Costco to replace AmEx with Visa, Citi

Costco Wholesale Corp. (NASDAQ: COST) reported this week that Visa (NYSE: V) will be its new credit card network of choice and Citigroup (NYSE: C) would issue its co-branded card, replacing a 16-year deal with American Express (NYSE: AXP).

The acceptance and co-brand incentive agreement with Visa and the co-brand card deal with Citibank are subject to Citi's purchase of the existing co-brand credit card portfolio. The change is expected to take effect April 1, 2016, the day after the American Express agreement expires.

"Once issued, Costco's co-brand Visa credit card would provide generous rewards to Costco members, serve as the Costco membership card, and would be accepted at Costco locations in the United States and Puerto Rico, as well as all merchants worldwide that accept Visa credit cards," Costco said in a statement.

The new agreement will expand the types of cards accepted at Costco, which had previously only accepted AmEx credit cards, and debit cards branded by MasterCard and Visa, according to the Wall Street Journal. When the new agreement takes effect, Costco shoppers will be able to use many Visa cards issued by other financial institutions, as well as the new co-branded card. At that time, Costco members will receive the new cards.

"The details of that will come out down the road," Costco spokesperson Bob Nelson told the Los Angeles Times.

Costco still will not accept MasterCard or Discover credit cards, although it will continue to accept Visa and MasterCard debit cards, the Wall Street Journal reported. Financial terms of the agreements were not disclosed.

In an interview with CNBC, Warren Buffet, CEO and chairman of Berkshire Hathaway, said that in negotiations with AmEx, "Costco thought they could do better elsewhere. Clearly, if you have a retailer with the size and scope of Costco, and you have the exclusive card, you know that is a very important relationship," he said. Buffet's company has more than a 10 percent stake in AmEx and he said he still has confidence in the company.

But in a previous interview with CNBC, David Nelson, chief strategist at Belpointe Asset Management, had said of AmEx, "I think the business model is broken."

American Express is the only credit card Costco accepts, and Costco cards represent about 10 percent of the AmEx cards in circulation, and 20 percent of its loan portfolio, according to the Wall Street Journal. The announcement of the end of the agreement resulted in a sharp drop in AmEx's stock price. The company predicted that the end of the 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 at the time. "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.

For more:
- See this Costco press release
- See this Wall Street Journal article
- See this Los Angeles Times article
- See this online article and video coverage on CNBC
- See this Bloomberg Business article

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