Canadian credit card market relatively unscathed

The Canadian credit card market is starting to show some signs of strain, but it would take severe cracks before banks backed off from this lucrative but little-understood business.
Rising credit card delinquency rates in the United States have reportedly prompted banks to tighten up their lending standards, making it hard for some consumers with maxed cards to borrow more.

Losses and delinquencies have also been ticking upward in Canada, according to credit rating agency Moody's Investors Service Inc. It has an index that tracks about $59.9-billion, or more than 80 per cent, of the Visa and MasterCard credit card receivables outstanding in Canada. It found that the charge-off rate - a measure of credit losses - climbed to 2.8 per cent in the third quarter of 2007 from 2.49 per cent a year earlier. The 90-plus day delinquency rate rose to 0.73 per cent, from 0.63 per cent a year earlier. Moody's is still waiting for fourth-quarter data, but it's safe to say the market here is not eliciting the same level of concern as in the United States, where the agency has a negative outlook for the weakening credit card sector. Canadian bankruptcies increased marginally in the fourth quarter, but employment levels were very strong, said Moody's vice-president Sumant Inamdar. "We have no concerns about any of the Canadian credit card transactions that we rate," echoed DBRS Ltd. senior vice-president Jerry Marriott. In fact, it's clear banks here are salivating over this business and there's plenty of room for growth.
"Every bank suggests that the competition is more intense now than it has been in some time, and there's some evidence of that simply because you see all the loyalty programs offering more and becoming a little more creative," said Genuity Capital Markets analyst Mario Mendonca.
One big new growth area is prepaid cards. "The marketing guys haven't even really turned their brain to how they can use MasterCard and Visa in that world," said one industry veteran.
An example is Bank of Montreal's recent experiment with a prepaid travel Mosaik MasterCard, a type of hybrid between a credit card and a traveller's cheque.
Part of the reason for the lack of concern in the Canadian market is the relative strength of the economy. There are also major differences between the businesses on either side of the border. The average Canadian adult has half as many credit cards as the average American, but uses each more often. Canadians held 61.1 million credit cards at the end of 2006, up from 50.4 million in 2003. The annual amount spent on them rose to $214.70-billion from $150.49-billion during that period. Importantly, it's estimated that roughly two-thirds of Canadian cardholders pay off their balances regularly, making cards more a payment tool than a method of borrowing.
That means less money to be made from interest payments, but banks also make large profits from fees that are paid by retailers when consumers pay with credit cards.
Banks that issue cards recoup about one to 1.5 per cent of the value of each dollar spent on the card through these fees. And there's more money to be made on foreign exchange when consumers shop abroad. Add it all up, and there's still plenty of room for growth in the Canadian credit card market, where the number of cards has been increasing in recent years as the number of cards in the United States dropped. "The big competition to card payments is cash, and cash is still king," said the industry veteran.