Costco to Pay Almost Zero to Accept Credit Cards | Hacker News Reader

Costco to Pay Almost Zero to Accept Credit Cards

bloomberg.com

36 pointsprostoalex66 comments

I wonder if the fact that you need a membership card to even get into a costco store has anything to do with this. I'm guessing it is a lot harder to commit credit card fraud which is what the justification for a lot of the fees the credit card processors charge is.

These cards can be used outside of Costco, where membership cards are not required. The reason they were able to negotiate such low fees is that Citi/Visa wanted access to this customer base. The Amex CEO was quoted saying something like 'the math of Costco's proposed deal didn't make sense.'

It doesn't matter what people do outside costco if I know that I will have significanty lower instances of fraud on transactions that happen at costco then it makes sense to offer them extremely low processing fees if their clientele is a customer base you want to attract.

> The Amex CEO was quoted saying something like 'the math of Costco's proposed deal didn't make sense.'

According to the 4th paragraph of the article:

“The numbers didn’t add up,” AmEx Chief Executive Officer Kenneth I. Chenault told investors last month. “We couldn’t accept their financial terms nor their contract terms, some of which would have meant taking on more risk than we were comfortable with.”

Costco has extraordinarily thin margins, so this is a very big deal for them.

Operating profit margin: 0.0285%

Net income margin: 0.0182%

There are stores that accept only one type of card? Is this kind of thing common in the US?

I was similarly confused. But now it makes sense that every American seems to have a dozen of different credit cards in his wallet.

That's not what you should take from the article. What you should take from the article were:

- Costco was an oddity in that they only took 1 credit card network. American Express

- This was extremely lucrative for American Express

- This odd position made Costco very attractive to the credit card networks and thus allowed them to bargain for a much better deal than normal.

- Visa has signed a deal with costco which is wrecking American Expresses share price, but might be overly aggressive from a risk perspective for Visa.

If you encounter someone with a wallet full of credit cards (American or otherwise) they are either A) rotating debt or B) gaming the credit cards. Nothing about using credit cards in the US is significantly different than anywhere else in the world (with the large exception of the lack of PIN infrastructure)

My understanding was that in much of the rest of the world, it's actually much less common to use credit cards for standard daily purchases you don't really need any 'credit' on. And much harder to get as much of a credit line in the form of credit cards as the companies offer Americans. No?

That is very locality dependent but can be true. I was really talking about the "have a bunch of credit cards" instead of "one credit card" difference.

The actual usage/spending on the cards does vary greatly from place to place.

In Germany you would have a hard time using a credit card for daily purchases. Most physical stores that don't sell things worth hundreds of dollars don't accept credit cards. We almost exclusively use cash and debit cards (backed by the bank account, not prepaid). I observe the same in the rest of Europe.

Some time ago, no week went without seeing another of these "consolidate your credit cards in a single card" startups pop up on HN, which is a bizarre product to start with and would be completely out of place in any part of Europe.

Yet, HNers seemed to think this was a perfectly sensible product they had a use-case for. Are there really that many people here that are rotating debt or gaming credit cards (a futile game in any case)?

Gaming credit cards isn't a futile game in the US; there are signup bonuses for most of them ranging from $300-multiple thousands of dollars worth of value, depending on how you spend them and what you're interested in doing.

American credit cards nearly universally offer lengthy interest-free grace periods, as well, so there's little risk as long as you have enough base spending to qualify for the signup bonus.

As an example, you can sign up for an American Airlines credit card and earn 50,000 miles after spending $3000 on the card. Buy $3,000 worth of things you were going to buy anyway, and then you have a one-way business-class ticket from the US to Japan (worth at least $2K, probably significantly more).

There are hundreds of these offers, so gaming credit cards can be a significantly net positive hobby for people who know how to manage their spending and who don't actually use the credit facility of the cards beyond the grace period.

