Discover CEO Defends AmEx’s Decision to ‘Walk Away’ From Costco

American Express Co., down 10 percent since announcing it would end its U.S. partnership with Costco Wholesale Corp., has a defender in Discover Financial Services.

With competition mounting for tie-ups with retailers, AmEx is in a better position than other banks because it negotiates the so-called swipe fees it reaps as the creditor to cardholders, Discover Chief Executive Officer David Nelms said in an interview late Tuesday. Rival payments network Visa Inc., which wrested away Costco, agreed to fees that banks -- as the lenders that issue Visa cards -- will now have to live with.

“Being able to control when to do a deal and when to walk away is one of the advantages” when serving as both the payments network and lender, said Nelms, whose firm also fills both roles but doesn’t engage in such partnerships with retailers. “I would say AmEx decided to walk away.”

Visa and Citigroup Inc. will replace AmEx as Costco’s exclusive network and co-brand card issuer, respectively, starting next year. After Visa agreed to swipe fees of less than 0.4 percent, some Visa-issuing banks other than Citigroup are trying to gauge how much revenue they might forgo when their cards are used at Costco, people familiar with the terms said last week.

The fees set by Visa -- a fraction of the industry average -- are low enough that the retailer’s credit-card acceptance costs will be about zero after it collects incentives from Visa and Citigroup, the people said.

“I doubt Visa’s other customers necessarily had a say in whether to accept the pricing or walk away,” said Nelms, 54, referring to banks that issue Visa cards.

Profit Possible

Citigroup and other Visa-issuing banks may profit from the new arrangement as people use their cards more and carry interest-earning balances. Paul Cohen, a spokesman for Foster City, California-based Visa, declined to comment on Nelms’s remarks.

AmEx announced Feb. 12 that it will exit the Costco partnership next March. AmEx CEO Ken Chenault has said Visa and Citigroup won because he wouldn’t agree to the conditions and risks required for his firm to continue its exclusive 16-year relationship with Costco.

Competition among banks and payment networks for co-brand deals is intensifying as merchants demand better terms. Analysts asked Nelms about the fight for partnerships during his company’s quarterly earnings conference call Tuesday. Discover, based in Riverwoods, Illinois, was Costco’s credit-card partner before AmEx.

The co-brand market “has become very competitive,” he told analysts. “That makes me glad that we’re not in the co-brand business.”

Discover said first-quarter profit was $586 million, or $1.28 a share, beating analysts estimates by 1 cent. Revenue rose 4.5 percent to $2.2 billion.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE