Costco – new credit card coming soon frictional electricity examples

#####

Citi announced last week that its new Costco co-branded cards will soon start shipping out. Citi’s new card replaces the old Costco American Express cards that are soon to expire after the big box store and the card issuer terminated their 16-year partnership.

Cardholders won’t have to do anything to get their new cards except wait patiently by the mailbox for a few weeks. Starting June 20, you can use your new Citi Costco Anywhere Visa card at Costco locations and anywhere Visa is accepted, so basically everywhere. Your earned rewards and account balances will be automatically transferred to the new Citi card, also on June 20.

Citi Costco Anywhere cards will offer 4% cashback on up to $7,000 worth of gas purchases each year, whether or not those purchases are made at Costco or other gas stations. Compare that with Amex’ gas cashback deal of just 3% back on up to $4,000 worth of gas purchases.

Citi’s card will also pump up the rewards for restaurants spending. Citi’s Costco Anywhere card will give you 3% cashback at all restaurants, compared to the 2% that Amex TrueEarnings used to offer. At Costco and Costco.com, Citi offers 2% cashback on all purchases, and 1% cashback on all other purchases.

In addition, Citi’s card doesn’t limit your rewards to purchases within the United States, unlike Amex. The Citi card also offers free worldwide car rental accident and theft insurance. Visa and Citi are obviously trying to get in on some of that overseas holiday spending, but there’s no word yet about foreign-transaction fees, which could eat into your vacation rewards.

The annual Costco membership fee of $55 is not coming down, but from now on your Citi Costco Anywhere card will act as your Costco membership card, leaving a little extra room in your wallet. According to Costco, of the $80 billion spent on the Amex TrueEarnings card, only $20 billion was actually spent at Costco locations or at Costco.com. The company hopes that by making the Citi Costco Anywhere card into its Costco membership card, it can boost spending at its stores.

Cobranded credit cards are created by partnerships between merchants and card issuers. The advantage for merchants is a larger customer database and increased spending by loyal customers out for rewards. For card issuers, more customers and more transactions equal higher fees and more profits, but the margins are usually very slim.

The fees that card issuers charge are limited by the rewards attached to the card: higher rewards, lower fees and less profit for card issuers. But because cobranded cardholders are likely to use that card for all of their purchases at a particular merchant, cobranded cards gives one card issuer a near-monopoly on credit card purchases made with that merchant. Both sides win, and so do consumers.

Why can Citi and Visa offer better deals than Amex? Simply because they have more pull with more merchants than Amex. Although there’s an appeal to a no-spending-limit black or platinum card, Amex is not as good as other card issuers at making rewards work for cardholders. As a result, Amex ends up footing the bill for a lot of the perks that get people interested in applying. According to Credit Suisse, it costs Amex about 60% to 70% more to offer the same 3% cashback on groceries that many other card issuers like Citi do.

It’s no wonder that Amex rewards are not always the best in the business. Unlike Citigroup, JPMorgan Chase and others, Amex is strictly a card issuer and payment processor, and doesn’t have the heavy clout of a major bank to back up its offers, which makes offering the same level of rewards more costly.

The competition is tipping the scales in favor of retailers, which have shown more willingness to ditch deals that don’t work to their favor. Although Amex and Discover have received the highest customer satisfaction ratings in recent years, the fact that Visa and Mastercard are accepted by more retailers puts Amex and Discover at a disadvantage.

You might think that stockpiling cobranded cards is a good idea. That way, you get the greatest benefit of bonuses and rewards no matter where you shop. That’s a good strategy up to a point, but you have to make sure you don’t spread your spending too thin. Cobranded cards usually come with an annual fee, so you have to make sure you’re spending enough and getting enough in rewards to make it worth your while.

Say you shop at both Costco and Wal-Mart frequently. You get a Chase Costco Anywhere card and a Wal-Mart Mastercard, each of which offer you 3% cashback when you shop at Costco and Wal-Mart respectively. But if both cards charge $55 per year, you need to spend at least $1850 at each merchant just to cover the cost of the cards. If you keep just one cobranded card and do all your grocery shopping at just one merchant, on the other hand, you’ll start earning rewards a lot quicker.