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American Express (NYSE: AXP) has been one of the hardest hit stocks in the financial industry over the last year. Shares are off 25% in the last 12 months. This comes as American Express continues to lose partnerships.
American Express stock has gotten a small boost recently thanks to speculation that Wells Fargo (NYSE: WFC) might be interested in buying the company. Note that Warren Buffett has a sizable stake in both companies.
Nonetheless, one of the biggest disappointments for American Express was the loss of its 16-year partnership with Costco (NASDAQ: COST).
Citigroup (NYSE: C) has managed to swoop in and take advantage, buying up the Costco portfolio. Things officially switch over this summer.
It’s a feather in the cap for Citigroup, because Costco is the leader in the warehouse club market. Now, the issue with Citigroup is that it’s in a number of businesses, from conventional banking to investment banking. This deal does little to move the needle for the big bank.
In truth, Citi is focusing on the emerging markets, with sizable credit exposure outside the U.S. But at this stage, I’m much more interested in the companies that help facilitate digital and mobile transactions, with no borrower or lender risk.
Meanwhile, the loss of the Costco credit card business is profound for American Express. However, with the stock off so much over the last year, the market already seems to recognize breadth of American Express weaknesses. These includes the rising competition from mobile payment technology and competitors like Citi undercutting rates to get more partnerships.
Big Benefits for Costco
With that, the real winner in this transition might be Costco. The fees that the retailer has to pay for credit card processing is close to 0%. Costco is now getting charged virtually nothing on its card transactions. This is key for a company that already runs on slim margins. Costco sells most of its goods at a very small markup, making its money on volume.
But it’s been a great business over the last few years, proving to be defensive. Plus, it still has a highly recurring and visible cash flow stream: membership fees. The renewable rates for its membership business is upwards of 90% in the U.S., suggesting its business is still doing quite well.
Don’t Overlook Visa
One company that’s getting left out of the conversation is Visa (NYSE: V), which will become the exclusive card network for Costco later this month. Visa will win from the shift toward digital payments as it’s a payment processor and not a card issuer like American Express.
It also has a well-established network across the globe, able to navigate regulations and laws. It already accounts for half of all credit card transactions and 75% of debit card transactions across the globe. The rise of digital banking and card usage in emerging markets bodes well for Visa. There are few, if any, companies that can replicate Visa’s technology, marketing efforts and security.
For now, everyone is focused on American Express and its recent loss of its Costco credit card partnership. It’s smart to look to the winners after the transition, namely Visa and Costco.
This Is Making Ordinary People Rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her.