Canadian credit card issuers are waging a new war for each others' customers, but this time they have a new end game in mind.
Historically, issuers such as the Big Six banks or American Express tried to steal clients to boost the size of their loan portfolios. Credit card lending can be an extremely valuable business because the interest rates charged to cardholders are high, often around 20 per cent. Financial institutions cover these loans with debt and deposits that cost them much less.
The problem is that portfolio growth is barely noticeable anymore. Canadian household debt is sky high, now sitting at 163 per cent of disposable income, so credit card issuers are lucky to achieve a growth rate of 1 per cent annually. In this environment, they must rely on transaction volumes to boost their bottom lines.
Every time a Canadian pays with plastic at the checkout counter, the card issuer earns a cut, known as the interchange fee. The exact value of these fees are kept secret and differ from card to card, but they often amount to 2 per cent to 3 per cent of the total purchase price, according to the federal Competition Bureau, and the majority flows to the card issuer. Such revenues are so lucrative that they can make up one-third of total credit card revenues for a Canadian bank.
This burgeoning revenue stream has also pushed the fight for customers onto a relatively new front – going after people who use their card a lot.
Typically, card issuers are keen to acquire people who are slow to pay back their credit card balances. Now the issuers are targeting high-end cardholders who, even though they may pay off their monthly balances, spur a lot of transactions, often for big-ticket items.
"There are two levels of play here. There's a macro, strategic shift within the industry, and there's a tactical opportunity in the short-term," said Dave McKay, head of personal and commercial banking at Royal Bank of Canada, assessing the new focus on transactions.
Card issuers were served up a "once-in-a-lifetime" opportunity this summer, according to Credit Suisse analyst Gabriel Dechaine, when Canadian Imperial Bank of Commerce and Toronto-Dominion Bank duked it out for the right to be the card issuer for Aimia Inc.'s Aeroplan loyalty program. Once CIBC hinted it would not renew its Aeroplan contract, instead opting to launch an upgraded version of its own travel reward card, it appeared there would be a free-for-all for existing Aeroplan customers.
That didn't play out as planned. After some legal tussling, CIBC and TD decided to carve up the Aeroplan portfolio between themselves, making it more difficult for other card issuers to steal customers. But by the time that decision was announced, rivals had already lined up new advertisements, which can now be seen on billboards, TV screens and newspapers across the country.
Mr. Dechaine estimates that card issuers will ultimately spend $500-million in a relatively short period, and calculated that issuers must pay between $400 and $500 to acquire a new card customer after factoring in such things as incentives, including bonus travel points handed out simply for switching over.
To some, it is simply the cost of doing business. Toronto-Dominion Bank long underperformed in credit cards, so it wanted the Aeroplan account badly. To win, it agreed to pay 15 per cent more per travel reward point than CIBC paid under its old contract. TD declined to comment for this story.
Bank of Nova Scotia, who was also rumoured to be in the running for the Aeroplan account, stressed that offering lucrative loyalty programs are simply par for the course today. "If you're going to pay for things, you might as well get rewarded for it along the way," said Mike Henry, who oversees retail lending at Scotiabank, of his institution's take on customer attitudes.
Yet because many loyalty programs are already so attractive, there are questions about the prospects of taking on established credit card players. "It's tough to win in this space," Mr. McKay said, with RBC being one of the heavyweights. "Trying to steal customers is difficult."
Editor's note: Mike Henry's last name has been corrected in the online version of this story.