Costco is expected to pay almost nothing to two credit companies replacing American Express.
Costco Wholesale has attained a goal that retailers have sought for years: near-zero expenses for credit-card payments.
In a deal with Visa and Citigroup, Costco’s acceptance costs will be about zero, according to people familiar with the arrangement. That compares with the roughly 0.6 percent of each transaction the retailer pays its current partner, American Express. While Costco will still incur small fees on Visa cards issued by other banks, incentives from Citigroup and Visa will offset them, the people said.
The arrangement shows the pressure that Costco, the biggest U.S. retailer that accepts just one brand of card, was able to exert on financial firms seeking one of the industry’s most coveted partnerships.
Amex has said Citigroup and Visa won because it wouldn’t agree to the conditions and risks needed to continue its exclusive 16-year relationship with Costco, which is now set to end next March.
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“The numbers didn’t add up,” Amex chief executive Kenneth Chenault told investors last month. “We couldn’t accept their financial terms nor their contract terms, some of which would have meant taking on more risk than we were comfortable with.”
Incentives are common in these types of deals, and it doesn’t mean Visa and Citigroup won’t profit in the long run. If customers carry loan balances on Citigroup’s Visa cards, the bank will reap more interest income. The lender will also benefit when customers use those cards at places where fees are higher, and Visa will get the additional volume.
Spokesmen for Costco, Citigroup, Visa and New York-based Amex declined to comment on the terms.
AmEx’s old arrangement had been lucrative, and the divorce has helped push the lender’s stock down 17 percent this year, the worst performance in the Dow Jones industrial average. Costco shares have climbed 2 percent in 2015, compared with the 1.1 percent advance of the Standard & Poor’s 500 index.
Costco, the world’s largest wholesale club, generated more than $100 billion in sales last year, and its customers account for 20 percent of AmEx’s loans and 8 percent of spending.
The average credit-card interchange fee on Visa’s network is about 2 percent, according to a 2014 study by the Federal Reserve Bank of Kansas City.
Costco announced Friday an increase in its quarterly dividend to 40 cents per share, up from 35.5 cents per share. That means the company will dole out $1.60 per share to owners of its stock every year going forward. Costco’s board also extended for four more years a $4 billion stock-repurchase program that was expiring this month.