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Costco Ends American Express Canada Credit Card Partnership

costco credit card canadaIt seems as though American Express Canada’s partnership with Costco has come to an end. While not officially announced, all American Express True Earnings Credit Cards from Costco applications and marketing material have been pulled from Costco locations and American Express’ website.

It looks like American Express is replacing the Costco True Earnings Card with a very similar and extremely competitive alternative which was launched in early August called the New SimplyCash Card. The New SimplyCash Card offers 5% in the first 6 months on gas, groceries and restaurants (up to $250 cash back for the no-fee card and $400 cash back for the fee card) and 1.25% on every thing else. The 6 month promotion is very rich, and the 1.25% cash back rate on all other spend without any caps is the richest for a no-fee cash back card in Canada. It’s now available to all Canadians, not just former Costco cardholders.

This is a massive loss for American Express Canada on multiple fronts. Firstly, from an issuing perspective we would estimate that the Costco program was one of Canada’s larger and more profitable credit card partnership programs, with close to $1B in credit card outstandings. We would expect it to be a relatively high performing portfolio with good spend and low losses due to the attractive demographics offered by the Costco membership. Let’s assume they earn a 3.5% ROA on the portfolio, that would infer a $35M profit. Regardless, for a company like Amex Canada, losing such a significant amount of cardholders in a small country, is going to hurt.

The second challenge for Amex will be the loss of the exclusive acceptance of American Express credit cards in Costco. Currently neither MasterCard nor Visa are accepted in Costco locations. That means Costco Canada’s approximately $16 billion in annual revenue was split between cash, interac and American Express. We don’t know the terms of the new agreement, but it’s possible that Costco starts accepting MC, Visa and Amex, just Visa and MC or Visa alone or MC alone. If Amex is no longer accepted at Costco locations, assuming 40% of transactions are American Express (guesstimate), that would be around $6.5B in acquiring volume lost. Let’s assume Amex was charging somewhere around 1% in acquiring fees to Costco, that’s $64M in revenue lost on the acquiring side.

So who’s going to be the big winner? While it hasn’t been announced yet, we will try to make an educated guess. We believe that Costco switched partners in Canada to force American Express to sharpen its pencil for its relationship with Costco in the U.S. We think that would entail Costco selecting a U.S. based issuer for its Canadian business, that could threaten to unseat Amex in the U.S. As a result we believe Chase, TD or Capital One would be the strongest candidates. However, we think that MasterCard has the most to gain from a network perspective. Given that CapOne is exclusively Mastercard in Canada, we think they were likely to have worked closely with MC, both of whom might have overpaid slightly for the deal to get access to the U.S. and to improve their second tier status in Canada. So CapOne’s our guess for Costco’s new partner in Canada, but at this point it’s only a guess.

 

 

 

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