American Express Loses, But Who Wins the Most With the New Costco Card Deals?

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Well, that was a quick rebound ... or so it seemed. Less than a month after Costco Wholesale and American Express failed to agreeon terms to renew their 16-year collaboration on credit cards, the big retailer has found new partners.

Starting in April 2016, Visa is to replace AmEx as the only credit card accepted at Costco stores, while Citigroup will take its spot as the exclusive co-branding partner of the retailer's proprietary credit cards. Shares of both Visa and Citigroup saw modest price rises after the news was announced, but did they deserve higher pops after landing such a huge deal?

Tough talks
Costco exclusivity is considered a prize, and the retailer is well aware of this.

Apparently, its decision to go with Visa and Citi wasn't as fast as it appeared. The Wall Street Journalreportedthat it followed several months of negotiations not only with those two firms, but also a pair of rivals -- MasterCardfor the exclusive credit card provider slot, and JP Morgan Chase's card unit in the case of the co-branded product.

All parties were surely hungry for this business, so we can be reasonably certain that Costco drove a hard bargain. Visa and MasterCard already charge relatively low fees for merchants compared to the departing AmEx.It's safe to assume, in other words, that Costco likely managed to shave even more off Visa's rate.

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As for the co-branded product, Costco says the plastic will be similar to the current TrueEarnings card of the AmEx partnership. In other words it'll also serve as a Costco membership card, function as a regular credit card outside the store's walls, and "provide generous rewards" like its predecessor. Neither Costco nor Visa have yet provided further details.

Win-lose
After the news of the deal was announced, both Citi and Visa saw modest (2% and 3%, respectively) bumps to their share prices. In contrast, when news broke regarding the termination of the AmEx deal, that company's stock took a 6% hit.

That's likely because, going by what we know at this stage, the recent developments are more of a loss for AmEx than a win for Visa/Citi. TrueEarnings comprise about 10% of AmEx's total credit cards in force. Ouch.

With something on the order of 55 million AmEx cards in circulation, that would amount to roughly 5.5 million TrueEarnings cards.

Meanwhile, credit cards that use the Visa network total around 281 million, meaning that at the above circulation figure the Costco co-branded product would be less than 2% of Visa's outstanding amount.

The exclusivity end of the deal could be a marginally bigger victory for the card giant. If we run a best-case scenario assuming that every single Costco purchase in fiscal 2014 was made with a Visa credit card, and the company charged that full 2% transaction fee, Visa would reap something around $2.2 billion purely on those purchases.

That would add around 17% to Visa's top line (again, using fiscal 2014 numbers). But I emphasize that this is a best-case scenario, so we should assume the real numbers are significantly lower.

Citi, meanwhile, definitely stands to gain from adding millions of co-branded Visa/Costco plastic rectangles to its pile of cards outstanding (approximately 52 million going into 2014).The question is by how much; we don't yet have enough information to judge whether Costco credit card 2.0 will be attractive enough a replacement for current TrueEarnings cardholders, or sufficiently tempting for new customers.

Credit to Costco
The one clear winner in all of these developments, naturally, is Costco. And the one clear triumph is the new exclusivity deal. This gives the retailer a direct pipeline to those 281 million or so Visa credit cards, as opposed to staying limited to the 55 million AmEx "members" (although we should bear in mind that the retailer continues to accept all major flavors of debit cards). There's little doubt that Costco will also save handsomely on the transaction fees thereof.

Visa and Citigroup have certainly gained from their respective deals, it's just too soon to estimate by what degree. We're sure to get more details as these arrangements are firmed up, so watch this space for developments in the story.

The article American Express Loses, But Who Wins the Most With the New Costco Card Deals? originally appeared on Fool.com.

Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends American Express, Costco Wholesale, MasterCard, and Visa, and owns shares of Citigroup Inc, Costco Wholesale, JPMorgan Chase, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.