Two dramatic disruptions are coming to the credit card industry. The biggest is in China, where that nation’s central bank will allow three of the four big U.S. credit card brands, Visa (NYSE: V), MasterCard (NYSE: MA) and American Express (NYSE: AXP), to start processing payments beginning on June 1.
This is really good news for American Express, which was not accepted in China until now. Visa and MasterCard were accepted in China but had to be run through China’s national payment processing network, UnionPay, until now. It made it real difficult for foreign visitors to use their plastic in China.
This is big news because UnionPay’s network processed $5.2 trillion worth of payments in 2013, the Associated Press reported. That could make China the world’s largest credit card market and a windfall for all three companies. Visa processed $6.9 trillion in payments worldwide in 2013.
Under the new policy, MasterCard, Visa and American Express will be able to set up payment networks in China and compete directly with UnionPay. It is not clear how long it will take for that to happen and if the networks will cover all of China.
My guess is that American cards will be first accepted in major Chinese cities like Beijing and Shanghai then expanded nationwide. It will probably take some time for U.S. credit cards to be accepted in all parts of China. News articles did not say how this will affect payment apps like Apple Pay in China.
Costco Hurts Amex Bad
This is especially good news for American Express, which has been hit hard by the other major disruption in the credit card industry: Costco Wholesale’s (NASDAQ: COST) decision to scrap its exclusive agreement with American Express. Formerly, AmEx was the only plastic besides debit cards accepted at Costco stores.
Now Costco only accepts Capital One’s (NYSE: COF) MasterCard in its Canadian stores and is planning to only accept Citigroup’s (NYSE: C) Visa at its U.S. stores starting next year. That’s really bad news for American Express because Costco reported a TTM revenue of $115.64 billion on February 28, 2015.
It gives people less reason to hold American Express because they will not get rewards discounts by using it at Costco. It also means that the Costco AmEx card will be replaced by a Citibank-issued Visa. This is great news for Visa because it means that all Visa cards could now be accepted at Costco.
The loss of Costco Canada is already hurting American Express, where revenue fell slightly between December 2014 and March 2015. AmEx reported a TTM revenue of $34.04 billion on March 31, down from $34.29 billion on December 31. The loss of Costco Canada hit American Express hard because the club store giant is huge in Canada, as anybody who visits the country knows.
Costco has 10 million members in Canada, which means almost one in every three Canadians shops there. Its revenue in the country exceeded $13 billion in 2013. Among other things, Costco is now Canada’s third largest grocer; it sold $8.9 million worth of food in the country in 2013.
My prediction is that the loss of Costco in the U.S. will hit American Express hard, and the opening to China will not make up for those losses. American Express will have to change its business model if it wants to sustain revenue growth.
Flexibility Is Now the Name of the Game in Credit Cards
Costco’s action indicates that neither retailers nor consumer want to rely on exclusive cards like American Express. They want open ended payment systems like Visa, MasterCard and Apple Pay. They want a card that they can use everywhere in town; one of American Express’s drawbacks is that many retailers refuse to take it. People want a credit card that they can use at the corner convenience store and the local greasy spoon as well as giant retailers like Costco.
That situation will get worse in the years ahead as consumers demand the ability to integrate card-less payment apps like Apple Pay and Venmo with lines of credit and bank accounts. American Express will have to address this situation, perhaps by buying a payment app company like PayPal (soon to be spun off from eBay) or Square.
AmEx is not the only credit card operator threatened here. Last year America’s largest retailer, Walmart (NYSE: WMT), dumped Discover (NYSE: DFS) as its credit card partner. Walmart decided to replace Discover with the more flexible MasterCard.
The most important benefit that consumers want from their credit cards is flexibility. Retailers know that and are trying to give consumers what they want. Companies like American Express and Discover will have to become more flexible if they want to remain competitive in the payment processing space.
Disclosure: the blogger holds shares of eBay Inc. (NASDAQ: EBAY), PayPal’s parent company.