Relationship With Costco

Earlier this year, American Express announced termination of the co-branded relationship with Costco. This relationship, which goes back 16 years, would expire March 16,2016. Obviously this decision gave American Express a big hit. On Feb 12 when the news was broke to the public, Amex shares dropped 6%. In this memo, I want to give some advises about how American Express make up the lost after breaking up with Costco.

The Costco portfolio makes up about Amex’s 20% of worldwide loans and about 10% of its 112million worldwide cards in force. (Doorn, P) After the current partnership ends, Visa will replace Amex to be Costco’s next exclusive credit card partner and Citibank will also offer a Costco-branded credit card to replace

Closed-loop network, spend-centric model are the two special business strategies of American Express. The closed-loop network enables American Express to earn discount fees charged to merchants, interest income from loans issued to cardholders, and membership fees from card members. (Trefis Team) This means American Express earns more revenue than its competitors because those competitors such as Visa and MasterCard have to work with other card issuers to finish transactions and charge separate processing fees. The spend-centric model is another strategy that American Express differentiate form its competitors. American Express focus on high revenue per transaction, while Visa and MasterCard focus on large transaction volumes. About 65% of American Express’ revenue comes from discount fees charged to merchants while revenue generated from lending process is relatively small (Trefis Team). According to the Nilson Report, a publication that tracks the card industry, in 2014, Amex members spent an average $144 per purchase, compared with $84 for Visa users and $90 for MasterCard holders. (Leonard, D) That’s why Amex’s cardholders are more affluent than its competitors’. Best customer base and the highest credit quality are two competitive advantages that Amex has. As I mentioned before, American Express’s customers are more affluent, and it charges more fees than its competitors. It believes that its customers are superior to others and provides better customers services. Its closed-loop network provides more information to merchants and helps them targeting the right customers, which makes the affluent merchants spend more and keep loyal. The closed-loop network also enables American Express to offer customized reward programs, financial services, and other industry-leading products.