Attention Costco Shoppers—please have your new co-branded Visa card ready upon checkout. That’s because Citibank is upping the ante on its Visa cash back rewards compared with Costco’s previous partner, American Express, as outlined in the following.
It’s now clear why Costco (NASDAQ:COST) dumped American Express(NYSE:AXP) in favor of a Visa (NYSE:V) co-branded card issued by Citigroup(NYSE:C). As members of the warehouse giant learned this week, the rewards program on the Citigroup-backed Visa went beyond what American Express was willing to match.
You can see this by comparing the terms of the two cards. Users of the American Express TrueEarnings card earn 3% cash back on purchases of gasoline, 2% cash back on travel and restaurant expenditures, and 1% cash back on everything else.
This 3-2-1 structure has, in fact, become a popular framework for other rewards cards. Wal-Mart (NYSE:WMT) offers a case in point. Its recently announced 3-2-1 Save cash back program offers 3% back on Wal-Mart.com purchases, 2% back on purchases of fuel at Wal-Mart or Murphy USA stations, and 1% back on everything else, including purchases made at Wal-Mart stores.
It’s thus no surprise that Costco’s upcoming Citigroup-backed Visa uses a similar rewards structure. The difference is that it’s much more generous than its predecessor.
When you take all of this into consideration, then, it’s obvious why American Express wasn’t willing to match Citigroup’s terms. American Express is a high-margin business. It’s long sought out the wealthiest cardholders and supplements its fee-income from processing payments with interest income from financing the underlying loans.
Citigroup, meanwhile, is a volume business. It’s long aimed to be a financial supermarket along the lines of Wal-Mart, not Whole Foods. On top of this, Citigroup is in the midst of a transformation, brought on by its missteps in the lead-up to the financial crisis.
Buying market share, even at lower margin levels, is always a tempting proposition, and that’s what Citibank appears to be doing. Not only is Citibank waiving Costco’s card acceptance fees, but also increasing customer cash back rewards at levels apparently too rich for American Express. Citibank has aggressively sweetened Costco’s new co-branded card offerings in exchange for reeling in one of retail’s most coveted customer bases. We will see before too long if Citibank’s gambit pays off and Costco customers put Visa at top of wallet, and make it everywhere they want to be.
Overview by Raymond Pucci, Associate Director, Research Services at Mercator Advisory Group
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