Credit Cards - Canada

HEADLINES

• The number of credit card transactions grew by 2% in 2010, to 2.6 billion

• Transaction value increased by less than 1% in 2010, as Canada is emerging only slowly from the recession

• Chip migration is practically complete, with most credit cards now having both a chip and a magnetic strip

• Visa is the leading operator in terms of transaction value, with a share of 63% in 2009, followed by MasterCard, with 32%

• Transaction value is predicted to grow at a CAGR of 3% over the forecast period, to a value of C$324 billion at constant 2010 prices in 2015

TRENDS

• A post-recession turnaround was evident in 2010, with the number of credit cards transactions increasing by 2% and transaction value returning to growth, buoyed by renewed confidence in the Canadian economy. Individuals used their cards to make purchases of C$261 billion in that year. Commercial cards, however, saw a slight drop in transaction value, of 1%, to C$19 billion, but value is expected to start growing again as companies began to spend more in the latter part of 2010.

• The shift to chip credit cards is practically complete, as all new credit cards issued are now chip enabled. Credit cards will continue to have a magnetic strip so they can be used in countries without the chip technology. Merchants have until 2015 to update their POS equipment to accept chip cards, and are slowly getting on board with the new technology as they invest to replace or upgrade old equipment. Most consumers appreciate the perceived added security of the chip card and are accepting the new cards, but some are experiencing hiccups in the process. Moneris, an industry leader in Point POS payment processing, reports that merchants are experiencing fewer chargebacks due to increased security and fraud detection of chip cards. However, other sources report that merchants have also noticed an increase in the number of cards being left behind at the cashier, as consumers forget to take their cards out of the machines. Some consumers also complain that they now have to remember too many PINs, with a four digit code for every card they own. Restaurants are also complaining that clients have to weave through tables to enter their PIN at the cashier’s desk, or the waiter/waitress now has to carry a portable card reading machine to the table.

• As of October 2010, the liability for certain types of fraud passes from the issuer to the merchant if a chip card is accepted at a non-chip accepting merchant. Visa and MasterCard have announced specific shift dates as a result of the chip technology having finally been implemented.

• Credit card companies were hit hard in 2009, as consumers reduced their spending significantly. There was only 3% growth in credit card transaction numbers, and a decline in value, compared with increases in debit card and pre-paid purchase transactions, as Canadian consumers took a more conservative approach to spending. More consumers paid off their credit cards every month and were more careful about how they spent in an effort to avoid getting into debt. Consumers are also now more attracted to rewards cards as a means to get more out of their spending. There are early signs of economic recovery in Canada and a change of attitude by many Canadians, credit card companies saw increased transaction value and profits in the first half of 2010.

• The new Code of Conduct for the Credit and Debit Card Industry in Canada came into effect in August 2010. The new Code is an attempt to protect merchants and consumers from being overcharged and misled by debit and credit cards companies by, for example, specifying that debit and credit functions cannot reside on the same card.

• Air Canada announced in Mach 2010 that it is only accepting credit cards for payment of goods during its flights. Cash, debit cards and travellers cheques are no longer accepted. Some US airlines have also gone cashless in-flight, but it is not certain yet if other Canadian airlines will follow suit.

• Mobile payment is picking up momentum, with most banks having banking apps for smart phones available by the spring of 2010. Many more retailers also have apps for smart phones, including Starbucks and Best Buy. The line between e-commerce and m-commerce (on-line and mobile payments) is becoming more blurred, as smart phones provide Internet access to users, who can then “use their phone” to purchase items in the same way as on their computers at home. On-line payments, as reported by the Canadian Payment Association, increased by 94% in 2009, in line with the trend away from cash and cheques and the growing acceptance and usage of electronic payments. However, while these numbers might be encouraging, 80% of Canadians still consider that on-line banking is important but not worth paying for, and many express security concerns about financial transactions undertaken over mobile phones. As well as using the Internet capabilities of certain mobile phones, Canadians also make mobile payments by using text messaging (SMS), with their purchase cost being added to their mobile phone bills. The higher cost of smart phone technology and services in Canada remains a significant barrier to the country catching up with the rest of the world in m-commerce.

COMPETITIVE LANDSCAPE

• RBC was the first major Canadian bank to take advantage of “card duality”, following the Competition Bureau’s decision, in November 2008, to allow credit card issuers and acquirers to issue credit cards or acquire transactions for more than one of the two major credit card networks. Previously, most major banks had exclusive agreements with either Visa or MasterCard. RBC is now issuing a travel rewards MasterCard co-branded with WestJet Airlines, along with its extensive line of Visa products.

