Warehouse club Costco wholesale Corp (COST, Financial) chose Citigroup Inc (C, Financial) and Visa Inc (V, Financial) to issue co-branded credit cards in United States. From the beginning of 2016, Citi group will exclusively issue the co brand cards and Visa will cater to the payment network, Replacing American Express Co. (AXPN, Financial) which lost the long-term tie-in last month. This clearly implies that existing Costco customers will only be able to use Visa credit cards at its stores as currently American Express cardholders are doing.
While the terms of the tie-in have not been made public, the high-profile partnership is said to be lucrative for both companies. As per the graphs Costco is a substantial co-brand partner given its affluent, captive customer base and portrays a win for Visa. Costco serving a relatively high income group compared with Walmart (WMT, Financial) and Target Corp (TGT, Financial) would stop partnering with American Express to issue its co-brand cards.
American Express, which lost the contact that was there for more than 16 years, is going to impact its earning for the next two years. American Express reportedly said that it had been unable to reach a deal with Costco that would have made “economic sense.”
The deal is expected to add a sum of $120 million of annual revenue to Visa or approximately about 10 per cent in earnings per share.
Impact on customers
There is no visible impact that customer may encounter due to the deal. The merger and co-branding is an internal corporate reorganization and is not expected to result in any substantial change to the personal systems or strategy for origination of credit card accounts. It will also not have any impact on the servicing of credit card by its back offices. They have not announced the impact on credit rating action or terms. This is a horizontal merger which means both parties are involved in the same business line.
Post-merger increases sometimes result in product switching which may impact the customer satisfaction rate or that co-branded entity may drive away customers. The exit rate of existing customer may also be impacted due to the working style of the co-brand. In the past decade, we have witnessed how Target National Bank lost its customer base after a bank merger that did not cater to the lower level borrowers. Small firms are especially sensitive to such changes.
The market risk
Investment involves risk. We need to look at the past experience should not guide future performance or risk assessment. Both the companies should make their own informed decision about the value of investment and income generated. This will impact the credit card users and changes are anticipated in the short term but we will remain, as always, vigilant to the opportunities that market volatility creates.
Costco sells everything from jewelry to fresh produce at its cavernous members-only stores which has already been replaced by American Express With Capital One Financial Group and Mastercard Inc. (MA, Financial) as its brand partner in Canada since December 2014. Speculation about Am Ex being replaced by another credit providers in United States have geared up. Costco shares rose by 0.6% at $147.90 whereas Mastercard was up about 0.7% at $90.73 and Capital one was marginally up at $78.80. Tie up to be effective from April 1, 2016. It has been reported that Visa shares has been hit all-time high.