Yep. I just applied for a few, and here's what I got:

- 70,000 Marriott points which I estimate to be worth about $700, based on the equivalent cash price I'd have paid for the hotel rooms (which I do have plans for)

- $890 in cash bonuses

- 50,000 ThankYou points which are worth $500 cash (the trick is to request mortgage or student loan redemptions, which can be made out to the bank in which you have a checking account, and then just deposit it in your account. The redemption value is higher this way than with the normal cash option.) or more for travel (probably will just take the cash as I have enough airline + hotel points right now).

The tilt towards cash or cash-redeemable bonuses is intentional, as I have enough points of various types to support my travel plans.

One other 'danger' I've seen some fall into is valuing their points based on the cash value of whatever they redeemed them for. For example, it's common to see people redeem airline miles for a ridiculous $10,000 ticket, and then claim they got 10c/mile or whatever based on that price. In my opinion, unless you would have paid $10k cash for that ticket had the points not existed, you haven't gotten 10c/point; you've gotten $(price you would have paid for a ticket) / $(pointsRequired).

I have to spend a little over $10k to get these bonuses, which will be almost entirely in manufactured spend. I'm most certainly not spending a single penny more than I would have spent if credit cards didn't exist at all.

It's also worth adding a few statistics:

- Total credit card debt I've ever held in my life beyond the grace period: $0

- Total interest I've ever paid in my life: $0

And that's the right way to use credit cards, as an alternative to cash, paid off every month. Don't buy what you wouldn't/couldn't have bought with cash, and you'll be fine.

The trouble is people who use credit to try to live above their financial means who end up getting trapped in a cycle of trying to pay down debt that accrues interest faster than they can pay it off.

Yep. Basically, the ones who use it incorrectly are subsidizing the ones like myself who (ab)use it correctly.

My observation of Europe is that:

- a surprising number of businesses are cash only or strongly prefer cash

- when they do take cards its the superior chip & pin system (though we've never had a problem with our crappy American cards)

- Europe tends to have strong consumer protection laws in some ways

- Credit is harder to get because of these laws

In the U.S. building up and managing credit is a life skill that starts sometimes in high-school, but almost always by 18, usually with low-cap high-interest "starter cards". Most of the U.S. is virtually cashless at this point, I can start a month with $40 in my wallet and still easily have $30 in it by the end of the month. There are some places (and some milieus) where there are exceptions. But I've recently been on several long-term trips to wildly different parts of the U.S. and don't remember using cash except in very rare circumstances, usually as tips of some sort or to make very small purchases (gum).

Credit development is strongly encouraged (for better or worse) and it's expected that everybody has at least one major credit card.

The problem really comes in with lower income levels, credit is often used to buy things above the means of that level, creating a vicious cycle that traps people into long-term revolving debt, or playing a credit game of shifting the money around endlessly between cards and debtors. Consumer protection laws in the U.S. for this kind of thing are not very strong yet for a variety of stupid reasons.

> when they do take cards its the superior chip & pin system

EMV is legally inferior because of the liability shift. If fraud happens (and EMV fraud does happen, don't let they tell you otherwise) the card holder is on the hook because the schemes declare EMV as "fraud safe" when in reality it isn't.

> (though we've never had a problem with our crappy American cards)

Because the schemes require it. Because of the non-discrimination clause in the acquiring contract if a merchant has a VISA or MasterCard logo on the door he has to accept every VISA or MasterCard brand. Some locally issued brands may be artificially crippled though (which isn't cool).

There are local laws about surcharging though.

The major reason why I'm walking around with 5 credit cards in my wallet is that, as being relatively new to the country (4 years), I needed a way to boost my credit score. Note that the recommended number of credit lines (by CreditKarma) is supposed to be 20. I'm working on it :)

For the record, I view that as gaming the credit cards. That is an oddity of the way that credit reporting agencies work that using 5 credit cards is perceived as better than spending the same amount on 1 card.

