4 Reasons Why CapitalOne's Costco Canada Partnership Might Fail

4 Reasons Why CapitalOne's Costco Canada Partnership Might Fail

Last updated on June 27, 2018 Views: 5454 Comments: 34

As we called it earlier in August, Costco Canada is ending its 15 year-old credit card partnership with American Express and beginning a new one with Capital One.

CapitalOne has already soft-launched its new product in select stores, and our understanding is the new co-branded MasterCard with Costco will fully launch by the end of September, 2014. American Express will no longer be accepted at Costco as of January 1st, 2015.

With over $17 billion in Costco Canada revenues at stake, this is a significant win for CapitalOne and MasterCard. However, we’re not so sure CapitalOne is going to come away from the deal profitably.

We believe CapitalOne will face 4 significant challenges to succeed with the Costco program:

1. Profitability: One has to imagine that CapitalOne offered more compensation to Costco than American Express was able or willing to match. But remember, the incumbent always has insider knowledge, meaning American Express knew more about how the Costco credit card portfolio behaved than CapitalOne did when Amex walked away from the table. In all likelihood, CapitalOne gave away most of the interchange revenue to Costco, thereby relying on Costco customers to spend out of store on their co-branded credit cards. We’re not convinced that’s going to happen nearly often enough.

There has always been a self-fulfilling prophecy when issuers fall into the trap of relying on cardholder out of store spend to drive profitability. It goes like this: the issuer gives away in-store interchange revenue to their partner and rely on out of store spend for interchange profits. However, because the issuer is relying on the out of store spend to fund their interchange revenues, they offer a weaker rewards rate to cardholders for out of store spend. As a result, the cardholder uses the co-branded card almost exclusively in the partner store, and then uses another card that offers them a better value proposition for their out of store spend. Then the issuer only gets the unprofitable in-store spend, and not much of the more profitable out of store spend. It’s a spiral of self-fulfilling declining margins.

More than a handful of issuers have found themselves in that predicament with retailers. The only winners are the retailers, in the short term, and the cardholders.

2. Size: Another challenge CapitalOne will face is competition from other Mastercard issuers for Costco customers’ share of wallet. As we know BMO, MBNA, National Bank, ATB, Sears, Hudson Bay, Shoppers, Target, Petro-Canada, WestJet & TD cash back are all MasterCard programs. In fact, Costco customers can earn more from BMO’s World Elite MasterCard in Costco (2%)  or the MBNA Rewards World Elite MasterCard (2%), than they can with Capital One’s Costco card (less than 1%). When American Express had the Costco program, if a customer wanted to use a credit card within Costco, they had to get the Costco Amex card (very few people already had an alternate Amex card). Now, more Costco customers already have a MasterCard, than they did an Amex card. As a result, we actually believe there will be fewer CapitalOne Costco cardholders, than there were Amex Costco cardholders.

3. Interchange: The Minister of Finance has asked both MasterCard and Visa to lower interchange by 10-15% within the next few months. While MasterCard may exclude the “wholesale warehouse” merchant category from an interchange reduction, thereby protecting CapitalOne’s interchange within Costco’s stores, it can’t do anything about protecting CapitalOne’s interchange margin outside of Costco stores. This is when a CapitalOne Costco cardholder would use their card outside of Costco. This will put even further strain on CapitalOne’s out of store spend margins, which we surmise is the primary place CapitalOne is relying on making its money. As a result, it will either have to eat the margin reduction, reduce the cardholder value proposition or reduce Costco’s compensation.

4.  Slow-Start: Capital One is not buying the American Express Costco credit card portfolio. That means Capital One is starting from scratch. In most cases, the new issuer buys the co-branded accounts from the incumbent issuer, so cardholders don’t have to re-apply. CapitalOne did this with HBC, RBC did it with Shoppers, TD did it with Aeroplan, CIBC did it with Petro-Canada. Growing organically will slow things down for CapitalOne.

