AmEx plans for life after Costco

American Express (NYSE: AXP) is making plans for life after Costco (NASDAQ: COST).

Last week, the two companies said they would end their 16-year co-brand and merchant acceptance agreements on March 31, 2016, when they are due to expire. American Express was the only credit card Costco accepted, and Costco cards represented about 10 percent of the AmEx cards in circulation, and 20 percent of its loan portfolio, according to the Wall Street Journal.

The result was a sharp drop in AmEx's stock price, and the company predicting that the end of the Costco contract would be a drag on earnings and revenue this year and in 2016.

To make up for the losses, AmEx will expand other parts of its business, and spend on marketing and rewards programs to try to get Costco customers to use the card at other stores, CEO Kenneth Chenault told Bloomberg Business. "We will focus on opportunities in other parts of our business where we see significant potential for growth and more attractive returns over time," he said on an analyst conference call.

Meanwhile, Costco said it is close to making a deal with a new credit card company which would also have exclusive rights to the retailer's customers, the Los Angeles Times reported. Costco should be able to announce the new card issuer "probably sooner rather than later," said spokesman Bob Nelson. He said it is possible that it might happen within days.

More than 70 percent of purchases made with Costco AmEx cards are made outside of Costco, he said. AmEx lost the Costco business last year in Canada and has been able to retain customers after starting a new cash-back program and approaching customers with other AmEx products. The company is confident it can do something similar in the U.S., Chenault said.

Another part of the company's strategy will be to spend the next year building up the company's digital payment products, reported PaymentsSource. The goal is to create opportunities that will ease the company's short-term pain and guarantee its long-term health.

"The payments industry is going through accelerated change, new technology is driving changes in consumer behavior and there is a convergence between online and offline channels," Chenault said during the conference call.

AmEx's technology initiatives include the establishing technology hubs to attract employees from outside the payments industry to bring in fresh ideas from people more accustomed to a working in startups, PaymentsSource said. The company also plans to use its OptBlue program—which allows acquirers to make fees flexible for small businesses—and its involvement with Apple Pay as levers for growth. The AmEx Serve prepaid account is embedded in Softcard, an Apple Pay competitor.

The high percentage of non-Costco purchases suggests the Costco consumer base is higher end and valuable, said Ken Paterson, VP of research operations and director of the credit advisory service at Mercator Advisory Group. "Seventy percent is remarkable. It shows how desirable these consumers are," he told PaymentsSource.

For more:
-See this Wall Street Journal article
-See this Bloomberg Business article
-See this Los Angeles Times article
-See this PaymentsSource article

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