Why would credit cards want Costco?

Nova Safo Feb 16, 2015
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Why would credit cards want Costco?

Nova Safo Feb 16, 2015
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The Costco and American Express partnership, which is ending at the end of March, was just one example of what credit card companies are doing more of these days. 

American Express offered an official Costco card and had been the only credit card you could use to buy stuff at the retailer, which posted $110 billion in revenues for fiscal year 2014.

Their partnership was a co-branding arrangement. Such arrangements have become more common, says Jason Arnold of RBC, and offer loyalty programs such as airline miles or cash-back cards. These arrangements are alluring to risk-averse credit issuers, says Arnold, because they are less likely to result in delinquencies.

“If a card-member wants to keep their rewards, they typically have to pay their card on time,” Arnold says. 

Since the Great Recession, banks have been increasingly employing co-branding agreements to stand out from the competition, instead of competing with each other on lower interest rates, says Arnold.

Co-branding partnerships can encourage spending. American Express says 20 percent of its monthly outstanding balances are on its Costco cards. And, 70 percent of the money people spend on those cards, isn’t even spent at Costco, according to the company.

Customers have been using the cards for other purchases, too.

Sameer Gokhale, who tracks the banking industry at Janney Capital Markets, says co-branding gives credit card companies a captive customer base.

“You have this one merchant. You have customers loyal to this one merchant,” says Gokhale, “In this case it was Costco.”

But he adds that it probably did not make sense for AmEx to retain the partnership under the terms which he thinks Costco was asking: accepting lower fees for point-of-sale transactions at Costco stores. 

For its part, American Express says it will try to hold onto its many Costco credit card customers by offering them other AmEx cards. It also plans to ramp up spending on marketing.

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