Canada’s largest banks are gearing up for fierce competition in the credit-card market next year, rolling out strategies to add new customers even as the risk of losses is rising.
Competition has intensified in anticipation of Air Canada’s 2020 relaunch of the popular Aeroplan loyalty program; Toronto-Dominion Bank is its lead partner, and both Canadian Imperial Bank of Commerce and Visa Canada Corp. are on board.
Banks have already been jockeying for position in 2019. Three banks that aren’t part of the Aeroplan scheme, Bank of Nova Scotia, Royal Bank of Canada and Bank of Montreal, each increased their credit-card lending faster than other banks. Low interest rates have squeezed the margins banks earn on lending, but credit cards are still among the most profitable products they offer. At Canada’s six big banks, credit-card lending accounts for an average of about 2 per cent of total loans, but generates nearly 10 per cent of those banks’ profits, according to estimates by National Bank Financial Inc. analyst Gabriel Dechaine.
And, as banks put more energy into mining troves of data on customers’ spending and habits to better predict their needs, credit cards are key to the success of increasingly valuable loyalty rewards programs.
New promotions, pricing and data-driven strategies are expected to get more aggressive in 2020. Yet an uncertain economic outlook, coupled with rising loan losses at banks and high consumer debt, add to the risks in offering more unsecured credit to borrowers.
“I think we’re going to see the banks aggressively putting in promos to acquire customers,” said Scott Lapstra, a credit-card and payments consultant at Lapstra Consulting.
Some banks may feel compelled to court a wider array of borrowers in order to expand their reach and boost profitability, he said. “I do think you’re going to see banks going a little bit lower in credit scores just to try to get a bit more yield. If we do go into a recession or have a major swing in unemployment, that’s going to lead to larger credit losses."
Some analysts have questioned whether now is the time for banks to expand credit-card lending, as economic growth has slowed, personal insolvencies are at their highest level since 2009, and the current economic expansion grows long in the tooth.
But Mr. Dechaine said the short-term risk of higher loan losses is worth it in the long run. “The knee-jerk reaction is, it’s late in the [economic] cycle,” he said. “You might have some short-term pain because of where we are in the cycle and some of these macroeconomic indicators. But that doesn’t change the fact that this is a great, highly profitable business.”
Bank of Nova Scotia has been leading the charge, with its credit-card lending in Canada up 7 per cent year over year in each of the last two quarters, as the bank plays catch-up in a segment where it had lagged its peers. In September, Scotiabank launched a revamped Gold American Express card, with no fees on purchases in foreign currencies and higher cash-back for certain spending categories, such as groceries or food delivery.
“The card market has become more competitive even in . I know there’s a lot of discussion about 2020, particularly in the airline [rewards] space," Dan Rees, Scotiabank’s head of Canadian banking, said on a late-November conference call with analysts. "We certainly have plans for making changes into next year.”
BMO increased its domestic credit-card lending by 6 per cent in the fiscal fourth quarter and 7 per cent in the third quarter, with aggressive offers on cash-back cards. And RBC had steady 5-per-cent growth in credit cards in each of those quarters, focusing on travel rewards through its Avion brand and a partnership with WestJet Airlines Ltd.
Some of the competitive pressure is also coming from non-bank credit cards, as President’s Choice Financial teamed up with Shoppers Drug Mart’s Optimum loyalty program, and Canadian Tire Corp. revamped its Triangle Rewards. The Canadian arm of Amazon.com Inc. also struck a new deal with TD to issue Mastercards in Canada that offer perks on Amazon purchases.
Banks are also focused on expanding adoption of mobile payments through digital wallets such as Apple Pay and Google Pay, as well as the banks’ own apps, which have been slow to catch on. Cards used digitally tend to be “sticky," Mr. Lapstra said. “Even if behaviour changes, that card tends to stay active."
One headwind on the credit-card business is a new deal that the federal government struck with Visa and Mastercard Canada to lower average interchange fees – which credit-card companies charge to businesses each time a card is used. It takes effect in 2020, which will reduce one source of revenue for card issuers.
A large part of each bank’s growth strategy may play out behind the scenes. Lenders can offer credit-limit increases to some clients, which tends to push card balances higher by increasing customers’ capacity to spend. And banks will try to move more customers to premium cards, which have annual fees and carry higher interchange rates. “I anticipate we’ll continue to see rewards being devalued on no-fee products," Mr. Lapstra said.
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