The Truth Behind Costco's Credit Card Conversion

When a retailer makes a big change to a well-liked, heavily used program, problems are inevitable.

That's what happened to Costco (NASDAQ: COST) when it switched its rewards credit card from longtime provider American Express (NYSE: AXP) to Visa (NYSE: V) provided by Citigroup (NYSE: C). The change led to short-term chaos, customer outrage, and plenty of headlines using phrases like "Disastrous Credit Card Swap."

Focusing on problems is easy, especially when aggrieved parties tend to make more noise about negatives than positives. It's worth noting that Citigroup acknowledged that the first few days were pretty rough. Early problems with the switch led to more than 1.5 million calls to Citigroup, according to Jennifer Bombardier, a spokeswoman for the card issuer.

"With any conversion of this magnitude and a brand this beloved, call volumes were unprecedented," she told The Motley Fool via email. "As a result, some customers experienced longer-than-desired wait times in the first few days of the launch."

Since those early days, however, both Costco and Citigroup have said that things got much better very quickly and new independent research from Lightspeed Financial Services Group backs that up.

Costco has switched credit card providers. Image source: author.

What do the numbers say?

While Bombardier did send this report to The Motley Fool, she was clear during an email discussion that neither Costco nor Citigroup paid for, solicited, or had any role in the creation of Lightspeed's report. She was also careful to make it clear that, even though most people are not having problems, the credit card provider takes very seriously the ones who are.

Lightspeed found that "despite widespread media reports to the contrary, in-store use of the new Citi Costco Anywhere card during the June conversion may not have been a negative experience." The research firm based its report on an online quantitative study of 10,001 U.S. consumers conducted from July 7 through July 26, 2016.

The company found that for most Costco Anywhere Visa Card users, the experience has been positive:

  • 81% rate the communications they've received from Citi as positive, while 5% rate the communications negatively.
  • Four in five Costco cardholders say they've already used the card while shopping at Costco.
  • Among these shoppers, almost three in four rate their experience using the card as "excellent" while 3% rate the card usage experience negatively.

Overall, these are very strong numbers for Costco, with the only clear negative -- or at least cause for concern -- being Lightspeed citing earlier research it conducted that concluded that most Costco customers who did not previously plan to add a loyalty credit card do not intend to apply for the new one.

That's a number that analysts will not be able to judge for at least a few quarters because Costco had stopped taking new loyalty credit card signups for eight months prior to the switch. In the early days, demand had been high, with Bombardier noting that "on day one, approximately 60,000 applications were processed -- more than triple any one day in Costco's 17-year history with Amex. Since then, there have been over 550,000 total applications to date and we don't anticipate the demand to diminish anytime soon."

Much of that is likely pent-up demand from the card not being available, not necessarily enthusiasm for Visa. Still aside from unknown growth prospects, LightSpeed's findings are very good news for the warehouse club and its credit card provider.

What happens next for Costco?

The big challenge for Costco going forward is to avoid any major hiccups. Every time there is a minor glitch with its Visa card, it gets reported as a much bigger issue than it actually is (or at least that has been the case so far).

Bad publicity can scare away new customers from the program and that's likely the biggest negative headwind facing the company. This independent research shows that the warehouse club did a pretty good job of managing its move from American Express to Visa. From now on, it needs to be extra vigilant, handle any problems quickly, and erase the perception that this was some sort of massive bungle.

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Daniel Kline has no position in any stocks mentioned. He is eager for the start of the fall television season. The Motley Fool owns shares of and recommends Costco Wholesale and Visa. The Motley Fool recommends American Express. 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.