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Did Citi screw up by being aggressive to win Costco and Amex having the last laugh?

Did Citi screw up by being aggressive to win Costco and Amex having the last laugh?

Old Jun 25, 19, 5:53 am
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Did Citi screw up by being aggressive to win Costco and Amex having the last laugh?

Most of us would agree that Citi won the Costco deal by being very aggressive. But within months after winning the Costco deal, Citi devalued the benefits of Citi Prestige and yesterday, they went and slashed benefits across the board. Seems like the ROE (if there is any) on the Costco deal is very low and Citi Card division is pressed against the wall to meet their numbers.

On the other hand, Amex after losing Costco (and partly because of competition from Chase) has improved its benefits and also competitive positioning. So, did Citi really mess up in being too aggressive and Amex is having the last laugh??
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Old Jun 25, 19, 7:09 am
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Originally Posted by jediwho View Post
Most of us would agree that Citi won the Costco deal by being very aggressive. But within months after winning the Costco deal, Citi devalued the benefits of Citi Prestige and yesterday, they went and slashed benefits across the board. Seems like the ROE (if there is any) on the Costco deal is very low and Citi Card division is pressed against the wall to meet their numbers.

On the other hand, Amex after losing Costco (and partly because of competition from Chase) has improved its benefits and also competitive positioning. So, did Citi really mess up in being too aggressive and Amex is having the last laugh??
Didn't Visa win the Costco deal, and then the bank assigned to carry out the lending was Citi?

Also, AMEX lacks many benefits the Citi cards used to have. I'm not sure how AMEX has improved their benefits... They've simply just offered new cards and increased the AF on current ones.
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Old Jun 25, 19, 7:47 am
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Well, these programs for these benefits must not have been a big success in Citi's eyes. If they were, they'd be offsetting losses from the Costco deal, so there would be no reason to cut them.

Unless, of course, it's all about their next quarterly earnings report.
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Old Jun 25, 19, 8:02 am
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It was AmEx vs. Visa. Citi is just the 3rd party. With AmEx, you had little options to use other AmEx CCs. But with Visa, I can use any VISA CCs. It could be a win for VISA, but not for Citi.
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Old Jun 25, 19, 8:10 am
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Originally Posted by mikesyr18 View Post
Didn't Visa win the Costco deal, and then the bank assigned to carry out the lending was Citi?
My recollection is that VISA and Citi made a joint proposal, but I do recall Citi reassuring investors that even though Costco was bragging about net zero transaction fees, there would be positive fees for Citi (implying that VISA would reimburse Costco). In any event Citi should be doing fine on the Costco contract due to the finance charges from cardholders who carry balances, and cardholders who use the Costco cards elsewhere.

Is there ANY evidence linking Citi's decisions to make changes in their card portfolio to problems in the Costco portion? Citi has always tinkered with rewards and benefits, and there has been turnover in senior management. I don't see any connection to Costco.
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Old Jun 25, 19, 8:13 am
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Originally Posted by mikesyr18 View Post
Didn't Visa win the Costco deal, and then the bank assigned to carry out the lending was Citi?

Also, AMEX lacks many benefits the Citi cards used to have. I'm not sure how AMEX has improved their benefits... They've simply just offered new cards and increased the AF on current ones.
AMEX did increase their extended warranty benefit from 1 additional year to matching up to 2 additional years. Not quite prior Citi levels, but better.

As you suggested, AMEX’s benefits were world class, then middling, and are slowly becoming more competitive by virtue of competitor attrition.

AMEX’s rewards program has steadily improved over the past few years. For the right customer AMEX’s increased annual fee cards (Gold, Platinum, Hilton Aspire, Marriott Brilliant) are cheaper and more rewarding than they were 3 years ago.
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Old Jun 25, 19, 9:05 am
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Originally Posted by mia View Post
My recollection is that VISA and Citi made a joint proposal, but I do recall Citi reassuring investors that even though Costco was bragging about net zero transaction fees, there would be positive fees for Citi (implying that VISA would reimburse Costco). In any event Citi should be doing fine on the Costco contract due to the finance charges from cardholders who carry balances, and cardholders who use the Costco cards elsewhere.

