A year ago, Costco Wholesale (COST -0.60%) decided to dump American Express (AXP -0.36%) as its credit card partner in favor of a new deal with Citigroup (C -2.55%). The Citigroup deal was scheduled to go into effect on April 1, 2016.

In the long run, Costco's new partnership with Citigroup and its move to the Visa network should bolster its profitability. However, the impending switch has had a negative impact on Costco's profit during the transition period -- and Costco recently revealed that this transition will take longer than originally expected.

Costco's unique credit-card policy
Whereas most retailers accept cards from most or all of the four major credit card networks, Costco has had an exclusive relationship with American Express in the U.S. since 1999.

Costco prefers exclusive credit card deals. Image source: The Motley Fool.

As part of this special deal, Costco pays swipe fees of about 0.6% of each credit-card transaction's value: about a quarter of American Express' average swipe fee. The company also earned a bounty each time it signed up a new customer for the Costco American Express card.

However, Citigroup offered even better terms in order to win Costco's business. Under the new agreement, Costco's swipe fees will fall to approximately zero, according to Bloomberg. This shows the value to creditcard companies of getting access to a pool of tens of millions of relatively high-income Americans.

A costly transition
On Costco's earnings call back in December, CFO Richard Galanti noted that the impending end of the American Express agreement had a $15 million negative impact on Costco's Q1 earnings. That translated to about $0.02 per share after tax.

The reason is that American Express has stopped taking new card signups as it winds down its Costco co-branded credit card. This means that Costco is no longer earning bounties. At the same time, it must continue paying swipe fees for existing American Express cards used in its warehouses.

Credit-card switch delayed
The disruption from this transition between American Express and Citigroup will continue for a little longer than originally planned. Galanti recently told the Puget Sound Business Journal that the switch to Citigroup has been pushed back to early summer -- perhaps June.

"There are millions of members and millions of members' data to move over and it is taking a little longer than expected," Galanti stated. Beyond these mechanics, American Express has to sell the Costco credit-card loan portfolio to Citigroup as part of the transition, and it's not clear if the two financial companies have reached a final agreement yet.

Based on the new timeline, the credit-card transition won't be completed until sometime during the fourth quarter of Costco's 2016 fiscal year. This means the loss of credit-card bounties will continue to impact its results for two or three more quarters.

The loss of $15 million a quarter is hardly devastating for Costco, which generated $3.6 billion in operating income last year. However, this is one of several headwinds that could severely limit Costco's ability to grow its earnings in fiscal 2016.

That said, by the end of the fiscal year, Costco's new credit card partnership with Citigroup should be up and running -- and paying big dividends in the form of lower swipe fees. This sets the stage for a return to faster earnings growth for Costco in fiscal 2017.