It’s official. Costco and American Express (AmEx) are now divorced. The pair agreed to separate in early 2015, but it took more than a year for Costco to find a new partner and make the switch. Earlier this year, AmEx sold its co-branded portfolio to Citigroup Visa, said Business Insider. The divorce became official on Monday, June 20.
According to Business Insider, 10 percent of all AmEx cards in circulation came from the Costco partnership and 8 percent of of all AmEx-billed business in 2014. AmEx is expected to net $1 billion from the sale. How does that translate in terms of financial impact?
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CreditCards.com said American Express had 54.9 million cards in circulation in the United States at the end of 2014 with 2014 volume spent at $668 billion. Ten percent of that total is about 5.5 million cards in circulation in the U.S., and eight percent total volume is $53.4 billion. Ouch. That’s a big hit for American Express.
As a result of the partnership, subscription businesses could get hit hard, said Dan Burkhart, CEO and co-founder of Recurly, a subscription management platform. In an exclusive interview with Subscription Insider, Burkhart said the AmEx-Costco divorce will have unintended consequences for subscription companies because every Costco-issued American Express card will have to be replaced with a Citigroup Visa card. Each Visa card will have a new card number, expiration date and security code.
That means that auto-renewed subscriptions paid for with a Costco-issued AmEx card have the potential to fail once the new credit cards are reissued. Let’s say, for example, a Netflix subscriber pays for their monthly streaming video subscription using their Costco-issued AmEx card. Unless Netflix uses Account Updater to update that subscriber’s credit card information, or the subscriber proactively contacts Netflix to change payment information, future subscription payments will fail until that payment data is updated.
“The continuity of the billing relationship is interrupted, leading to unintentional returns which greatly diminish customer lifetime value,” Burkhart explained.
The biggest danger here, said Burkhart, is for B2C subscriptions like Netflix, Spotify, the Washington Post, Scribd, gym memberships and subscription box services which can be categorized as discretionary spending. Subscription companies that accept American Express could experience significant involuntary churn unless they’ve been proactive in updating that card information through Account Updater. When payments fail, subscribers may experience an interruption of services as well.
B2B subscription companies, with a strong value exchange for their business customers, are less likely to be impacted than B2C companies, said Burkhart.
“B2C subscriptions are less sticky than B2B, so B2C companies are more exposed,” Burkhart said.
Burkhart offers advice for subscription companies to address the problem of involuntary churn.
- Access the subscriber database to identify how many customers pay for their subscriptions with American Express. This will help determine the potential impact of this change. B2B companies are more likely to have customers using their AmEx cards for payment than B2C companies.
- Identify which customers use AmEx as their payment method and create a plan for reaching out to them proactively.
- Ask subscribers to update their billing information if they have a Costco-issued AmEx card.
- Monitor the response rates of affected customers. If subscription companies are not getting responses from customers after one or two reminders, offer an incentive or discount to get the customer to update their information. “It is always cheaper to retain a customer,” said Burkhart.
- Work with a payment processor that uses Account Updater to update all cards at once.
As EMV chip cards are slowly replacing traditional credit and debit cards, Subscription Insider has been advising subscription companies and payment processors on best practices to minimize involuntary churn.
This situation is similar, except that 100 percent of all Costco-issued AmEx cards will be replaced. This could have a significant impact on subscription companies that accept AmEx, so we encourage subscription businesses to be proactive and vigilant in protecting that all-important recurring revenue. We’ll keep you posted as the cards are replaced and how the subscription industry is responding.