US Insights

Costco's credit card controversy

Tim Campbell

Senior Analyst

Retail 06.28.2016 / 18:35

barcode trolley

Will the long-term benefits of its switch from American Express to Visa and Citibank outweigh a rocky transition?

Costco’s June 20 switchover from American Express’s co-branded TrueEarnings Card to Visa’s Costco Anywhere Card by Citibank has come and gone. Amid the flurry of activity, customer reviews have poured in, and they have not been kind.

While Costco proclaims its new partnership as mutually beneficial and member-friendly, some members are decrying the move as mishandled and anti-customer. Sam’s Club has even offered Costco cardholders free access to their clubs through the July 4 weekend and mimicked Costco’s social media push with its own similar banner image, reminding shoppers that Sam’s Club accepts both American Express and Visa.

Did Costco make a mistake by abandoning its longtime partnership with American Express? Despite the social media noise and the sensationalist headlines, the benefits of Costco’s transition will outweigh the short-term troubles.

To help deconstruct the situation, let’s look at where Costco stands:

Some members are angry. Costco’s social media accounts are awash with comments from frustrated members who have reportedly spent hours on hold with Citibank’s customer service to solve numerous problems. Of the 12 million members transitioning to the new card, over 1.5 million (or 12.5% of the total) called to report a problem between the Monday and Wednesday after the transition. Some members claim they never received a card, while others say they received cards with misspelled names, wrong membership numbers, or cards that simply were not accepted at checkout for an unknown reason. A few voices stood out to defend Costco’s handling of the situation. 

Costco social media comments 

Shopping incidence at Costco remains steady. According to our ShopperScape database, the lead-up to the transition has caused no apparent adverse effect on Costco’s national shopper penetration. Costco’s long-term shopper penetration is on the rise. We’ll keep an eye on this statistic in the coming months and note significant changes.

Costco national shopper penetration

Costco communicated the change well in advance. Costco first announced it would not renew its agreement with American Express 16 months ahead of the eventual transition. When the launch was delayed from April 2016 to June 2016, members were notified more than four months ahead of time. Coinciding with an intense email and mail campaign, in-club signs near checkout continuously informed members of the switchover months in advance. Many (less vocal) members reported a flawless transition, saying they received functioning cards in the mail weeks before the transition.

Short-term factors

Citibank was not prepared to deal with the transition — and you can bet that Costco is not pleased. Costco’s excellent customer service record is something of a mismatch with Citibank’s spottier reputation. In its most recent customer satisfaction survey, J.D. Power ranked Citibank as the second-worst credit card company. It has become clear that consistent communication and providing cards to some members fell through the cracks. Similarly, Citibank was ill-equipped to deal with the resulting fallout and large influx of complaints. As these issues are resolved, expect such outrage to be temporary because issuing so many new cards should not occur again under the current system. Citibank’s day-to-day customer service is another matter. If it does not live up to Costco’s standards, expect Costco to intervene to ensure better service.

American Express is historically aligned to Costco’s members and to business owners. Some members are also put off by the fact that they can no longer use their TrueEarnings Card for shopping in general. American Express and Costco have similar shopper bases so a divorce leaves members with a difficult choice of sticking to stores that accept their preferred American Express card or continuing to shop Costco and pay through other means. We think these retention fears are short-lived due to Visa’s wide acceptance and use and the fact that leaving Costco is a steep price to pay for the benefit of using an American Express card.

Long-term factors

The numbers don’t lie. The Visa deal is better for Costco and Costco members, considering the announced rewards. Whereas the AmEx card offered 3% back on US gas, 2% on dining and travel, and 1% on all other purchases, the new Costco Anywhere card provides members with 4% back on gas globally, 3% back on restaurant dining and travel, 2% back on all Costco purchases, and 1% cash back on all other purchases. While the transition difficulties will eventually subside, the improved competitive benefits are here to stay.

Costco Anywhere means improved accessibility. Visa is the most accepted and used credit card in the US. By aligning itself with the credit industry’s largest player, Costco has opened the doors of its most premium value to more current and potential members than ever before. Even if some members leave the new card and Costco behind, other potential members will join to make up the shortfall. Furthermore, Costco now accepts all Visa credit cards, so every member will have improved access to payment options. 

Tim’s take

In conclusion, we believe the long-term benefits of the co-branded Visa/Citibank Costco Anywhere card will outweigh the short-term, rocky transition for both members and Costco. Suppliers can expect the superior value and availability of the Costco Anywhere card to give members one more reason to keep renewing their membership, and Costco will remain well-positioned for future growth. We are closely monitoring developments and will keep readers updated on the transition as events warrant.

Source: Kantar Retail

Editor's Notes

This article was first published on the Kantar Retail blog on June 28, 2016. Journalists, to speak with the author or for inquiries, contact us. Follow @Kantar and sign up for our insight alerts.

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