Most retailers try to maximize profit per customer. Costco operates differently.
Its philosophy is:
"Make money primarily from membership fees and pass operating savings back to members."
Costco is famous for extremely thin merchandise margins. For decades, management has focused obsessively on lowering costs so prices stay lower than competitors. Even tiny expenses matter.
From Costco's perspective, credit card processing costs are not just an accounting detail. They directly affect member value.
When the AmEx contract came up for renewal, Costco reportedly believed the economics no longer supported the value proposition it wanted for members. Costco executives openly framed the decision around reducing costs and saving money for members.
American Express's Philosophy: Premium Service and Premium Economics
American Express historically built a different kind of business.
AmEx is not simply a payment network. Its brand has long centered on:
- Affluent customers
- Premium rewards
- Exclusive benefits
- Strong customer service
- Higher merchant acceptance costs
This model works because AmEx customers often spend more than average consumers. Merchants may accept higher fees to gain access to those customers.
The problem is that Costco is not a luxury retailer.
Costco attracts wealthy shoppers, but it also attracts intensely value-conscious shoppers. The culture of Costco is not prestige. The culture is efficiency.
In a sense, Costco and AmEx eventually developed a philosophical mismatch.
- AmEx: "Provide superior payment experiences."
- Costco: "Remove every unnecessary cost."
Neither philosophy is wrong. They simply diverged.
Why Visa Won
Visa and Citi reportedly offered Costco a package that included broader card acceptance and economics that Costco found more attractive. Costco and AmEx were unable to agree on renewal terms, leading Costco to move to Visa and Citi in 2016.
From a strategic standpoint, Visa also had another advantage.
Many more consumers already carried Visa cards than American Express cards. That made shopping at Costco easier for a larger percentage of the population.
Costco's leadership likely looked at the situation and asked:
"Why restrict members to a premium network when a larger network can offer comparable functionality at lower cost?"
That question fits perfectly within Costco's culture.
The Hidden Lesson: Scale Eventually Beats Prestige
One of the most important principles in business is:
A company can ignore economics for a while, but not forever.
For sixteen years, the Costco-AmEx partnership was highly successful. Yet even successful partnerships end when incentives stop aligning.
Costco had enormous negotiating power.
Millions of loyal members. Huge transaction volume. A reputation for customer retention.
As Costco grew larger, it gained the ability to demand increasingly favorable terms.
AmEx's premium model became harder to justify within Costco's low-cost ecosystem.
This is a recurring theme in business history:
- Luxury brands win through differentiation.
- Scale businesses win through efficiency.
- When the two collide, efficiency often wins.
A Broader Business Philosophy
The Costco-AmEx breakup demonstrates a principle that extends beyond finance:
Great businesses are not loyal to partners. They are loyal to their mission.
Costco's mission is value for members.
If a supplier, logistics partner, technology vendor, or payment company cannot support that mission as effectively as an alternative, Costco will switch.
That discipline is one reason Costco has been so successful.
Many companies become emotionally attached to long relationships.
Costco did not.
They evaluated the partnership through a single lens:
"Does this still create the greatest value for our members?"
When the answer became "no," the relationship ended.
The Irony
Ironically, both companies stayed true to their principles.
- Costco refused to pay more than it believed members should indirectly bear.
- AmEx refused to dilute its premium economic model merely to keep the account.
So the split was not a failure.
It was a case of two successful companies following different philosophies to their logical conclusion.
In business, that is often how major partnerships end: not because one side is wrong, but because each side becomes increasingly committed to a different definition of value.
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