Around this time last year, Costco Wholesale (NASDAQ:COST) announced plans to end its co-branded credit card agreement with American Express (NYSE:AXP) after 16 years. Instead, it reached a long-term agreement with Citigroup (NYSE:C) and Visa (NYSE:V) to issue a new Costco co-branded credit card.

Costco's U.S. warehouses will only accept Visa credit cards as of June 20. Image source: The Motley Fool.

From day one, it was clear that Citigroup and Visa had offered much better terms than American Express was ever willing to stomach. The new agreements -- which will go into effect in late June -- will cut Costco's card acceptance fees to around zero.

Costco has consistently stated that it would pass on most of its savings from the new credit card agreement to customers. The terms of Costco's new co-branded Citi Visa card recently became public, showing just how much value cardholders will be getting.

How Costco's current credit card works
Costco's current co-branded credit card -- the American Express TrueEarnings card -- allows cardholders to earn cash back rewards. The card offers 3% cash back on up to $4,000 in annual gas purchases at Costco and most other gas stations, 2% cash back on travel purchases and at restaurants in the U.S., and 1% cash back on everything else.

Rather than receiving the cash back over time, cardholders get a voucher for their cash back earnings for the prior year every February. The reward vouchers can be redeemed at Costco for merchandise or cash.

This system is good for Costco because it drives extra traffic to its warehouses every year after the reward vouchers are distributed. And while members are allowed to get cash, most probably end up shopping and using the reward to cover their purchases.

A better version of the Costco credit card
Costco's new co-branded Visa card will have the same basic rewards structure. Cardholders will continue to accumulate cash back earnings and receive a voucher in February that can be redeemed at Costco. But now there will be more money in those rewards checks.

First, purchases at gas stations have been bumped up to 4% cash back from 3% previously. Additionally, the limit for receiving 4% cash back will be raised to $7,000.

The new Costco credit card will offer 4% cash back at gas stations. Image source: The Motley Fool.

Second, cardholders will now earn 3% cash back on travel purchases and restaurant purchases (instead of 2%). Restaurants outside the U.S. are also now eligible for the extra cash back, which wasn't the case with the American Express card.

Third, all other purchases at Costco and will be eligible for 2% cash back, instead of being lumped into the regular 1% category. Given that many members spend thousands of dollars a year at Costco, getting an extra 1% back could be very valuable.

Finally, cardholders will be able to earn more cash back simply because Visa cards are accepted in significantly more locations than American Express cards.

Citigroup and Visa are hungry for growth
American Express clearly wanted to renew its long-standing agreement with Costco. After all, the Costco co-brand relationship accounts for about 10% of all American Express cards and 20% of the company's loan portfolio. However, it wasn't willing to pay enough to win the deal.

The increase in rewards for cardholders shows just how aggressive Citigroup and Visa were in bidding for Costco's business. Only time will tell whether they feel buyer's remorse a few years from now. One thing is certain, though. Unless American Express opens up its pocketbook in the future, it risks losing even more business.

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