In the meantime, American Express will do everything in its power to convert and retain former Amex Costco cardholders. They’ve already launched two new cash back credit cards (not charge cards), which somewhat mirror the Costco cash back card, but nonetheless both offer market leading earn rates.

  • The no fee SimplyCash card offers 1.25% on all spend with no caps, and a bonus of 2.5% on purchases up to $150 cash back in the first 3 months. There is no annual fee.
  • The Preferred SimplyCash card offer 1.5% on all spend up to $100K then it goes to 1.25%, and a bonus of 5% on gas, groceries and restaurants up to $400 cash back in the first 6 months. It comes with a $79 annual fee.

All that said, we are excited to see what the new CapitalOne Costco cardholder value proposition will look like. Perhaps we’ll proven wrong. With an exclusive deal like this, both at the issuer and network level, perhaps MasterCard subsidized CapitalOne and contributed to the cardholder value proposition. We’re skeptical it will be enough.

Article comments


Received notice today. Capital One is severing relationships with Costco Canada. Who will jump into the breech?

Frank K Mardian says:

The Capital One credit card is a joke. I get it with an 8k limit but I charge around 40k per month on my Presidents Choice financial card. I was talked into this card at costco and when I called they said they could not raise the limit for 1 year because I am a new client. So I charged about 3 times the 8k limit by paying it off and charging again. I did that for two months and tired of that so I overpaid my card by 5k thinking it could be applied to my credit limit. Well I was wrong, I charged 8k and its been 11 days and it still says I have no credit limit left when I clearly overpaid my card by 5k. I call in and they said overpayments dont count and I asked how it could take 11 days after it said payment processed to apply it to my account. I am going back to my credit card and have applied for MBNA, maybe I will have better luck there. Costco should know that the company told me they are not in the business of giving credit and the card is only meant to be used at costco. Yikes, what a response from Capital One, a joke of a credit card company.

Mona Mortensen says:

Stay away from Costco Master card unless you can keep at least 500.00 to 1000.00 ahead of them because they will find a way to rip you off by charging interest on your full amount of the monthly charges even if you have paid the majority of your balance off …eg: your Bill is for $3000.87 and you pay off 3000.00 you will be charges interest on the full 3000.87 anyway …meaning you are now ripped off !!!

B H says:

They all work like that. I have had a half dozen cards, and every single one had that clause in the agreement. If you don’t pay it off in full, they charge interest on the full amount… from the date of use – not the due date. (In some cases they get to go back up to another month.)

Remember to fully read your 40+ page cardholder agreement. :/

Alannah says:

I called and gave Master Card permission to accept a credit on my account from a medical company out of the country. They then denied the company permission to credit my account and closed my account. When I called they said my account had been hacked. I’ve got some swamp in Florida to sell you if you believe that one. I was off to China for a month with no credit card due to their denying my credit card after giving them permission on the phone. Not happy with Master Card but what can I do, that is the only credit card Costco accepts.

Dan says:

Add me to the list of dissatisfied customers using the Costco Capital One MasterCard. I thought I would replace my VISA Gold with this card but Capital One only gives me about 40% of the credit limit of my VISA. Nothing sucks more than getting to the front of the Costco line only to be told that the card won’t work. I have tried unsuccessfully to raise my limit but am told I have to wait 6 months to do so. I am one of those people who treats his plastic like cash (paid every month, carry no balance) so it is probably not in Capital One’s best interest to help me out. Come January I will cash in my accumulated points and cancel this card.
It’s a worthless piece of plastic compared to other services offered by other banks.

Edward Martindale says:

In Canada at least the Costco Capital One MasterCard is only to be used for personal purchases. Try this….have a couple thousand dollars in business purchases on a couple flat decks….then call Capital One and ask them if you can put this business purchase on your credit card. They will tell you it is for personal use only and not business purchases. If you ask Costco management about this rule they know nothing about it…ask the employees flogging the card…they too know nothing about this.