Is there ANY evidence linking Citi's decisions to make changes in their card portfolio to problems in the Costco portion? Citi has always tinkered with rewards and benefits, and there has been turnover in senior management. I don't see any connection to Costco.
Is there any evidence showing many Citi Costco cardholders are carrying balances? I'd like to somehow see Citi's total profit on their Costco Visa. Looking at the benefits and rewards system, I could see how Citi's Costco card could be a profit loser.

4% on gas, 3% on dining and travel, and 2% on Costco purchases aren't profitable for Citi... And I have a feeling that's all most use the card for in addition to the travel benefits.
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Old Jun 25, 19, 9:18 am
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Originally Posted by mikesyr18 View Post
Is there any evidence showing many Citi Costco cardholders are carrying balances? ....
There is. Citi bought the account balances from American Express and paid a billion dollar premium. There wouldn't be a premium if there were no finance charge revenue stream.
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Old Jun 25, 19, 10:01 am
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Originally Posted by mia View Post
There is. Citi bought the account balances from American Express and paid a billion dollar premium. There wouldn't be a premium if there were no finance charge revenue stream.
Yes, but after the premium what is the ROE? It’s similar to Alaska paying an arm and a leg to acquire Virgin America. Just because they paid twice the VX share price does not mean Alaska is going to make money off of it. Quite the contrary if you ask me. The same argument/logic for Citi paying a premium for Amex’s portfolio.
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Old Jun 25, 19, 10:03 am
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Originally Posted by mia View Post
There is. Citi bought the account balances from American Express and paid a billion dollar premium. There wouldn't be a premium if there were no finance charge revenue stream.
Wouldn’t there still have been a premium to pay so that Amex wouldn’t be able to still keep the card members on a card type which it would no longer be able to offer but may have otherwise been able to retain?

Finance charge revenue streams are of course a factor in how much of a premium an asset acquirer may or may not want to pay to buy a portfolio.
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Old Jun 25, 19, 10:19 am
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Originally Posted by mikesyr18 View Post
Didn't Visa win the Costco deal, and then the bank assigned to carry out the lending was Citi?
If I remember this correctly, both Citi and Visa made a joint bid. Visa did its part but capping what other Visa card issuers can charge Costco at 0.6%. So, if you use Chase Ultimate Freedom or whatever Chase Visa card, they would get 0.6% from Costco. Citi and Visa would reimburse Costco 0.6% -- I am assuming split equally between the two. Citi would be 100% responsible for the benefits (cash rewards) the card offered and would get the benefits of credit card charges elsewhere as well as finance charges and interest income on the loan portfolio.
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Old Jun 25, 19, 4:45 pm
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Originally Posted by RedSun View Post
It was AmEx vs. Visa. Citi is just the 3rd party. With AmEx, you had little options to use other AmEx CCs. But with Visa, I can use any VISA CCs. It could be a win for VISA, but not for Citi.
This list disagrees. I have an AmEx card from another bank. It worked at Costco in the Costo/Amex days.

https://www.doctorofcredit.com/list-...-credit-cards/
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Old Jun 25, 19, 5:05 pm
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FWIW, when City acquired the Costco loan portfolio it was about 10bn or so in dollars.

CFO Gerspach said that in a July 2016 conf call which might googleable.

I seem to remember reading that about 20% of card holders carried balances at the time.

Not sure if its true now.

To put in context, 40% of Double Cash customers carry balances while only 10% of Prestige ones do.

Those were estimates given out a Citi Investor Day maybe last year?
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Old Jun 25, 19, 5:39 pm
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Originally Posted by jediwho View Post
So, did Citi really mess up in being too aggressive and Amex is having the last laugh??
For AMEX, Costco's revenue was accountable for AMEX 10% revenue. AFAICT - AMEX does not have any new co-brand agreements since Costco has left. While AMEX has been able to retain co-brand agreements, it is unlikely that AMEX can make up the 10% gap that quick.

For Citi, Citi's rule of business is to cut when it is too good to be true. Is Citi being too aggressive? Absolutely.
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Old Jun 26, 19, 6:44 am
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BTW, I think Delta was a winner here. They're a pretty aggressive negotiator, and their re-up with Amex came in the wake of Amex losing Costco. Delta has been bragging about how much they expect to make. While some will clearly be from consumers, some portion is related to getting a good deal from Amex.
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