The Demise of the American Express Card?
Feb 5, 2016, 5:18 pm
#241
Join Date: Nov 2014
Location: NYC
Posts: 581
Even if they kept Costco, the profitability was lost once Costco started to negotiate for different terms. Losing Costco isn't the issue. It's losing net revenue, which would have been lost even if Amex held onto Costco.
Feb 5, 2016, 5:35 pm
#242
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Just direct net revenue from Costco charges.
They would still hold onto all of the revenue from those cardholders using those Amexes everywhere else.
They would still hold onto all of the revenue from those cardholders using those Amexes everywhere else.
Feb 5, 2016, 5:45 pm
#243
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Posts: 3,072
Yes, and Amex obviously knows how to calculate those numbers.
Feb 5, 2016, 8:21 pm
#244
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Feb 5, 2016, 10:33 pm
#245
Moderator: Manufactured Spending
Join Date: Jul 2011
Posts: 6,578
Amex should have tried to keep the Costco business and they probably lost it because of the New York arrogance. At the same time, I think Citi did not cut a great deal for themselves. The benefits on new Costco cards are nothing to write home about and I won't even get the Citi Costco card as I have much better Visa rewards card that give me better than 1% at Costco.
Citi essentially will be getting 0% on transactions at Costco. So, they are hoping that those card holders will spend enough elsewhere and carry balances enough to pay for the Costco deal. Also, every other Visa swipes at Costco will earn 0.4% for issuers, but Costco will still pay 0%.....Citi and Visa will pay the issuers 0.4%. I am waiting for Citi's 10Q in Q2 and Q3 to get a sense on how well Costco cards are doing.
Citi essentially will be getting 0% on transactions at Costco. So, they are hoping that those card holders will spend enough elsewhere and carry balances enough to pay for the Costco deal. Also, every other Visa swipes at Costco will earn 0.4% for issuers, but Costco will still pay 0%.....Citi and Visa will pay the issuers 0.4%. I am waiting for Citi's 10Q in Q2 and Q3 to get a sense on how well Costco cards are doing.
Costco is paying practically 0% swipe fees on their cobranded cards, and offering incentives to offset the swipe fees when non-cobranded Visa cards are used. The only revenue for Citi here will be when the card is used at other merchants, or if someone carries a balance. I really don't see any reason the math would work out for Citibank when it didn't work out for Amex, which is (mostly) closed loop and therefore in a better position.
Feb 6, 2016, 6:09 am
#246
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Here is some info on the Costco deal - sounds like nobody is willing to spill the beans on the real reason.
http://www.bizjournals.com/seattle/b...html?ana=yahoo
http://www.bizjournals.com/seattle/b...html?ana=yahoo
Feb 6, 2016, 7:32 am
#247
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I really doubt Citi or Visa will be making much, if any, money on the Costco deal. I'm guessing they did it for the sake of publicity and to send a "Visa is better than Amex" message to the public. If anyone has New York arrogance, it is probably Citibank.
Costco is paying practically 0% swipe fees on their cobranded cards, and offering incentives to offset the swipe fees when non-cobranded Visa cards are used. The only revenue for Citi here will be when the card is used at other merchants, or if someone carries a balance. I really don't see any reason the math would work out for Citibank when it didn't work out for Amex, which is (mostly) closed loop and therefore in a better position.
Costco is paying practically 0% swipe fees on their cobranded cards, and offering incentives to offset the swipe fees when non-cobranded Visa cards are used. The only revenue for Citi here will be when the card is used at other merchants, or if someone carries a balance. I really don't see any reason the math would work out for Citibank when it didn't work out for Amex, which is (mostly) closed loop and therefore in a better position.
Feb 6, 2016, 9:32 am
#248
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I don't think Fidelity would realistically believe that they can bring the same demographics to the table as Costco. Fidelity is an investment company; by its nature, people are using their services to make money. So they currently offer a 2% card.
