Costco has become a major driver of Citi's business (C, COST)

BI Intelligence

This story was delivered to BI Intelligence "Payments Briefing" subscribers. To learn more and subscribe, please click here.

Citigroup's acquisition of Costco's co-branded credit card portfolio from Amex in June 2016 continues to pay off.

In its Q4 2016 earnings release, Citi posted 8% overall revenue growth on a constant-currency basis. 

The Costco portfolio appears to be a major driver of Citi’s overall growth right now.  

• Costco cards are still driving massive spending. The customer base, which likely totals roughly 12 million, saw over $52 billion in purchase sales in its first six months, and over $6 billion in loan growth, according to the firm's earnings call. That’s really strong performance — for context, Amex saw roughly $80 billion in Costco billed business in 2015, which puts Citi’s annual run rate roughly $24 billion ahead of the Amex card.
• That’s propelling growth in Citi’s US branded cards business. Citi’s branded cards earned $2.2 billion in revenue in Q4 2016, posting 15% growth year-over-year (YoY). Without Costco, that growth rate dips to 2%, showing the massive impact that the portfolio acquisition continues to have on Citi’s business.
• And growth in branded cards revenue is one of the major drivers of Citi overall. Citi’s other segments aren’t performing this strongly — retail banking revenue was down 4% YoY, and retail services remained flat. Growth in branded cards, which was driven by Costco, reflects just how pivotal the portfolio is to Citis’ results. 

And while that’s good in the short term, the rewards rat race we’re seeing could pose some problems for the bank moving forward. Costco has given Citigroup immense growth in the months since acquisition. But it’s also leading to rising costs — operational expenses, for example, rose 6% YoY in Q4, largely reflecting expenditure on the Costco portfolio.

The firm will have to “overcome promotional balances” in order to maintain success. And though Costco feels “well-positioned” to do so, keeping an eye out for the bank’s branded cards and other new investments will be key. That’s particularly true in light of stiff rewards competition, which is raising expenses for card networks but providing sometimes limited returns. 

The Costco and Citigroup relationship is just one part of the broader payments ecosystem, which has grown to include vendors, merchants, acquirers, processors, and more.

John Heggestuen, director of research at BI Intelligence, Business Insider’s premium research service, has compiled a detailed report on the payments ecosystem that drills into the industry to explain how a broad range of transactions are processed, including prepaid and store cards, as well as revealing which types of companies are in the best and worst position to capitalize on the latest industry trends.

Here are some key takeaways from the report:

• 2016 will be a watershed year for the payments industry. Payments companies are improving security, expanding their mobile offerings, and building commerce capabilities that will give consumers a more compelling reason to make purchases using digital devices.
• Payments is an extremely complex industry. To understand the next big digital opportunity lies, it's critical to understand how the traditional credit- and debit-processing chain works and what roles acquirers, processors, issuing banks, card networks, independent sales organizations, gateways, and software and hardware providers play.
• Alternative technologies could disrupt the processing ecosystem. Devices ranging from refrigerators to smartwatches now feature payment capabilities, which will spur changes in consumer payment behaviors. Likewise, blockchain technology, the protocol that underlies Bitcoin, could one day change how consumer card payments are verified.

In full, the report:

• Uncovers the key themes and trends affecting the payments industry in 2016 and beyond.
• Gives a detailed description of the stakeholders involved in a payment transaction, along with hardware and software providers.
• Offers diagrams and infographics explaining how card transactions are processed and which players are involved in each step.
• Provides charts on our latest forecasts, key company growth, survey results, and more.
• Analyzes the alternative technologies, including blockchain, which could further disrupt the ecosystem.

To get your copy of this invaluable guide, choose one of these options:

1. Subscribe to an ALL-ACCESS Membership with BI Intelligence and gain immediate access to this report AND over 100 other expertly researched deep-dive reports, subscriptions to all of our daily newsletters, and much more. >> START A MEMBERSHIP
2. Purchase the report and download it immediately from our research store. >> BUY THE REPORT

The choice is yours. But however you decide to acquire this report, you’ve given yourself a powerful advantage in your understanding of the payments ecosystem.