With the End of this Partnership, Amex to Miss Out on $82 Bn Worth of Charge-Volume

American Express is discontinuing its merchant-acceptance and cobranded credit card agreements with Costco Wholesale Corp. The Costco Amex card accounted for around $82 billion worth of Amex’s worldwide charge volume last year. Costco had already ended its Amex cobranded card program in Canada last year and Bloomberg had earlier reported that Costco is considering a new US card partner.

The contractual agreement officially expires on March 31, 2016. Amex cards will continue to be accepted at Costco’s 474 US warehouses until then. Although Amex will have to face the charge-volume hit, the Costco business wasn’t that profitable as compared to its other card programs. As it turns out, 70% of Amex’s Costco cardholders conduct their spending outside of Costco stores.

Jeffrey C. Campbell of American Express said in his prepared remarks for the investor call: The end of the Costco U.S. relationship will have a positive impact on our reported discount rate as our merchant pricing at Costco U.S. is significantly lower than our overall average. This will likely result in a smaller than average decline, or perhaps even an increase, in our reported discount rate as Costco U.S. volumes roll off in 2016. Generally speaking, the revenue and profits on the spending inside Costco U.S. are much lower than on spending outside of Costco. Therefore we will focus on customers who frequently use their card at non-Costco merchants.

Amex can try retaining some of the Costco cardholders by offering them other Amex cards. Along with numerous non-cobranded cards, Amex offers a host of cobranded card programs including those for Delta Airlines, Starwood Hotels, etc. With the end of the 16 year old partnership, card-issuing banks such as J.P. Morgan Chase and Citigroup are vying for the rights to offer Costco’s co-branded cards.

It is unclear whether Costco will go for multiple card brands like Visa and MasterCard, as most merchants do. Costco already accepts Visa and MasterCard debit cards. In Canada, Costco has established partnerships with MasterCard and Capital One Financial Corp. Amex is already facing some stiff competition from other card brands and the exit of one of its biggest partners is not a good sign. Amex is witnessing a shortfall in revenue and is in a cost-management phase, trying out all means to reduce expenses. Just last month, the company had announced the elimination of around 4,000 jobs.