Costco is now issuing new Visa credit and debit cards to their consumers. Customers who have previously purchased Costco cards from American Express after June 20th will be unable to use them anymore.

Citi spokeswoman stated that all Costco cardholders should have new cards in June or May.

Investors and consumers were concerned when Costco and AmEx announced that they would end their 16-year-old exclusive partnership.

The stock of the credit-card company plunged 6.4% after it was announced about the relationship. It is the largest percentage drop in one day after August 2011.

Cardholders were worried. Although Costco offers a wide range of deals, the average cost of a payment transactions can be quite high (giant packets of large bottles lotion and paper towels), and credit cards offer more flexibility and convenience than cash as compared to a debit card.

Costco announced that Visa would replace AmEx. It would take effect in spring 2016. Citigroup would become the special issuer for Costco’s credit card cards. It led to an increase in both Citigroup and Visa share prices, which was -0.25%.

This timeline was slightly extended, and Costco now accepts Visa cards, merchant service checks, and cash.

Citi said that new Costco consumers looking to get Costco Visa Card won’t be able to receive any further information until June.

Eric Wasserstrom, managing director of Guggenheim Securities LLC and AmEx, stated that for some consumers, American Express’s special relationship with Costco was one of the reason they were able to obtain an AmEx card.

It isn’t the first split between a retailer and credit-card issuing network.

Wal-Mart changed their credit cards in 2014 MasterCard from Discover. Capital One also sold its Best Buy credit-card portfolio to Citigroup in 2013. Best buy switched their credit-card processing company to Visa from MasterCard after that.

Matt Schulz, CreditCards.com senior industry analyst, stated that people are very loyal to brands and tend to keep their cards for a lengthy period of time. AmEx has maintained that kind of brand loyalty for years as compared to other credit card issuers. People say, “Well, I use AmEx,” and when any change occurs, it can be troublesome.”

American Express management is directly responsible for this mess. American Express management knew how to create large customer concentrations and ignored the risks. The company lost over $40 billion in shareholder value when key customers left the company.

AmEx Stuffed Tried To Sell Too Many Eggs

American Express announced the ending of its Costco partnership in January. Management informed shareholders that 10% of the 112,000,000 American Express cards in circulation had been co-branded with Costco when it first made the announcement. This is an astonishing concentration for a company with American Express’ sophistication and size.

Credit Suisse’s analyst looked deeper into American Express’ data and found that 23% of Amex card purchases were made on co-branded cards. Market participants immediately asked if these customers were loyal to American Express or were choosing to spend due to loyalty to Delta (NYSE/DAL), JetBlue (NASDAQ/JBLU), Starwood Hotels, and another co-branded partner.

Over-dependence on a few customers can lead to customers leaving and taking a large percentage of revenue. The risk, or in other words, what Costco and AmEx experienced last year, was the same.

The Concentrations made AmEx-Costco Catastrophe Possible

American Express’ co-branded business was already in trouble after the Costco split. Soon after, JetBlue, another major partner in co-branding, announced that they would be shifting their card business from American Express to MasterCard (NYSE.MA) and Barclays. The exodus continued in January when Fidelity, a co-branded card with American Express, switched to Visa.

As one would expect, given the high levels of partners, the company’s revenues have suffered from the loss. American Express’ revenue has declined significantly in the past five years, despite steadily growing quarterly revenues. American Express’ quarterly revenue has fallen nearly 11% since its peak in 2014’s fourth quarter.

The market has reacted in kind. The stock is now 35% below its 2014 highs.

American Express’ management made it too dependent on a few co-branded card partnerships. The benefits from this strategy were temporary and outweighed by the concentration of risks. These risks still exist today, even though Costco, Fidelity, and JetBlue were sold.

Marriott acquired Starwood Hotels in April 2018. Marriott is currently a partner with JPMorgan Chase to offer its co-branded credit card cards. It gives the megabank the ability to take Starwood away from Amex when the contract is renegotiated.

Finding the Silver Lining in This Mess

American Express and its shareholders have had to leave Costco. But, all is not lost.

American Express’ financial statements are strong, despite the difficulties on its top line. American Express reported a 25% return on equity in 2015, which is profitable. It is higher than Visa’s 22.1% but lower than MasterCard’s amazing 59%. The balance sheet of the company is strong from both capital and liquidity perspectives. Last quarter, the company generated $2.2 Billion in free cash flow. It is more than Visa and MasterCard combined.

American Express remains a favorite of high-net-worth clients despite increased competition. According to the Nilson Report, American Express customers spend an average of $144 per purchase, which is significantly more than the $84 average for Visa cards and $90 at MasterCard.

In late 2014, the company signed a six-year extension to its largest co-branded airline partner Delta. It is a win for the company in the short term. It does not change American Express’ dependence on a handful of co-branded partners. Before the Costco partnership collapsed, about 5% of card spending was accounted for by Delta co-branded cards. This concentration is probably higher today because total spending has declined without Costco’s influence.

A Problem That Was Created By Themselves

Every company must find ways of diversifying its customer base and reducing customer concentration risk. American Express failed to recognize this basic principle and has been harmed by its competitors who have taken their key customers.

It is bad management regardless of whether the company’s a small family-owned business or a large multinational corporation like American Express.