Note that the "recommended" lines of credit is lifetime credit and includes things beyond credit cards.

I mention this due to the context of this thread being "US residents have lots of credit cards", not because I think you misunderstand.

Credit Karma's scores and "recommendations" like that are jokes. Of course Credit Karma wants you to have 20 credit cards - they hope you get them through their affiliate links!

> Nothing about using credit cards in the US is significantly different than anywhere else in the world

There is one big difference: the widespread use of credit scores. If you never use a form of credit that reports to a credit score agency, you may find yourself unable to rent some apartments, and it can also affect your mortgage rate.

I'm not sure about outside the U.S., but inside you get almost constantly harassed to get store-only credit cards. My wife likes Anne Taylor, and every time she shops there they ask her if she has an "Anne Taylor" card. This is not a discount card, it's a real credit card, only usable at Anne Taylor stores.

Almost every retail clothing store and most department stores seem to want to be in on this kind of thing. Originally, when we were a little dumber and before we bought our first home and started really caring about credit scores, we found our wallets slowly filling up with these cards, not really realizing they were actual credit score altering credit cards.

I think it finally dawned on us when our credit score started to be hurt by having too many revolving credit accounts open, and we finally realized what these cards were. So we closed them all, just have 1 each of the three major cards (and we'll be getting rid of our AMEX card once Costco switches over) and our credit scores are amazing and credit management is simple.

Costco is somewhat of a special case. The shopping pattern they encourage means that getting an additional card to use there isn't a big blocker.

The majority of stores take Visa/Mastercard. Many do not take American Express. Many stores do offer their own branded credit card (maybe with some incentives specific to the store), but they do that in cooperation with a lender and do not limit payments to that card.

It is worth noting that Costco currently accepts Visa and MasterCard debit cards, but not credit cards. Most likely they will continue to accept MasterCard debit cards (and perhaps also American Express prepaid debit cards) after this change.

Amex is expensive I recall we had a meal for all our our grads one year and the managers corporate amaex was refused - on of my colleagues had to put it on his personal card

It is not common in the US, no. Most retailers accept VISA and MasterCard, the two largest credit card networks.

It is more common _not_ to accept American Express -- because American Express typically charges _higher_ interchange fees than the other networks, traditionally their business model was to charge higher interchange fees and use them to fund higher 'reward' programs for the card holders.

That Costco accepts only one network is unusual. That Costco formerly chose AmEx as their exclusive network is surprising, since AmEx ordinarily charges higher fees than the others, they must have had a special deal before, but they found they could get a better special deal from VISA, apparently.

All of these things are interesting in being unusual, rather than typical, in the US market. And perhaps pointing the way to changes in the market driven by mega-retailers like Costco, at least changes in the market that mega-retainers operate in, with unclear effects on smaller retailers if it sets a precedent.

I agree it's fairly atypical, but it's not only Costco. Sam's Club, their most direct competitor, only took Discover for many years, which is an even more unusual choice of card (they now take MasterCard). There's also a significant AmEx-only niche in Manhattan restaurants. Not sure what's going on with that one, and it's not something I've seen with restaurants in other cities.

AmEx is seen as the card for the well-off. They usually have stricter qualification requirements and are well-known to never issue another card to someone that discharges their AmEx in a bankruptcy. They have perks and reward programs that are attractive to the people who can qualify. They're seen as more exclusive, so restaurants that are trying to pander specifically to richer people may see it as an opportunity to bolster the impression that only other rich people eat there ("The clientele is so upscale here they don't even have to accept VISA!").

No. Costco's default position is to accept no credit card. If you have a membership there you pay with Cash or Debit (Check card).

AMEX has a higher than normal merchant charge, so many businesses (especially ones that work on many small transactions like restaurants and convenience stores) don't accept it.

