The Costco AnyWhere Visa: Off to the Races

The Costco AnyWhere Visa: Off to the Races

The Costco AnyWhere Visa credit card program is the largest co-brand program in the country, surpassing other retailer programs, as well as major airline and hotel programs in annual cardholder purchase value. For detailed analysis and estimates, see Co-Brand and Affinity Credit Cards in the U.S., 6th Edition.

Profitability worries? What’s the problem?

Industry watchers have debated the viability of the Costco Visa credit card program since Citi announced acquiring it, pointing to the concessions Citi made to Costco in winning the portfolio and the expenses related to the high cost of card program rewards. However, Citi has reported that the program will soon begin contributing to earnings. Here are some of the reasons why:

  • First, it is gigantic, the ultimate high-volume play, which gives Citi a massive margin floor on which to build.
  • The cards also generate more than 70% of spend outside of Costco, providing opportunity to make up any concessions related to Costco in-store usage.
  • Moreover, outside of Costco, the Costco AnyWhere Visa generates higher-than-average interchange rates, given the card’s premium “Signature” rewards card status.
  • While it is consumer-centric, the program draws a chunk of purchase value from small business cardholders. These cards also generate higher-than-average rates of interchange.
  • The card program is lending juggernaut, providing a multi-billion-dollar pot of interest income, with significant potential for more. By Q2 2017, program loans outstanding had already surpassed $17 billion, and $20 billion in loans by the end of 2017 seems reasonable. While new cardholders can tap competing balance transfer offers once delayed interest promotions end, the portfolio won’t wilt and dry up. 
  • While the card is a major contributor to Costco tender share, ample room exists to grow that share beyond current rates. Similarly, card penetration among Costco members has room for growth.
  • Prospects for improved Costco tender share and member card penetration are boosted by the transition from American Express to Visa as Costco’s exclusive credit card brand. Visa has broader consumer acceptance and merchant acceptance than American Express, which should boost interest in the card.
  • The improved value proposition of the Costco Anywhere Visa, compared to the TrueEarnings card, will also likely boost its share.
  • Blending Costco purchase loyalty (rewarded with 2% cash back) to affluent-centric discretionary spend and an everyday staple is a masterstroke. While the rewards pay-out carries high expenses, it is also very compelling, offering a dining and travel rewards rate (3%) unheard of among retail co-brand cards, and a gas rewards rate (4%) that is just a shade below those offered by gasoline co-brand cards.
  • A great deal of room exists in the marketplace to position soft credit card benefits to affluent consumers, and Costco members generally skew affluent. However, these shoppers are drawn to Costco in the first place because it offers exceptional prices. They love a good deal. The enhanced hard benefits offered by this card likely resonate very well among them

-- by David Morris, market research analyst