Why the Costco and Capital One Partnership Failed

Posted on July 12, 2021

Last Update: September 24, 2021

In 2014, Capital One bank announced that its Canadian branch had formed a partnership with Costco Wholesale. The bank effectively became Costco Canada's sole credit card issuer with this announcement. 

The Costco Capital One Mastercard offered some pretty impressive benefits to cardholders, especially considering the convenient and diverse shopping experience that Costco offers. It featured no annual fees and doubled as a Costco membership card. Costco members received 3% cash back on restaurant purchases, 2% on all gas purchases, and up to 1% on all other purchases. 

Now, only seven years later, the two conglomerates have ended that partnership. This news will take effect by or before late 2021. 

If you're wondering why the Capital One and Costco partnership failed, you aren't alone. News of the partnership ending has implications for which credit cards you can use at Costco and Hudson's Bay in Canada. Keep reading to learn what those implications are and how they could affect your card use.

Reasons of Failed Partnership

The Capital One cash back Mastercard was created exclusively for Costco members. Although cardholders could use the credit card at all locations accepting Mastercard, not just Costco.

The feeless, up to 3% cash back card had a competitive annual interest rate of only 19.75%. It also featured benefits like:

  • Price protection
  • Purchase Assurance
  • Common carrier travel accident insurance
  • Travel assistance
  • Zero liability

One cool feature of this rewards card was that it had no cap on cash back earnings. Cardholders could collect rewards without yearly or all-time limits.

With all of these advantages, why would Costco let its Capital One partnership slip through its fingers? Capital One is probably ending its Costco loyalty program because Costco and its members benefited more than Capital One did.

We'll explain the four reasons Capital One wasn't benefiting from its Costco partnership next. Stick around to get answers to all of your burning questions, including whether you can use your Mastercard at Costco going forward.

Capital One Faced An Uphill Battle Winning Costco Customers

Capital One's partnership with Costco was rocky from the beginning. American Express simply switched its Costco cardholders to a new credit card accepted by the retail giant.

Not acquiring Amex's Costco customers meant Capital One had to build up its customer base from scratch. And that was easier said than done considering how hard of a time Capital One faced gaining a foothold in Canada.

At the same time, Capital One also had to win business from Amex. American Express drove hard competition, opening up two new card offerings to attract former Costco customers.

Ending its partnership only five years after launch hints that Capital One's battle to win Costco members hasn't been going well. But problems marketing its loyalty program is just one reason the Capital One-Costco partnership failed.

Capital One Is Reducing Its Canadian Footprint

Its partnership with Costco isn't the only business deal Capital One Canada is backing out of in 2021. The bank and credit card company also recently announced that its Hudson Bay partnership will end in mid-2021. 

This comes after Capital One stopped taking new customers for its leading Canadian rewards credit card — the Aspire Travel World Elite Mastercard. And before that, the company canceled its IHG- and Delta-branded credit cards.

Along with its announcement that its Canadian partnership with Costco would end, Capital One shut down its Montreal and Toronto call centres. All of these moves signal that Capital One is trying to pull back from the Canadian market.

Capital One Couldn't Compete with Canadian Banks

It's notoriously difficult for American banks to compete in Canada. And even with the Costco partnership, Capital One hasn't managed to gain a significant foothold in the market.

Why? For one, Capital One failed to secure an exclusivity contract with Costco. Not having exclusive rights to Costco's members meant customers could use any Mastercard, not just Capital One's, to pay for wholesale goods.

And even among Mastercards, Capital One couldn't compete. Its cash back rates paled in comparison to Canadian competitors like BMO, MBNA, and Scotiabank's Tangerine.

For example, BMO's cash back card offered 1.5% on all Costco purchases. Compare that to only 1% cash back Costco members received when paying with the Capital One Mastercard. 

Capital One Wants to Focus on Own-Brand Credit Cards

A spokesperson from Capital One has stated that the company will shift focus to its own-brand credit cards. And experts speculate this is because the Costco cash back card wasn't profitable enough.