Costco and AMEX had some kind of deal for a very long time that allowed you to use AMEX cards instead of cash/debit, and if you got a Costco branded AMEX card it acted as both your membership card (it has your Costco ID and photo ID on it) as well as gave you some percentage of total purchases back at the end of the year. [1]

We've been Costco members for about a decade and the Costco membership fee is easily made back on the low prices we pay for toilet paper over a year. The rest of the prices are good enough that it almost doesn't make sense to shop other places for a great many goods. And if you don't have an in-depth knowledge of pricing and quality, you can usually be assured that most of the stuff Costco sells is of reasonably high quality at a good price.

My wife and I pretty much only buy our wine there. They have a deep selection, and their $10-13 wines are easily $17-30 at the local wine stores, and $30-70 at restaurants and are of pretty consistently high quality.

We don't do as much grocery shopping there, with just two of us, all the bulk items are simply too large and we end up throwing away most of the food due to spoilage. For large families though I think it works very well. We'll buy meat and repackage it into our freezer, and milk, yogurt, some frozen items. We also get detergent, medicine, bulk cleaning items, coffee, nonperishables, that sort of thing.

I honestly don't know why people who live within reach of a Costco don't have memberships. There's always some kind of excuse about bulk items, but seriously, between wine and toilet paper the membership pays for itself for us at least 10 times over during a year. And we get several hundred dollars back every year from their AMEX program.

[1] https://www304.americanexpress.com/credit-card/costco-americ...

> Costco membership fee is easily made back on the low prices we pay for toilet paper over a year

Kirkland Signature 2-Ply Bathroom Tissue, 425 Sheets costs $0.650 per roll at Costco.

http://www2.costco.com/Browse/Product.aspx?prodid=11751647&w...

Angel Soft Toilet Paper, 2-Ply, 396 Sheets costs $0.664 per roll at Walmart, no membership card required.

http://www.walmart.com/ip/Angel-Soft-Triple-Roll-Bathroom-Ti...

Adjusting for the difference in sheet count of 425 vs. 396, the Walmart product costs $0.06 more per roll than the Costco product.

So to pay for your $55 membership fee, you and your wife would need to consume about 917 rolls per year, 17.6 rolls per week.

That's 67 sheets of toilet paper every waking hour, assuming you sleep 8 hours each night.

And herein lies the genius of these bulk discount stores: people think they're being frugal just by walking in the door, even though there's an admission fee.

Yes, it's true that some things are substantially cheaper, but on many things the items are the same cost or more expensive than they'd be elsewhere. We've found that each item needs to be priced out specifically to find if it's actually cheaper at a wholesale club like Costco/Sam's (we've had memberships to both but only have Sam's now since Costco is much further away) or a big box retailer like Wal-Mart. The overall difference for general household goods is usually not very significant (YMMV depending on what you're buying).

We maintain the membership(s) because we like to get some things in larger quantities and some goods for sale at Sam's/Costco are not available elsewhere. Costco also has ultra-good customer service and return policies.

Actually this isn't a good comparison.

You should be comparing cost per sheet. The Kirkland SKU you linked to is cheaper than the Walmart one.

But this is a shitty fight, if I wanted the cheapest toilet paper in town, I could drive an hour across town and buy some from Big Lots.

It's not like we only go there to buy toilet paper, that's a dumb pedantic argument to make. With the toilet paper are six or seven bottles of wine, $5-$15 cheaper than anywhere else in town for the same, several pounds of meats, about 30% cheaper than any local grocer, bulk milk, again cheaper than my grocer (and without the troubling safety issues the plague Super Walmart grocery sections), maybe a hard-drive at reasonably cheap prices.

And 0-minutes spent shopping around, instead of hours spent finding the best possible price for each item. My time isn't free, why is yours?

I think they were responding to your hyperbole. You did say something very specific about the membership fee being covered by what you save on toilet paper in a year.

I realize that people have different communication preferences, but I understand where they are (apparently) coming from, I too find hyperbolic emphasis tiresome.

