American Express recently reported that its Costco exclusivity agreement that had been in place for 16 years would come to an end in 2016. Both Costco and American Express cited an impasse on terms that would make it “economical” as the justification for the termination. A similar agreement was cancelled in Canada last year between the two companies and could provide some insight into what the future relationships between Costco and American Express will look like going forward in the US. Co-branding presents a sizable opportunity for card networks and issuers beyond immediate revenue from payment volume. The loans and access to a particular consumer segment can provide an initial contact point for additional financial service cross-selling. However, in an increasingly competitive environment for co-branding partnerships among networks, the share of profit created from the programs may continue to shift toward retailers.
As a result of the deal expiring, American Express mentioned in their announcement they expected to spend more on acquiring new customers and to offer additional products to current Costco co-branded cardholders to offset the lost value. They have not said how effective the same strategy has been with the Canadian Costco customers. Third party issuing agreements represents approximately a fifth of all American Express cards in circulation or 22 million cards. The US Costco relationship accounted for nearly half of all American Express co-branded cards. Although these cardmembers generally spend less than their proprietary customers consisting of corporate and affluent members, third party agreements provide access to many more customers and the opportunity to utilize excess capacity on their network.
Costco cardmembers represented 8% of American Express total billed business, 20% of total worldwide loans, and 10% of their total cards in force. The Costco co-branded cardholders are also a particularly appealing consumer segment for networks because they use their cards outside of Costco stores frequently; only 30% of cardmember spend took place in Costco. The Costco partnership was a logical fit for American Express given the middle class and small business customer base of the retailer. The network has been investing in expanding beyond its traditional corporate and affluent consumer cardholders for several years.
The company turned to its recent co-branding renewal with Delta and Starwood as examples of its commitment to retaining third party issuing partnerships in general, and considers the Costco partnership lapse an exception. Delta received US$2 billion a year from its previous agreement with American Express and the renewal amounted to a 15% increase. Total airline related volume accounted for 9% of the network’s global value and increased 5% from 2013 to 2014. With greater competition for these programs, there is very likely going to be more shuffling of network partners going forward. It has been reported that JetBlue has also signaled they will change card network partners to MasterCard from American Express after a ten year partnership soon.
The loss of Costco and JetBlue could suggest that American Express needs to rethink its current co-branding partnership strategy. Greater competition in the space will undoubtedly translate to lower profit margins of the programs, but the company should consider where the value is transferred if it doesn’t reach an agreement. In the case of Costco Canada, it was to MasterCard. With the largest retailers and airlines understanding their competitive position and further looking to reduce costs, additional changes to third party programs will also impact the other card networks leading to opportunities for American Express to regain some of the share lost from the Costco and JetBlue agreements.
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