Why Doesn’t Costco Take Discover? The Real Story

Costco, the warehouse giant beloved for its bulk discounts and Kirkland brand treasures, accepts only Visa credit cards, cash, debit cards, and Costco Shop Cards. This leaves many Discover cardholders scratching their heads, wondering why their preferred plastic isn’t welcome at the checkout. The answer, in short, comes down to transaction fees and negotiating power. Costco leverages its massive sales volume to negotiate incredibly favorable terms with its credit card partners. In the past, Costco had an exclusive agreement with American Express, which shifted to Visa in 2016. Because Discover has a smaller market share and generally higher interchange fees than Visa (despite sometimes promoting lower rates), Costco doesn’t find the financial incentive to accept them. The economics simply don’t add up for the retailer given their low-margin business model.

Understanding the Credit Card Landscape

To fully grasp why Costco opts out of Discover, it’s crucial to understand the complex interplay of credit card networks, issuers, and merchants. Each time you swipe (or tap) your credit card, a small fee is charged to the merchant. These fees, known as interchange fees, are determined by the credit card network (Visa, Mastercard, Discover, American Express) and are paid to the card-issuing bank (e.g., Chase, Citibank) that provides the credit card to the consumer. Interchange fees vary based on numerous factors, including the type of card used (rewards vs. non-rewards), the merchant category, and the transaction method (in-person vs. online).

Costco operates on razor-thin margins. Their business model depends on high sales volume and membership fees. Accepting Discover cards, with potentially higher interchange fees than their Visa agreement, would eat into those already slim profit margins. Furthermore, the limited usage of Discover compared to Visa means the cost of accepting Discover does not translate into proportionally higher sales volume. The potential sales increase doesn’t outweigh the cost increase in transaction fees.

The Power of Negotiation: Costco’s Leverage

Costco’s significant sales volume gives it immense negotiating power with credit card networks. The company can effectively demand lower interchange rates and more favorable terms because credit card networks are eager to tap into Costco’s vast customer base.

When Costco switched from American Express to Visa in 2016, the deal was a massive win for Visa. The partnership gave Visa access to millions of Costco members and billions of dollars in annual transaction volume. In exchange, Costco secured dramatically lower transaction fees, allowing them to maintain their low prices.

For Discover, accommodating Costco’s demand for exceptionally low fees might not be financially viable. Discover’s smaller size and business model limit its capacity to offer the same deep discounts as Visa. Consequently, Costco doesn’t see sufficient benefit in accepting Discover compared to the cost.

Other Factors to Consider

Beyond interchange fees and negotiation power, other factors might influence Costco’s decision.

• Operational Simplicity: Limiting the accepted credit card networks simplifies point-of-sale systems, reduces training costs for employees, and streamlines accounting processes. Handling fewer networks translates to less complexity and potential for errors.
• Focus on the Visa Relationship: Costco invests heavily in promoting their Visa card, which offers rewards and benefits specifically tailored for Costco shoppers. This strengthens customer loyalty and drives sales.
• Customer Demographics: While Discover has a broad appeal, Costco may have determined that the overlap between Discover cardholders and their core customer base isn’t significant enough to warrant adding another payment option.

In essence, Costco’s decision to not accept Discover is a calculated business decision driven by economic factors and strategic partnerships. The company prioritizes minimizing transaction costs to maintain low prices for its members, and their exclusive relationship with Visa serves that goal.

Frequently Asked Questions (FAQs)

1. Will Costco ever accept Discover cards?

It’s difficult to say definitively. While unlikely in the short term due to the existing Visa agreement, market conditions, interchange fees, and negotiation power could change over time. Costco constantly evaluates its business strategy, so a future partnership with Discover isn’t entirely impossible. However, it would require significant shifts in the economics of credit card processing and Discover’s ability to offer highly competitive rates.

2. What payment methods does Costco accept?

Costco accepts Visa credit cards, cash, checks, debit cards (Visa and Mastercard), Costco Shop Cards, and EBT cards (where applicable). They also accept mobile payment options like Apple Pay and Google Pay, provided they are linked to a Visa card.

3. Can I use my Discover card online at Costco.com?

No. The same payment restrictions apply online as in-store. You can only use Visa credit cards, debit cards, and Costco Shop Cards on Costco.com.

4. What are Costco Shop Cards, and how do they work?

Costco Shop Cards are essentially gift cards that can be used to purchase merchandise at Costco warehouses and on Costco.com. They are a convenient way to shop at Costco without a membership (for non-members) or to pay using cash or other means.

5. Does using a Visa debit card avoid credit card fees for Costco?

Yes, debit card transactions generally have lower interchange fees compared to credit card transactions. However, the exact fees can still vary depending on the card issuer and the specific terms of Costco’s agreement with Visa.

6. How does Costco’s credit card agreement with Visa benefit consumers?

The agreement allows Costco to negotiate lower prices, which are then passed on to its members. Additionally, the Costco Anywhere Visa card offers valuable rewards, such as cash back on purchases at Costco and elsewhere.

7. Are interchange fees the only reason Costco doesn’t accept Discover?

While a significant factor, interchange fees are not the only reason. Operational simplicity, the focus on the Visa partnership, and potentially customer demographic considerations also contribute to the decision.

8. Could regulatory changes in the credit card industry impact Costco’s payment policies?

Potentially, yes. Any significant changes to interchange fee regulations or anti-trust laws could force Costco to re-evaluate its payment strategies and potentially consider accepting other credit card networks.

9. How does Costco’s payment policy compare to other major retailers?

Many major retailers accept all four major credit card networks (Visa, Mastercard, Discover, and American Express). Costco’s limited acceptance is unusual but justified by its unique business model and negotiating power.

10. If I don’t have a Visa card, can I still shop at Costco?

Yes. You can pay with cash, check, debit card (Visa or Mastercard), or use a Costco Shop Card. Alternatively, you can shop with a member or become a Costco member yourself and obtain a Costco Anywhere Visa card.

11. What happens if I try to use a Discover card at Costco?

The transaction will be declined at the point of sale. Costco’s payment systems are programmed to only accept approved payment methods.

12. Where can I complain about Costco not accepting Discover?

While you can express your dissatisfaction to Costco customer service, the decision is a strategic business one. You can also contact Discover to share your feedback. However, whether these actions will change Costco’s policy is unlikely unless there are major shifts in the market or within Costco’s strategy. Ultimately, Costco prioritizes its business model to offer low prices, and the current payment system is designed to support that goal.