Right. But he's decided to turn this into a pissing contest of "who has the cheapest possible toilet paper"

But that's not the comparison at all that people make. The comparison is, based on what normal people buy... Toilet paper is cheap enough that people just buy it whenever they see it. Like at their local grocer. Where places like Costco win is that almost everything is cheaper than your local grocer... And for things that aren't strictly a better buy, it's more convenient than running all over town to find a better price. The fact that they are competitive at all on price with an ultra cheap retailer like Walmart is amazing. But they definitely offer better quality than Walmart on just about everything.

The reasons I hear from people who don't have a membership even though they live within spitting distance of one is that they think the membership isn't worth it. Or the selection is bad or whatever. But my point is that the membership almost doesn't matter because you'll probably recover the cost inside of two or three trips and the selection, while isn't fantastic, and doesn't always have the absolute highest quality on the planet, are usually of high quality and thoughtfully made. It's clear after doing there for years that the buyers who work for Costco really try to hit a good price to quality ratio and that's where all the value comes from.

It is literally the comparison you made. I get your point that people shop at Costco because they think they save on normal household items, but I don't think you should be flabbergasted that someone on the internet decided to be pedantic about a point that was designed to be a sound bite more than it was intended to be, uh, accurate.

> It is literally the comparison you made.

If only we had some other concept that could be used in common conversation. Something where people use words to draw concepts and ideas, using various language devices to create or drive home some desired concept. Some kind of concept around representation or metaphorical speech.

But alas, all we have to work with is literalism and pedantry. It makes conversation feel kind of limited and poor, fact checking every statement down to some measure of significant digits, or splitting hairs to show that a claim is correct, but not quite as correct as it could be, feels like not fun or entertaining conversation, but we have to work with what we have and I guess that's the way we're required to speak to one another.

I'm surprised we use words at all, Hacker News should really just allow for formatted tables of figures.

I don't think it is obnoxious to call people out on statements that have 0 significant digits. Such a statement isn't "entertaining conversation", it's boring manipulation (it's boring because it is so flimsy).

Okay fine, let's do this. You seem to want to grind an ax with me on this and be an internet asshole. Your job now is to take the following omissions and come up with comparison down to the fractional cent. Because it's so important to you if I buy my asswipes at Walmart or Costco.

1) He literally showed that Costco was the cheaper option.

2) He failed to include savings from cash-back using an Amex

3) He failed to include savings from rebates, sales or other promotions

4) He failed to include savings from gas, vehicle wear and tear, from driving to another store to buy these ass wipes

5) He failed to account for the fractional wear and tear on shoes and clothing used for extra movement to the other store

6) He failed to account for caloric expenditure in the time spent going to Walmart to buy said toilet paper. What's the cost differential in buying a meal because I have to go to another store across town?

7) He failed to account for the cost of time-saved in not having to drive across town to buy this shit paper.

All I've been doing is explaining why I don't find hyperbole particularly interesting as a communication style.

I don't think further back and forth on this is going to do anyone any good, sorry I came accross as an internet asshole.

Meh. It's fine. But it's not hyperbole if it's true.

Just learn to live with different kinds of people a little eh?

There are other reasons to avoid Walmart, and not that is not meant to imply that Costco is perfect, just less imperfect.

I read the article but didn't understand what the deal actually was.

Do they pay no interchange on Citigroup issued Visa cards branded as Costco? Do they pay no interchange on Citigroup issued Visa cards? Do they pay no interchange on Visa cards? Do they pay no scheme fee on Visa cards? Do they pay no fee to their acquirer?

Do Costco shoppers have a higher percentage of "loan activity" on their cards? The type of activity that is more lucrative for credit card companies.

I would think that a possibility, given that many small businesses stock their shelves with products bought directly from Costco.

That is a large part of the American Express business model. They can offer larger incentives for use (to make up for the lower acceptance rate) because they get more in interest from the card as many small businesses use Amex as their operating line of credit.