• CIBC is taking over Citigroup’s Canadian MasterCard portfolio in October 2010, to become the second bank in Canada, after RBC, to offer both Visa and MasterCard. The transaction will also make CIBC the largest dual credit card issuer in Canada. While its Aerogold cards tend to cater to a more premium customer, Citigroup’s MasterCard portfolio includes more mass-market customers, which will allow CIBC to cross-sell its products to more customers. The portfolio includes accounts associated with co-branded Petro Canada credit cards that offer the Petro Points rewards programme, but leaves some smaller, private label credit card brands to Citigroup.

• The 2010 Winter Olympic that took place in February in Vancouver, British Columbia, was a big success for Visa, as it was the only credit card accepted during the event. Visa took the opportunity to install cashless vending machines and special ATMs, and launched several Olympic themed co-badged debit, credit and pre-paid cards. It saw its sales skyrocket during the 17-day event.

• MasterCard continues to have the largest share of credit cards in circulation, at 57% in 2009, but has only 38% of transaction volume and 32% of transaction value. MasterCard has the two leading issuers of cards in Canada, BMO (with more than 133 different affinity cards to choose from) and MBNA (79 cards offered), and seems to encourage its customers to have multiple cards in their wallets. The fact that MasterCard had many introductory offers for reward cards in recent years appears to have paid off in terms of the number of new cards issued, but has been slow to translate into a higher share of purchase transactions, as the shares indicate. It is also appears that MasterCard has a much higher ratio of inactive accounts than Visa.

• Visa is still the clear leader in terms of value of purchases (63%) and number of transactions (59%), probably helped by its greater acceptance by merchants. Furthermore, Visa Canada continues to target more affluent Canadians, as demonstrated by the recent launch of the Visa Infinite card.

• Visa PayWave contactless credit cards continue to gain acceptance in Canada, as more merchants, like Subway, Second Cup and The Jean Coutu Group, install Visa PayWave terminals. TD Canada Trust and RBC Royal Bank are now issuing Visa PayWave cards in Canada, and it is expected that a few million Visa PayWave cards will be in circulation by the end of 2010.

• MasterCard is also actively promoting its PayPass contactless credit cards, which can be used at PetroCanada service stations, Tim Horton’s coffee shops, Loblaws supermarkets, and many more merchants in Canada. BMO is offering PayPass on most of its cards but not on its affinity credit cards. Most other MasterCard issuers have also offered PayPass to their card holders since autumn 2008. Contactless transactions usually have a C$50 maximum per transaction. For transactions of a higher value, the consumer must use the chip feature and enter his or her PIN, or provide a signature.

• A new form of financing is available on Visa Desjardins credit cards, called Accord D. This is essentially a line of credit negotiated either in-branch with Desjardins Group or in-store with individual merchants (for example, RONA – a DIY store). The Visa Desjardins credit card with Accord D thus acts like two cards in one. When a purchase is made at one of the 6,000 merchants accepting Accord D across Canada, it can be put either on the credit card portion or on the Accord D portion of the card. The minimum monthly payment on the Visa bill is then augmented to cover the agreed upon monthly repayment of the Accord D financing.

PROSPECTS

• Commercial credit card transaction numbers are predicted to grow at a CAGR of 7% over the forecast period, while personal credit card transaction numbers will see a CAGR of only 3% over the same period, due to debit and pre-paid cards being increasingly favoured by consumers.

• An increase of 2% in the total number of credit cards in circulation is projected over the forecast period, as consumers will eventually reach saturation in terms of the number of credit cards they are willing to carry, which is expected to remain at around 2.2 credit cards per capita. There will be some culling of cards which lack the rewards or other features customers want, as more incentives/rewards and new features, like contactless payment, will be offered to them.

• The challenge for credit cards company will be to navigate within the new Code and offer credit cards that abide by the Code while providing incentives to consumers to use their credit cards instead of their debit cards. Merchants have also been drawn into the equation, as they are key in enabling the transition to chip and contactless payments to happen, and are offered different fees to accept either credit cards or debit cards.

• Loyalty cards and programmes will continue to be a determining factor in consumer choice, as confirmed in a recent report from Mintel Comperemedia, which projected that credit and debit card reward programmes will increase in 2010, as will cash incentives and other customer loyalty measures.

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