Costco Wholesale Corp. has attained a goal that retailers have sought for
years: near-zero expenses for credit-card payments.
In a deal with Visa Inc. and Citigroup Inc., Costco’s acceptance costs will
be about zero, according to people familiar with the arrangement. That
compares with the roughly 0.6 percent of each transaction the retailer pays
its current partner, American Express Co. While Costco will still incur
small fees on Visa cards issued by other banks, incentives from Citigroup
and Visa will offset them, the people said.
The arrangement shows the pressure that Costco, the biggest U.S. retailer
that accepts just one brand of card, was able to exert on financial firms
seeking one of the industry’s most coveted partnerships. AmEx has said
Citigroup and Visa won because it wouldn’t agree to the conditions and
risks needed to continue its exclusive 16-year relationship with Costco,
which is now set to end in March.
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“The numbers didn’t add up,” AmEx Chief Executive Officer Kenneth I.
Chenault told investors last month. “We couldn’t accept their financial
terms nor their contract terms, some of which would have meant taking on
more risk than we were comfortable with.”
Incentives are common in these types of deals and it doesn’t mean Visa and
Citigroup won’t profit in the long-run. If customers carry loan balances on
Citigroup’s Visa cards, the bank will reap more interest income. The
lender will also benefit when customers use those cards at places where fees
are higher, and Visa will get the additional volume.
Spokesmen for Costco, Citigroup, Visa and New York-based AmEx declined to
comment on the terms.
Deal’s Mechanics
Retailers including Wal-Mart Stores Inc. have struggled for decades in
negotiations, courts and Congress to cut the fees banks and networks reap
when shoppers use credit cards. While merchants say those costs erode
profits and drive up prices, rewards programs funded by the swipe fees, also
known as interchange, are persuading more shoppers to abandon cash and
checks.
AmEx’s old arrangement had been lucrative, and the divorce has helped push
the lender’s stock down 17 percent this year, the worst performance in the
Dow Jones Industrial Average. Costco shares have climbed 2 percent in 2015,
compared with the 1.1 percent advance of the Standard & Poor’s 500 Index.
Costco, the world’s largest wholesale club, generated more than $100
billion in sales last year and its customers account for 20 percent of AmEx
’s loans and 8 percent of spending. On Thursday, the lender reported first-
quarter revenue that missed analysts’ estimates, saying results were hurt
in part by an earlier decision to cut ties with Costco in Canada.
Costco announced last month that Visa will succeed AmEx as the exclusive
card network accepted at its U.S. stores. Citigroup will replace AmEx as the
issuer of Costco-branded credit cards.
More Spending
Visa-issuing banks other than Citigroup are trying to gauge how much revenue
they might forgo when their cards are used at Costco, the people said. Visa
has set the interchange rate at less than 0.4 percent, which could be too
little to fully cover the cost of rewards. Still, banks might benefit from
the additional loan volume and if more Costco shoppers make a habit out of
using their Visa cards elsewhere.
While banks typically generate about 80 percent of their credit-card revenue
from interest on balances and other fees, they rely on interchange for the
rest, according to Lisa Ellis, an analyst at Sanford C. Bernstein & Co. Most
cash-back rewards cards return 1 percent to 2 percent of transactions to
consumers, she said.
The average credit-card interchange fee on Visa’s network is about 2
percent, according to a 2014 study by the Federal Reserve Bank of
Kansas City.
“It’s always great when you can get a relationship with a quality partner
like Costco,” Citigroup Chief Financial Officer John Gerspach told
investors March 2. “We believe that we’re positioned well then to partner
with Costco and take advantage of their loyal customer base.”