chenault lost the Costco deal. It’s due to the processing CS or “swipe fee” that Amex charges on each purchase, which in most cases is 3.0 +. At this level, many vendors do not want to accept an Amex Card, and will put up a sign telling you so. My Centurian Rep told me that a the negotiations, Chenault folded very quickly, that’s too bad for Amex and all of its stockholders, Costco was one major piece of business for Amex, not to mention losing Jet Blue as well. I am well established in the Music/Enretainment business, and I see people in the biz leaving Amex, for the high end Chase Palladium Card, by the droves I may be a Rapper, and a very successful one at that, but I keep up on these things. Those Harvard MBAs over at Amex don’t know wha the hell they are doing, and this the bottom line, cause Bother Ron says so!

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