Some sources have stated that Costco forced Capital One to give up interchange fees on its rewards card. That means it could only achieve profits when Costco members used their Capital One card at non-Costco businesses.

Switching focus to non-partnership credit cards is a profitable move for Capital One. But what about Costco? Will members be forced to use another credit card at the wholesale retailer?

Costco and Capital One Mastercard

What Happens to People Who Have the Capital One Costco Card?

Costco is currently still accepting Capital One Mastercards. The retailer has yet to announce when and if it will stop accepting Capital One's cash back credit card.

However, there are two pieces of evidence suggesting that you won't be able to use your Capital One Mastercard at Costco for much longer. 

Firstly, there's historical evidence from American Express's failed partnership with Costco. When that partnership ended, American Express moved current cardholders onto its other loyalty program credit cards. 

Another piece of evidence comes from Capital One's announcement that it's closing two of its major Canadian call centres. That move signals that Capital One could close out its Costco cash back card accounts altogether.  

CIBC to Offer Costco Mastercard

After many considerations, meetings and discussions, Costco has officially partnered with CIBC.

cibc costco mastercard new partnership

Who will Costco's New Credit Card Partner Be?

Before partnering with Mastercard, Costco had an exclusive relationship with American Express. That partnership lasted 15 years, during which time the wholesale retailer only accepted American Express cards. 

Costco has a track record of only accepting credit cards from one network and beginning in early 2022, an official announcement has been made that the Canadian Imperial Bank of Commerce has taken on the exclusivity of being Costco's sole credit card partner. 

Laura Dottori-Attanasio, Group Head, Personal and Business Banking at CIBC says: "We are excited to partner with Costco, one of the best and most recognizable brands in Canada for providing unparalleled value, to enhance the rewards program and deliver even more value to their members."

As CIBC begins the task of issuing new Mastercards, they will also acquiring the millions of Canadian Costco credit card portfolios which reportedly includes over a whopping $3 billion in outstanding balances.

Although the cash back options on the CIBC Costco Mastercard have not yet been publicized, customers will be happy to know that the new Mastercards will support Apple Pay, which is a feature that the previous Capital One cards didn't offer.

Expect "generous" rewards for in person and online shopping using the CIBC Costco Mastercard. The card will also function as a membership card and will most certainly be able to be used worldwide.

“As we look to the future needs of our members, we believe that CIBC is well positioned to help drive even more benefits of a Costco membership to Canadians,” said Joe Portera, Executive Vice President/COO Eastern & Canadian Divisions, Chief Diversity Officer, Costco.

What Cards Are Costco Accepting Now?

Costco Canada currently accepts all Mastercards. This includes the Capital One cash back credit card for the time being. But once the partnership is officially over at the end of this year, all that could change.

We mentioned above that Costco has only ever accepted credit cards from one network. The three biggest credit card networks in Canada are Visa, Mastercard, and American Express. 

Visa is the largest credit card network in the world. And Costco has a successful track record with Amex. These facts make Visa and Amex top contenders for a coveted Costco partnership.

Interac is also a top contender. This Canadian credit card network holds 46% of the Canadian market. And that's a far cry from #2 credit card network, Visa, which only holds 31% market share.

Still, it would make the most sense for Costco to partner with another issuer offering Mastercard. That way, it can avoid ticking off members who will have to switch to a new credit card network altogether.

Will Costco Still Accept Mastercards?

For the time being, yes, Costco is still accepting Mastercard. This could change, though, depending on who Costco chooses as a credit card partner going forward.

It will be interesting to see which credit card issuer Costco accepts next. Because the answer to that question will determine which cards the retailer accepts after this year. 

Need Help Finding A Better Credit Card?

There are multiple reasons why the Capital One and Costco partnership failed. Yet, this news isn't necessarily bad. After all, the Capital One Costco card never offered the most competitive rates anyway.

Are you searching for a better card than to use at Costco than your Capital One cash back Mastercard? Compare credit card rates now to find the best cash back loyalty program for you!

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