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.
Showing posts with label Source: Globe and Mail reported by Tara Perkins. Show all posts
Showing posts with label Source: Globe and Mail reported by Tara Perkins. Show all posts
Wednesday, March 26, 2008
RBC looks to market prepaid benefits cards
Bank teams up with Edmonton firm to get governments to replace cheques with debit cards
TARA PERKINS
FINANCIAL SERVICES REPORTER
March 26, 2008
Royal Bank of Canada wants to cash in on the growing appetite for prepaid cards by marketing electronic benefit cards to governments across Canada, a development that could take a bite out of the cheque-cashing businesses. RBC, the country's biggest bank, has been working with a young Edmonton-based company, Pay Linx Financial Corp., to develop a card that allows government benefit payments to be doled out on prepaid cards rather than cheques.
The cards have been tested in a pilot project with the Alberta government, which has been experimenting with offering social assistance payments on them. Recipients who choose to receive their payments on a prepaid card can use them at any store or bank machine that accepts debit cards.
The cards will likely be offered province-wide this spring, said Dorothy Schreiber, a spokesperson for Alberta's ministry of employment and immigration. "Some people would take their cheques to cheque-cashing places and be charged a high fee," she said. "With the card, they get all of their cheque." Prepaid cards are a relatively new stomping ground for Canadian banks, and both RBC and Pay Linx are putting their creative talents to use to develop new ways of using them, such as insurance payments, corporate bonus programs, and travel cards.
"People have started to put their toe in the water in this space," said Anne Koski, head of card innovations at RBC. The total potential market for prepaid cards in Canada exceeds $100-billion while a more realistic figure is $35-billion to $50-billion, she said. The U.S. market is already about $157-billion, she said. "It's a different business," she said. "Like all things Royal Bank, we like to take a look at things a long, hard way before we decide to move forward."
RBC first took notice of Pay Linx in early 2006, when the Alberta pilot project was getting under way, and last year the bank bought 25 per cent of the TSX Venture Exchange-listed company. Yesterday, the companies announced a deal for RBC to provide the benefit cards, which it is now pitching to governments. "We're in the process of talking to pretty much all of the governments across Canada about this new capability that we'll be able to offer," Ms. Koski said.
Bank of Montreal recently launched a prepaid travel Mosaik MasterCard, a type of hybrid between a credit card and a traveller's cheque. A spokeswoman for Toronto-Dominion Bank said yesterday that prepaid cards are "a market we are interested in, but nothing to report at the moment." So-called "closed-loop" prepaid cards, such as those that are issued by retailers to be used in their own stores, have already taken off exponentially, Ms. Koski said. "But one of the other trends that's been happening primarily in the U.S., but also in other parts of the world as well, is the growth of what are called open-loop prepaid cards," she said.
While the cards are often branded Visa or MasterCard, in Canada they can also be done with Interac, a national payment network for debit cards. "That was where we've decided to focus our attention first," Ms. Koski said. While Ms. Koski's already dreaming up a myriad of uses for prepaid cards, the bank is focusing on this government offering for the moment.
"We're hoping with this card program that consumers will end up getting more of the funds that the government's allocating as opposed to paying fees to a cheque-cashing outlet," she said.
One of this country's largest cheque-cashing businesses, National Money Mart Co., charges a 2.99-per-cent fee plus a $2.99 item fee for cheque cashing, according to its website. Money Mart is owned by Nasdaq-listed Dollar Financial Corp. of Berwyn, Penn., and has more than 400 outlets in Canada. It could not be reached for comment yesterday. There are other savings with the cards. According to Ms. Schreiber it's been estimated that the average cost of issuing a cheque (including the salaries and administrative work involved) is $25 to $60, while the average cost of the prepaid cards is $16.62. Ian McNeill, Pay Linx founder and chief executive officer, said the firm is also working with High River, Alta.-based Western Financial Group on corporate programs, and will be announcing a relationship with another bank shortly
TARA PERKINS
FINANCIAL SERVICES REPORTER
March 26, 2008
Royal Bank of Canada wants to cash in on the growing appetite for prepaid cards by marketing electronic benefit cards to governments across Canada, a development that could take a bite out of the cheque-cashing businesses. RBC, the country's biggest bank, has been working with a young Edmonton-based company, Pay Linx Financial Corp., to develop a card that allows government benefit payments to be doled out on prepaid cards rather than cheques.
The cards have been tested in a pilot project with the Alberta government, which has been experimenting with offering social assistance payments on them. Recipients who choose to receive their payments on a prepaid card can use them at any store or bank machine that accepts debit cards.
The cards will likely be offered province-wide this spring, said Dorothy Schreiber, a spokesperson for Alberta's ministry of employment and immigration. "Some people would take their cheques to cheque-cashing places and be charged a high fee," she said. "With the card, they get all of their cheque." Prepaid cards are a relatively new stomping ground for Canadian banks, and both RBC and Pay Linx are putting their creative talents to use to develop new ways of using them, such as insurance payments, corporate bonus programs, and travel cards.
"People have started to put their toe in the water in this space," said Anne Koski, head of card innovations at RBC. The total potential market for prepaid cards in Canada exceeds $100-billion while a more realistic figure is $35-billion to $50-billion, she said. The U.S. market is already about $157-billion, she said. "It's a different business," she said. "Like all things Royal Bank, we like to take a look at things a long, hard way before we decide to move forward."
RBC first took notice of Pay Linx in early 2006, when the Alberta pilot project was getting under way, and last year the bank bought 25 per cent of the TSX Venture Exchange-listed company. Yesterday, the companies announced a deal for RBC to provide the benefit cards, which it is now pitching to governments. "We're in the process of talking to pretty much all of the governments across Canada about this new capability that we'll be able to offer," Ms. Koski said.
Bank of Montreal recently launched a prepaid travel Mosaik MasterCard, a type of hybrid between a credit card and a traveller's cheque. A spokeswoman for Toronto-Dominion Bank said yesterday that prepaid cards are "a market we are interested in, but nothing to report at the moment." So-called "closed-loop" prepaid cards, such as those that are issued by retailers to be used in their own stores, have already taken off exponentially, Ms. Koski said. "But one of the other trends that's been happening primarily in the U.S., but also in other parts of the world as well, is the growth of what are called open-loop prepaid cards," she said.
While the cards are often branded Visa or MasterCard, in Canada they can also be done with Interac, a national payment network for debit cards. "That was where we've decided to focus our attention first," Ms. Koski said. While Ms. Koski's already dreaming up a myriad of uses for prepaid cards, the bank is focusing on this government offering for the moment.
"We're hoping with this card program that consumers will end up getting more of the funds that the government's allocating as opposed to paying fees to a cheque-cashing outlet," she said.
One of this country's largest cheque-cashing businesses, National Money Mart Co., charges a 2.99-per-cent fee plus a $2.99 item fee for cheque cashing, according to its website. Money Mart is owned by Nasdaq-listed Dollar Financial Corp. of Berwyn, Penn., and has more than 400 outlets in Canada. It could not be reached for comment yesterday. There are other savings with the cards. According to Ms. Schreiber it's been estimated that the average cost of issuing a cheque (including the salaries and administrative work involved) is $25 to $60, while the average cost of the prepaid cards is $16.62. Ian McNeill, Pay Linx founder and chief executive officer, said the firm is also working with High River, Alta.-based Western Financial Group on corporate programs, and will be announcing a relationship with another bank shortly
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