Ro Tek says:

I had a call from a collection agency related to a Capital One backed HBC Card. I hadnt received a statement for months, and was unaware of a small balance on the card which I promptly looked after with the collection company.
We had moved over two years ago and my wife had changed our address with HBC for both our cards, and she continued to receive her statements. I didn’t, and didn’t notice.
Upon talking to Capital One, they claimed ignorance, and basically told me I was responsible for the problem in spite of the collection agency telling me that they had both my new and old addresses supplied by HBC and it looked like my statements were still going to my old address in spite of having the right info. Every HBC bill has always been paid, on time, in full, in my household, except for one it seems which was about 6 months old.
No statements sent, so I figured no balances. They had a phone number and Capital One said that they “reserve the right” not to bother calling people to tell them they are six statements behind, such as I was. The frustration that Capital One can create with a customer is uncalled for, its not good business, and downright rude.
They can take that card and shove it sideways. And every piece of Capital One mail for additional “credit cards” which comes to my home gets a “wrong address” on it, so that they get to pay the postage both ways. Good riddance. Maybe now they’ll stop sending me their junk mail.

Wolf says:

I called Capitol One/Costco today to close both our primary & secondary cards. I was advised that if I do this, I will lose any cash back we have earned. The rule is you must keep the card active for 1 year or forfeit your cash back value. I chose to keep the card open until January of next year. It appears Capitol One will do anything to steal from the consumer! Beware Costco members. Any complaints you have with Capitol One, Costco doesn’t want to hear about it. They will direct you back to Capitol One. Good Luck!

jA ja says:

So very true. Costco in a part of the rip off that is Capital One and they advertise with them, promote it and then if a complaint happens say they are nothing at all to do with Costco. First misstep I’ve seen costco do and repeat.

Too bad!

Same thing cancel as soon as rebate is issued.

We have mailed checks in plenty of time and Capital one is the only firm that seems not to receive the checks.

Jaja says:

Well maybe if you read your welcome kit booklet before activating the card then you would of read in the terms and the conditions that if you were to cancel the card your points are forfeited… it’s not like the company made up the rule out of nowhere… but it’s people who are stupid like you who don’t read anything and sign off to a credit card so you’re the only one to blame 😉

GreedyRates says:

A little harsh, but it is common that if you cancel your credit card, you forfeit your points. Where issuers differ is over how long you have after cancellation before your points are forfeited. One of the advantages of Aeroplan, Air Miles, Scene, and More Rewards cards are that the points you earn go into your loyalty bank – so that even if you cancel your card, they continue to exist.

GreedyRates Staff

Steve says:

When you compare Costco’s mastercard to other credit cards, it doesn’t even come close.

My AMEX gold gives me 4x the travel points back on practically everything I use it for with little restriction. The only real restriction is it’s AMEX and not necessarily used everywhere; however, I have not found any limitations with it. The Costco Mastercard can’t hold a candle to it. It’s kind of amusing when I’m at Costco and they try to sell me on the card, and I ask them, does it give me 4% back? No, well my Amex does.

If I don’t want a travel card, fine, I’ll move over to Visa momentum, again, 4% cash back on most everything I’d use it for with 2% practically on everything else. Again with little to no restrictions. The costco card can’t compare to it. Even doubling as a costco card, the amount i’d bring back from the Visa momentum would allow me to buy 6 costco memberships over and above the annual fee cost.

I don’t think it’s a case of it “might fail” I’m pretty sure it’s a case of “will fail”

Sean Woods says:

Capital One refused my 91 yr old mother a MasterCard because she has no monthly income other than her pension income. Doesn’t matter that she has over $1.2M sitting in GIC’s between Royal and TD Canada Trust and another $85K sitting in bank accounts. Couldn’t pay me to take one of their cards now, especially when I read of all the problems everyone is having with it.

fooy922 says:

mmmm… if she has monthly pension income plus $1.2M interest income then she should qualify for the income bracket. then the problem might be her credit risking.

theresa says:

We are living thru a similar situation where thy don t want to gise us a higher credit limit even thought our history is perfect. I suspect they dont want to pay the bonus…

T123 says:

I was declined as well. I was worried when I got the notice that maybe something had happened to my credit rating without my knowledge! I called the credit center and they assured me that my credit rating was fine and there was nothing negative on it. Then I called Capital one and the person on the phone told me that sometimes the decline them “just because”. After reading all of this I am glad they turned me down! And I am going to ask for a refund on my costco membership. That was the only reason I got an American express card. I don’t like jumping through hoops.

