Costco Wholesale Corp. recently ended its 16 years of exclusive relationship with American Express Co. Citigroup Inc, and Visa Inc. finally won the long-sought-after credit-card contract for Costco. This is a change that will majorly expand the kind of credit card accepted at the nation’s second largest retailer, just behind Wal-mart Stores Inc.
Starting April 1st, 2016, Costco will only accept Visa credit cards, which is nation’s biggest card network. Citi is going to partner with Costco to issue a new co-branded card to replace the existing AmEx-Costco card, issued by American Express.
Costco started in Seattle in 1983. It has 671 locations around the world present day. Due to strong brand loyalty towards Costco, the deal “represents a solid win for Visa,” stated J.P. Morgan analyst Tien-tsin Huang. After the announcement of the new partnership, Citi gained 2% to $53.49, and Visa increased 2.6% to $278.29.
For AmEx, the issued co-branded credit card with Costco represented one of every ten of its cards in circulation. It is also 8% of the spending of American Express. Although AmEx shares were negatively affected by the announcement of the contract termination, the latest news had less impact on the new partners, as their capital will be less tied to Costco.
However, challenges still remain in the new partnership between Citi and Costco. It is becoming increasingly difficult to persuade Costco customers to use its newly issued co-branded credit card instead of any Visa credit card or MasterCard in their pockets. Many Costco customers have expressed that, because they do not have an AmEx card, they are likely to switch to any other card that will yield them more reward points and side benefits. In order to encourage customers to switch to the new co-branded credit card, Costco would need to provide juicier rewards and extra benefits, in order to increase the number of users.
Costco have yet to provide any details regarding its rewards program, stating only that it “would provide generous rewards to Costco members.”