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Another Big Merchant Dumps American Express

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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If you’ve got a Costco American Express card, things will be getting a little roomier in your wallet next year. Costco is ending its 16-year relationship with the credit-card provider and is seeking a new partnership, though it’s not clear yet which lucky card will be the winner. The Costco AmEx will be discontinued, and the card will no longer be accepted in the warehouses.

It’s fair to say that this has been a terrible month for American Express. It also lost a partnership with JetBlue and, even worse, an important court case. American Express cards are more expensive for merchants to take than other cards, so merchants would like to ask customers to use other cards -- only they can’t, because American Express merchant agreements forbid this. They can refuse to take the cards in the first place, of course, but then they lose customers who don’t have a Visa or MasterCard.

American Express has taken a unique approach to a competitive field. Credit cards are what economists call a “two-sided market”: They need to get both customers to take their cards and merchants to accept them. Visa and MasterCard keep their fees relatively low in order to woo merchants; AmEx has kept the fees high and passed some of that money back to customers in the form of lower fees and higher rewards. Essentially, it gambled that merchants wouldn’t dare refuse its cards as long as enough customers preferred to use them.

That gamble looks to have been a bad bet. A federal judge just ruled that it cannot place those sort of restrictions on merchants, which means American Express will have to lower its fees or lose transactions as merchants ask customers to put that purchase on another card. Lower fees will mean fewer rewards for customers. Unless it can get the decision reversed on appeal, the company is going to have to rework its entire strategy, and “compete with MasterCard and Visa on their own terms” may leave it in a much worse position than in its original plan.

I’ve seen a few premature obituaries written for the company, but I personally wouldn’t count it out just yet. American Express is one of the few companies that has managed to reinvent itself many times, as previously core businesses failed. It survived the nationalization of its original shipping business in part because it had been so innovative in travel and financial services; it survived the death of its traveler’s check business because it had been an early innovator in credit cards. It may yet find the innovation that will get it out of this current tailspin.

That’s not to downplay the formidable obstacles it has to overcome. American Express's whole credit-card business will have to be reinvented, and reinvention is hard for any company, even one with 160 years of innovation behind it. Maybe especially hard for one of those. Organizations calcify over time, and change gets harder and harder. The saga of American Express may yet have a third act. But it better be writing pretty fast. 

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at

To contact the editor on this story:
Brooke Sample at