Cheryl says:

Do not sign up for this card!!!! This credit card company is by far the worse that I have encountered in over 35 years. I made a mistake in overpaying on this card. I called immediately for the payment to be reversed and that is where the BS began. Lots of red tape, claims they didn’t receive the proper documentation from me, etc. They told me the process (once initiated) could take up to 60 days. Although I initiated the process immediately, after a month they said they never received the correct documentation from me or my bank to start the process, so the end was still another 60 days out. I cancelled the card. Was told it would take 7-14 business days to receive a refund for my negative balance of $1300. Funny how former card members are promised their credit in half the time that current members are expected to wait for their overpayment to be reversed. I’m not that optimistic that they are going to expedite the refund but because I got this card to use at Costco, I’ll be letting them know of my negative experience with Capital One.

Elia says:

Hi Cheryl, I had a similar problem. I called two times but in the end was given good info on how to reverse an overpayment. Just do a balance transfer to another card. I did it online actually to my TD Visa which took a couple days to go to my TD Visa which had a zero balance. From there I just transfered it into my chequing account. Both transfers had no fee show up. I think it’s because they had a positive balance so there was no cash advance fee.

Nancy Xiao says:

I have used all kinds of credit cards and Capital One is the worst. Since Capitial One Mastercard doesn’t accept automatically payment, I have to remember to check the balance online because I don’t get mailed statements all the time due to my moving. With travelling, I missed one payment and I was charged for $45 interest. I called the customer service and the guy’s attitude was so bad. Even though I admit it was my bad of missing the payment and I asked the favor for adjusting the interest even partially, the guy kept blaming me that it was my fault so he could not do anything. I decided to close the account but he didn’t tell me that I have $70 cash back accumulated. So I end up losing it. He was on my account while I was calling and he could have told me that I had $70 cash back and I would not get it if I closed. I called again 2 weeks later after I found out I deserve $70 cash back. Of course, I got cold voice again that it is YOU closed the account and you would get anything. I totally understand it is Capital One’s decision what to do with interest and cashback. But do they want to keep customers with good customer service instead of pissing them off.
COSTCO made a BAD decision to partnership with Capital One for Costco card. I will never apply Capital One cards anymore. This also impact my COSTCO purchase. NO CAPITAL ONE, NEVER!!!

Travis says:

I agree. I have also have several credit cards and have to agree Capital One is by far the worst of all when it comes to customer service. I simply asked for a business Costco Capital One card, they said they don’t offer it. I ask could they increase my credit limit because my membership at Costco is a business membership and I was straight out told that my card was not to be use for any business transactions, proceed by a click on the phone. He hung up on me, so I proceeded to phone back and cancel my card. I wish Costco would have chosen a different Mastercard company. I have had MBNA Mastercard for a decade with no issues. I rather use it at Costco without the rewards than to deal with the worst service available in the industry from Capital One. I miss AMEX at Costco.

Murray says:

I recently got back from the U.S. Where I used my Costco CapitalOne MC. Going on line to check my account, there were several instances of double charging. I called CapitalOne and they said there was some computer glitches but assured me that my final billing statement would only a single charge. Believe me, I followed this up on my statement and all was fine but disconcerting nonetheless.

Steve says:

I just had the exact same problem. Never have I seen this with any other credit car I’ve owned. I also have about $2000 of fraudulent charges and its day 35 of dealing with it and it’s still on my account with no word from them. They just tell me to deduct the fraud charges and interest I’m accruing and pay the difference. This is hard to do when they haven’t made available to me my previous history since replacing my card. Obviously I’m slightly concerned with this. Seems like there should be a better process.

Lucas Tam says:

I just finished dealing with a disputed transaction (unauthorized charge by a hotel – they didn’t process my cancellation correctly). It took about 8 or 10 phone calls and 90+ days. No letter, no returned phone calls, barely any status from Capital One. Awful experience.

I’m going to be getting another MasterCard and dump Capital One once I get my cashback cheque.

Ryan says:

We were also forced to switch from AMEX to Mastercard for Costco, and it’s been a negative experience for sure.

There is no option to pay immediately online, and payments can take 4-5 days to reflect on the card.
When frequenting the US, they do not accept the Candadian Mastercard, only AMEX which we had to cancel.
There are other minor issues we never had with AMEX.

We are quite disappointed and will be cancelling it soon, so that means no rewards.

theresa says:

Just want to share all our frustrations with capital one card from the beiginning. Lot of mistakes, lack of quicken easy interface…. Recently they even failed following up on 3 requests to increase our credit limit, agent not available, no call back.. . No customer service at all, and a big costco mistake!!!

John says:

Most people who applied for the CapitalOne MasterCard (including myself) probably did not notice the “up to 1% cash rebate on all other purchases” It’s only 1/2% on the first $3,000. which in my opinion is significant since there are many other MasterCards (eg President’s Choice) which give 1% on all purchases without a annual fee. I initially looked at the convenience of having only one card rather than a membership card + a credit card in my wallet. The Amex Simply cash gives 1.25% with no annual fee, but unfortunately is not taken at many places where I shop eg: Costco and President’s Choice SuperStore etc. I plan to cancel my CapitalOne card once the double rebate intro promo ends.

DENNIS says:

I use President’s choice and am very happy, I don’t need another piece of plastic in my wallet, and Capital One forces you to automatically renew your membership with their card, I want to retain the right to pay as I choose.
By the way Costco USA is also dumping AMEX April 2016 and switching to Citibank VISA, but all Visa cards will be accepted

Darren says:

I was very open to this new Capital One card that Costco told me it was much better than American Express. After one month I had over $ 5000.00 of fraudulently charged charges put on my mastercard chip all within 20 min. After four months I still have not got all my money back. After calling and going to see Costco all I get is the run around saying the credit will come but I never see it.

American Express has always looked after their clients and customers same day. My advice to anybody applying for the card don’t apply.

Bruce Johns says:

Capital One has taken almost 6 months after approving my CC and still cannot get it to my door and Costco claims that they cannot do anything about it. It seems that this case is more frequent than just me as I have heard of others with the same problem. Capital One will likely fail if they can’t even get a customer a CC. Not going to keep this account active. Worse CC company I have ever dealt with.

Chris says:

I actually received someone else’s cardin the mail a few weeks ago. Their name, my address. They have major IT issues at Capital One. I called them and let them know.

Alex says:

“In the meantime, American Express will do everything in its power to convert and retain former Amex Costco cardholders.”
I just called AmEx to ask about switching my Costco card to another product and I was told this card can not be migrated. I don’t know for sure if the CSR was wrong, but I was pretty clear with my question and she said I need to reapply.

So AmEx is not doing everything they can to keep my business. Could be something in their contract with Costco, but I’m not reapplying for a new AmEx card, I wasn’t using it much anyway

Denis Sierra says:

Actually, AMEX does not allow any of its cards to be converted (migrate) to a different AMEX product. The only conversion allowed is a downgrade from the same product line, such as from the AIRMILES PLATINUM to the AIRMILES GOLD. So this issue has nothing to do with contract agreements with Costco. However, after you apply and get a new card, u can call in and merge the two lines of credit and close the older account. In my case, due to my high credit limit ($28,000), when I applied for a new card the credit card department called me and offered me the new card with the same limit as the old card and forced me to close down the old account. So in a roundabout way, it turned out to be a product conversion, except I took a hard hit to my credit report and had to talk to the credit department. However, their service is truly professional.

The only bad thing about AMEX is that most places won’t accept the card!

patrick says:

No Amex advised that you were only pre approved for a replacement Amex card if you did a lot of spending on your Costco Amex and could apply for a new one once the Costco Amex cards were closed by them.