ISSAQUAH, Wash.—Costco Wholesale Corp. has swung a deal that brings the retailer’s costs for credit card acceptance down to about zero.
The deal, Bloomberg Business reports, is with Visa and Citigroup. The near-zero cost compares with the roughly 0.6% of each transaction the retailer pays its current partner, American Express Co. While Costco, which generated more than $100 billion in sales last year, will still incur small fees on Visa cards issued by other banks, incentives from Citigroup and Visa will offset them, Bloomberg reported.
Visa will succeed AmEx as the exclusive card network accepted at its U.S. stores. Citigroup will replace AmEx as the issuer of Costco-branded credit cards.
Costco’s deal emphasizes how big-box retailers can exert pressure on payments networks. 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 in March.
“The numbers didn’t add up. 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,” Kenneth Chenault, AmEx CEO told investors last month.
Bill Hardekopf, CEO of LowCards.com in Birmingham, Ala., told CUToday.info the Costco deal potentially applying downward pressure on payment networks’ interchange, and FIs could feel the trickle-down.
“This deal certainly is unusual, and could be a harbinger of things to come,” said Hardekopf. “Some of the very large retailers, like Walmart, may begin to try to strike deals even better than they already have.”
Hardekopf acknowledged that the fee structure with the Costco agreement is “hazy. We don’t exactly know what that structure is now. But it’s safe to say, this is an attractive deal for Costco. Retailers margins are very thin, and as we know, they will do whatever they can to shave those interchange points down.”