Costco is a retail chain focusing on, yes, good deals in theory, but basically jamming consumer goods down customers' throats, 12-packs at a time. Finance is a sideshow there, not the focus. So they offer a 1% card.
Costco is a retail chain focusing on, yes, good deals in theory, but basically jamming consumer goods down customers' throats, 12-packs at a time. Finance is a sideshow there, not the focus. So they offer a 1% card.
Feb 6, 2016, 10:51 am
#249
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Perhaps stimpy misspoke when he wrote fidelity. Perhaps he meant "affinity card."
Feb 6, 2016, 11:04 am
#250
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Affinity is how I took it also.
Feb 8, 2016, 9:19 pm
#251
Join Date: Apr 2011
Posts: 233
I used to work at Citi. We had a huge deferred tax asset ($50B) that will probably be impossible to extinguish all of it given Citi's continued poor profitability.
So the consumer bank at least was mandated to chase after as many deals as possible to make use of the tax asset. Think about it, if you have a minimum 15% return on equity or 15% return on Basel threshold to get over with every deal, you are getting basically a ~500bps bump from not having to pay any taxes, and therefore you can undercut your competitors. That's how Citi won the deal. They will probably experience the winner's curse as a result of this.
So the consumer bank at least was mandated to chase after as many deals as possible to make use of the tax asset. Think about it, if you have a minimum 15% return on equity or 15% return on Basel threshold to get over with every deal, you are getting basically a ~500bps bump from not having to pay any taxes, and therefore you can undercut your competitors. That's how Citi won the deal. They will probably experience the winner's curse as a result of this.
Feb 8, 2016, 10:46 pm
#252
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It's worse than that. Amex didn't want to lose their pricing integrity. If they had given in to Costco, then every other large fidelity card would have demanded better terms. Amex is right to not give in. Now Citibank will be getting calls from others demanding the same deal that Costco got.
Granted I'm a small fish, but an unprofitable fish nonetheless, at least to Citi and their current arrangement.
Feb 9, 2016, 6:57 am
#253
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Feb 9, 2016, 6:59 am
#254
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I used to work at Citi. We had a huge deferred tax asset ($50B) that will probably be impossible to extinguish all of it given Citi's continued poor profitability.
So the consumer bank at least was mandated to chase after as many deals as possible to make use of the tax asset. Think about it, if you have a minimum 15% return on equity or 15% return on Basel threshold to get over with every deal, you are getting basically a ~500bps bump from not having to pay any taxes, and therefore you can undercut your competitors. That's how Citi won the deal. They will probably experience the winner's curse as a result of this.
So the consumer bank at least was mandated to chase after as many deals as possible to make use of the tax asset. Think about it, if you have a minimum 15% return on equity or 15% return on Basel threshold to get over with every deal, you are getting basically a ~500bps bump from not having to pay any taxes, and therefore you can undercut your competitors. That's how Citi won the deal. They will probably experience the winner's curse as a result of this.
Feb 9, 2016, 11:36 am
#255
Join Date: Jul 2014
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I used to work at Citi. We had a huge deferred tax asset ($50B) that will probably be impossible to extinguish all of it given Citi's continued poor profitability.
So the consumer bank at least was mandated to chase after as many deals as possible to make use of the tax asset. Think about it, if you have a minimum 15% return on equity or 15% return on Basel threshold to get over with every deal, you are getting basically a ~500bps bump from not having to pay any taxes, and therefore you can undercut your competitors. That's how Citi won the deal. They will probably experience the winner's curse as a result of this.
So the consumer bank at least was mandated to chase after as many deals as possible to make use of the tax asset. Think about it, if you have a minimum 15% return on equity or 15% return on Basel threshold to get over with every deal, you are getting basically a ~500bps bump from not having to pay any taxes, and therefore you can undercut your competitors. That's how Citi won the deal. They will probably experience the winner's curse as a result of this.