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.