In just one month, we will see the American Express Costco Card retire from service (June 19th) and the brand new Citibank Costco Visa Card enter in its place (June 20th).  For most of us, this is really a non-event, unless of course you own an American Express Costco card or are the CEO of Costco, Craig Jelinek.

Newsflash!  This change is really important for Costco Executive Members.  Why?  Because the cost of getting that 2% annual bonus just got cut in half!  Craig Jelinek – say goodbye to the $1 billion in extra fees paid by Costco Executive Members.

Currently, Costco Executive Members need to pay $110 annually to get an annual 2% refund on most of their in-store purchases (restrictions apply).  Since Basic Members don’t get cash back rewards, your only other reward option has been the American Express Costco credit card which costs $55 annually and gives you 1% cash back.  So for both of these cards, you need to spend $5,500 at Costco to pay back the respective annual fees.  Enter the new Citibank Costco Visa credit card.  It delivers 2% cash back, but only costs $55 (which is for the Basic Membership) which means you only need to spend $2,750 per year at Costco for the card to pay for itself.  The new card is also much more lucrative when using it at the pump and at restaurants (see chart) than the old American Express card ever was able to deliver.

According to Costco’s 2015 annual report, 39% of its 44.6 million members are “Executive” level, or 17.4 million people paying the extra $55 annually to get a 2% cash back reward.  Doing the math – $55 times 17.4 million people equals $956 million or almost a billion dollars.  For all the people who have an Executive card and are forced to pay with an American Express card, there will be a new revelation come June 20th.  If you are like me, using their American Express card only at Costco, there will be a world of hurt going down.  No longer will I need that Amex card and why should I spend an extra $55 to get that 2% cash back.  No sir.  Not for me.  I will be applying for my Citibank Costco Visa credit card and when it arrives, will be cancelling my Executive Membership and my American Express card.

Now I am sure that Costco is going to be receiving a $1 billion check from Citibank and Visa to reimburse them from all of the Executive Membership cancellations we will be seeing in the next 12 months.  Or at least we would like to think that this was factored into the overall deal economics that allows Costco to accept Visa cards with almost no interchange, down from the rumored (but not corroborated) 70-80 bps that American Express was charging.

So next Spring, when the 2016 Costco annual report comes out, I will be looking at the Executive Membership numbers and am pretty sure, those won’t be anywhere near 17.4 million.  Costco’s ability to keep that number high will be critical to its overall profitability and stock price.  Despite that company generating $113 billion in sales in 2015, it only produced $2.3 billion in net income.  These razor thin margins means that Costco will need to work extra hard to keep those Executive Memberships high.  I guess we’ll see the results in 12 months, but don’t hold your breath!

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About Michael Moeser

Michael is the JAVELIN’s Director of Payments. He advises clients on the rapidly changing payments industry. Michael is focused on tracking the evolution of the payments industry, covering specific areas such as person-to-person payments, U.S. and global EMV card migration, digital wallets, merchant acceptance of different payment forms, cross-border payments, real-time transactions, and digital payments.

Michael specializes in assisting clients in developing new payment products or repositioning existing services to capitalize on market opportunities, understanding how to market to particular consumer and small business market segments, and developing new corporate strategies that can transform an existing payments franchise.

Michael brings over 20 years of experience from the payments and consulting industries. Before joining JAVELIN, he led the international small business card portfolio at Visa, launching new and growing existing debit and credit card programs with banks and financial services companies across the globe. Previously, he was the Head of Competitive Intelligence at Capital One, a Payments Knowledge Expert at McKinsey’s Payments Practice, and the Head of Product Marketing at Ondot Systems, a Silicon Valley mobile card control startup. He has presented to audiences around the globe, primarily at Visa and McKinsey client and public audiences.

Michael holds a BBA in finance from the Ross School of Business at the University of Michigan and an MBA in marketing and entrepreneurship from the Kellstadt Graduate School of Business at DePaul University.

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