A number of Canada's biggest banks are scrambling to beef up their credit card portfolios, driven by the sudden realization that these products are quickly becoming major profit centres.
While some lenders, such as Royal Bank of Canada and Canadian Imperial Bank of Commerce, have already established themselves as credit card heavyweights, rival banks are not to be outdone, now spending heavily to market their own cards, and, in some cases, to acquire card portfolios.
Toronto-Dominion Bank has arguably been the most aggressive. Since 2012, TD has acquired Target Corp.'s $5.9-billion (U.S.) credit card portfolio and become the lead financial partner for Aimia's Aeroplan loyalty program, buying half of the Aeroplan portfolio at the same time.
Other rivals are quickly waking up. "We think we've got some catching up to do in the credit card business," Bank of Nova Scotia chief executive officer Brian Porter told a bank conference this week, adding that he sees a lot of profit potential.
The efforts to promote credit cards come as the nature of how they are used is changing. Historically these products were largely used to finance purchases that cardholders couldn't afford that the time of the transaction. But as loyalty programs caught on, more Canadians started to pay by card in order to accumulate incentives such as airline reward miles.
Over time credit cards have also become a convenient way to pay, whether it be online or by simply tapping the card at the checkout counter – with no signature required. Banks heavily support such payments because they earn what are known as interchange fees every time someone pays plastic, and these fees typically hover around 2 per cent of the total purchase price, depending on which card is used.
The banks do not disclose precisely how much they make from credit cards, but these interchange fees have become a substantial share of profits, often amounting to one-third of a credit card division's net income – and this percentage is expected to grow.
But the only way banks can capture these fees is by ensuring Canadians use their cards, and that's why those who weren't big credit card players in the past are now advertising extensively. Both Scotiabank and Bank of Montreal ramped up their marketing campaigns in the second half of 2013, and TD is now aggressively pushing its Aeroplan card, after becoming the lead partner on Jan. 1.
While TD has long eyed a credit card expansion, even chief executive officer Ed Clark was surprised by just how lucrative these products have become. "Frankly, as an asset class, [credit cards] have behaved better than people thought they would," he told the bank conference.
However, there is one Big Six bank staying out of the fray. Although National Bank of Canada is pushing hard to branch out from its Quebec roots, and offering credit cards to all Canadians could help it do that, CEO Louis Vachon told the conference that the timing isn't right for his bank to push its portfolio. "Don't expect us to make a huge bet on credit cards for the next few years," he said.
Rather than spend heavily on advertising to attract clients of all stripes, Mr. Vachon said his priority to get a National Bank credit card in the hands of every existing customer.
Yet even he admits these products can't be put on the back burner, and that National Bank should have expanded its card unit more than it has. "Could we do a little bit better in credit cards than we've done in the past three or four years? Absolutely," he said.