Costco Wholesale Corporation, a warehouse club that provides a wide selection of merchandise no longer accepts American Express cards. This change will affect many AmEx card users and in turn, will affect subscription businesses. Read to know what effect Costco's switching Amex credit cards will have on subscription retention.

1. 1
What’s the impact
of Costco
switching out 80+
million Amex credit
cards on
subscription
retention rates?
© 2015 Vindicia, Inc. All rights reserved. Vindicia Confidential.

2. 2
What’s the impact of Costco switching out 80+
million Amex credit cards on subscription retention
rates?
© 2015 Vindicia, Inc. All rights reserved. Vindicia Confidential.
As of June 27th, Costco no longer accepts American Express. The change will affect
more than just how 81M people pay for their 10-gal. tub of peanut butter. The bigger
impact is downstream, in other places where those members’ cards were stored.
For more than twenty years, Costco has issued an American Express card. In total, there
were more than 11m Costco-branded AmEx cards in circulation. This makes up about
10% of all AmEx cards in circulation. (per Bloomberg). For every Card Not Present
merchant holding AmEx cards, that means the potential to churn 10% of their AmEx
users in the coming months.
So, what’s merchant to do?
In ordinary circumstances, this would be a non-event. After all, we’ve seen card breaches
that resulted in 40m cards being turned over. As the issuing banks send out replacement
cards, Account Updater goes into overdrive, and services continue to flow for merchant
and consumer alike. Why is this one different?

3. 3© 2015 Vindicia, Inc. All rights reserved. Vindicia Confidential.
In a nutshell, it’s all about vested interests. In a traditional breach, the issuing bank has a
massive incentive to ensure you keep using their card. They want to make sure that
transactions that used to come to them, keep coming to them. If you have a Visa card
from ABC Bank and ABC has to send you a new Visa card, they want to ensure you
continue to use their Visa card, and not swap over to XYZ’s MasterCard that you also
carry. ABC is going to work hard to ensure that merchants get that new card number so
that the next time you make a CNP transaction, the transaction just “happens” and you
don’t even have to think about it. By replacing your old card number with your new card
number, ABC bank has retained your transactions for their bank, so they keep making
money.
In the Costco example, though, the parties’ interests are not aligned. AmEx is losing the
business. There is no new card for them to issue to you, so there’s no update for them to
provide. They have no incentive to help transition from your old AmEx card to a new Visa
card. Of course Citigroup would love to be able to replace your old AmEx card on file with
their new Citi Visa account- but they have no way to make the connection. They’d need
to be able to tie the new Visa card to the old AmEx card number- which is an unlikely
scenario.
We have heard rumor of a payment processor who said they might address the issue. It
would involve coding a special AU process to connect the old AmEx card to a new Citi
Visa card. However, since that was only one processor (and not one of the largest ones),
it seems unlikely this is going to get addressed.

4. 4© 2015 Vindicia, Inc. All rights reserved. Vindicia Confidential.
It’s a one-off event, so it just doesn’t make it over the list of things that have long term
impact. That’s a real problem for CNP merchants, including Vindicia clients.
What does this mean to our clients?
On average, AmEx accounts for 7% of credit card traffic. Given that 10% of those cards
might turn over, that’s .7% of all active subscriptions. That is non-trivial, and we certainly
expend more energy for smaller returns than this. However, in this case, there’s no way
for a merchant to get an automated update.
I’ve been asked about this several times in recent meetings. While I have acknowledged
that we can’t fix this, I’m also trying to point out that Vindicia has significantly helped our
merchants in other similar situations. For example, last fall, Capital One had a bug in
their account updater process, and they provided incorrect updates to merchants. If a
merchant requested a card update for John Smith, they could end up with a new card
number that actually beloved to Sam Brown. That was a disaster for CNP merchants. In
that instance, we were able to identify all accounts that had received a new card number
from Capital One through Account Updater. We contacted every one of our clients and
gained their approval to back out those updates immediately, and to request new
updates once the problem was fixed at Capital One. This meant that our merchants had
only a very small impact from the problem instead of it being a huge disaster. Folks
running an in house billing system might not have the resources to address these
problems as they come up.

5. 5© 2015 Vindicia, Inc. All rights reserved. Vindicia Confidential.
However, as a service provider with over 180m cards on file, it is worth our energy to
develop solutions to issues like this and to apply that fix across our entire merchant
base.
So, what’s our advice to merchants right now? If you’re on CashBox, make sure you
have configured email templates for hard billing failures. It is definitely in your interest to
have an automated outreach to your card holders if they hit “terminal failure”, so that
they are reminded to come and update their card.
Meanwhile, get ready to use that new Citi Visa card to buy more peanut butter…

6. 6© 2015 Vindicia, Inc. All rights reserved. Vindicia Confidential.
About the Author: Doug Smith
Doug has over 20 years of experience in technology
development and professional services in enterprise software
and telecommunications. His primary areas of focus are
professional services practice development and enterprise-
scale integration strategy. Prior to joining Vindicia, Doug was
responsible for technology assessment and product portfolio
strategy for Openwave Systems. Before Openwave, Doug was
a regional CTO for Portal Software. Previously Doug worked in
Accenture's telecommunications practice, delivering billing and
customer care platforms for major clients. Doug has a Bachelor
of Science degree in Computer Science from Purdue University.
Visit our Blog for more information.

7. 7
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© 2015 Vindicia, Inc. All rights reserved. Vindicia Confidential.