I thought the gap was bridged by the fact that Amex charges 2x per transaction of the other CC companies.

My guess is someone in management wanted to leave AmEx a long time ago.

Now AmEx is going to start hemorrhaging discounts and incentives as they lose valuation. Could this be the blockbuster of credit cards? That was a fun two years. So many "free" games and movies.

There's been articles the past few months about Costco's relationship with Amex, with the conclusion being that the Costco Amex cash-back card will be cancelled in 2016.

Possibly interesting to someone: Costco in Canada no longer has that Amex relationship. Instead, they are associated with Capital One and their Mastercard. There's a page on the costco.ca site with a heading of "Credit Cards Accepted at the Warehouse" that says:

The following cards are accepted in our Canadian warehouse locations and at our gas stations:

MasterCard Debit cards Costco Cash Cards

I didn't even think to try last time I was at Costco, but this does seem to imply we can use our normal Mastercard credit card there now?

They will try and sell you theirs, but you can use any MasterCard.

If both customers and retailers want a different method of payment, but can't get it, there seems to be something broken.

Also credit cards are supposed to be expensive because of their insurance function. But who needs insurance on their groceries?

This story is about a retailer getting a great deal.

(at their volumes it is quite likely that this deal is cheaper than accepting cash)

Where is the overwhelming evidence that customers want a different method of payment?

They will want it when they find out that they are paying a hidden fee that is being passed on by the retailer.

That fee covers insurance and other benefits on the card, and with the benefits, you can break even (e.g, I get 2.2% cash back, which offsets the increase the retailer adds to cover interchange). Are you suggesting people don't want the benefits?

Also, re your OP, Costco sells far more than just groceries.

Yes, people typically don't want to buy their products "bundled".

For cable, yes, but I don't see how "bundling" applies to credit cards. That credit card companies compete on benefits would also seem to argue against your point.

AmEx tried doing a piecemeal benefits program on their Zync card, but AFAIK the product uptake was poor and they no longer offer it.

As opposed to? Any system of exchange has transaction costs. Even cash does, to the point that many businesses prefer credit card transactions (fees and all) to cash ones. Being able to lower the transaction cost is advantageous to the entire ecosystem, but as an individual consumer it needs to offer more than an altruistic benefit.

Right now credit cards are pretty great for consumers (assuming they can handle the budget discipline required for their use). Virtually free 30 day credit, consolidated purchasing, and fraud protection will be very hard to replicate with any other transactional system.

The insurance angle is a red herring. I've never used it in my life, and the credit card companies offer it because it is essentially free to offer due to the systems they have to put in place for fraud/credit risk.

Regarding the insurance, I tried to use it once when my daughter dropped a new cell-phone in the water. A quick read of the credit-card insurance promo looked promising, but once we called and talked to a very nice customer-service rep for the insurance service, it quickly became clear that there were tons of fine-print that justified the insurance not covering this situation.

You can (and we do) run a locally issued debit card system with no interchange, a total annual fee to card holder of 20 to 30 bucks and a cost to the merchant that is at least an order of magnitude lower than credit cards.

Of course you can make trade offs on feature/functionality to change what the transaction costs are. Who said you couldn't?

The idea was that consumers were unhappy with credit cards. I haven't seen that. And your system sounds like a poor trade off for my use cases. It is several hundreds of dollars more expensive to me explicitly (based on card rebates on a zero fee card) and is not accepted at as many places.

That's a full MasterCard brand accepted globally.

How do you get no interchange fees then? Am actually curious.

Historic reasons and federal price control. MasterCard wanted to introduce interchange a couple of years ago but the government said no. The MasterCard market share is high enough so that antitrust laws apply. There is still a market development fee on it but no interchange.

It is may understanding that the EU views interchange as illegal but instead of outlawing it decided to curb it at 0.3%.

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