Costco Wholesale (NASDAQ: COST), in 2015, started to prepare for a considerable change of its business. It was all set to end its partnership with American Express. The partnership had held true for 16 years and made the latter the exclusive credit card brand to be accepted at all Costco venues. For Costco, its new partner of choice is Citigroup and Visa.
There is a good reason for Costco changing its business partner. Merchant fees are much higher for American Express compared to MasterCard and Visa. The discrepancy between these rates has not gone down despite the competitive nature of the market. AmEx charges its retailers a full point-if not more than its competitors. Although a section of AmEx loyalists claim that card holders of the company tend to be richer and thus spend more money, making them better customers. It is undeniable that AmEx services are much better. All arguments have merit.
Costco, under its new scheme, will accept exclusively Visa cards. The only issuer of any Costco branded credit card will be Citi, and the product is named Costco Anywhere Visa card. The Costco executives have welcomed the new arrangement, describing it as more beneficial for all card holders. On the other hand, AmEx executives have come under flak for losing Costco business.
The switchover from AmEx to Citigroup and Visa has been rough. There was no issue in utilizing a Visa card at a Costco site. The problem is that may of the replaced AmEx TrueEarnings card have suffered trouble. A few Costco customers faced trouble when they tried to activate the new credit cards. A few never received the new cards. Worse still, a few customers found themselves billed for the charges they had not actually paid.
The result is that Citigroup faced a massive 1.5 million calls from customers linked to Costco card during the third week of June. Call times naturally went haywire, leading to further customer dissatisfaction.
The matter of fact is that issues are to be expected when the operational complexities are considered. There was a switch of 11 million accounts to Citi from AmEx. Every card must have accurate information linked to the spending and consequent payments of the card holder. Each cardholder must activate new card. It is apparent that Citigroup did not devote sufficient resources to make sure that the transition go smooth. There was also the fact Citi is ranked as second among worst in the recent J.D Power's customer satisfaction survey. American Express ranked second among the best.