The media headline grabbers are all over this, led by BusinessInsider declaring that: Costco just made a huge change — and furious customers are threatening to cancel memberships. It would be easy to make that assessment if you simply headed over to Costco's Facebook page or checked out the Citi page on Twitter. Here's an example:
— Citi (@AskCiti) June 22, 2016
What's happened and just how serious is it?
The switch from Costco branded Amex cards to Costco branded Visa cards coupled to Costco ceasing acceptance of Amex cards has been in the works about 15 months. That's a good amount of time but not that much when you consider the significant systems changes involved coupled to the sheer volume of cards in play. Costco's 2015 annual report (PDF) stated there are 34 million Gold Star members and 7.1 million Business Members. Exactly how many of those also use Costco branded credit cards is not stated.
The deal was first announced by Costco in March, 2015. At the time, analysts thought the deal represents a win-win-win in the sense that Costco is estimated to be saving/earning up to $220 million in card processing costs/royalties, Citi gets a bump in Visa processing commissions while customers get enhanced benefits. Real Money points up the consumer differences which I have summarized in the following table:
It's not hard to see why this would be considered a great deal for customers. What nobody took into consideration was the fact that many Costco customers either did not receive their cards via USPS in time to make the switch or, found that implementing the switch was causing all sorts of issues. Factor in the last minute surge to manage the change and you have an entirely predictable and painful scenario in play.
Who to blame?
From what we can gather, issues can either be laid at the doorstep of USPS for delivery failure or Citi, which appears to have messed up the transfer process and, more worryingly for some customers, gotten tangled up in double charges. Unfortunately, that's not the way customers see it, considering instead that these are entirely Costco's problems. I get that. When your brand is attached to a credit provider, the customer really doesn't care who sits behind it - at least most of the time.
Whether this leads to a loss of Costco customers is a moot point. Plenty of people on Facebook expressed outrage at having the Amex option taken away and implying they'd take their business to Sam's Club, the Walmart equivalent. I'm not convinced that's a rational choice. While the Sams Club credit card offers arguably better benefits than the Costco Visa card, the customer is still signing up for yet an other credit card, this time operated by MasterCard.
Just how big of a problem is it? We cannot reliably know because we don't have visibility into the credit card numbers. If quoted/anecdotal failure to deliver rates are a reliable indicator then it is likely to run about 1.66%. That may seem tiny but it's certainly enough to be causing Citi and Costco major headaches. Of course it could just be the case that many consumers have inadvertently tossed out unopened mailings along with the rest of the tsunami of marketing junk that regularly flows through the postal system.
Projects of this kind are fraught with danger and the fact this has not been a complete fiasco is, in itself, a minor miracle. But what could Citi/Costco have done to head these problems off at the pass? After all, Costco had already done plenty of pre-cutover marketing both in store and on its site.
- One answer might have been to offer existing cardholders the opportunity to pick up and activate replacement cards in store as part of an enhanced checkout experience.
- Another might have been to ensure that customers received personalized reminder emails, asking them to check card receipt where there was no record of card activation.
- Yet another might have been an extended rollout period so that the inevitable bunching that occurs on such switches was reduced to manageable levels.
- Anything else?