Aug 14, 2010

Prospects weaken for Canadian credit card market

By Robin Arnfield, News Editor

A rise in Canadian household debt, coupled with growing unemployment and credit card delinquencies are all warning signs for the Canadian credit card market, says Mercator Advisory Group. The U.S.-based consultancy makes this point in a new report, lead-authored by Patricia McGinnis, Director in its Banking Group, titled “The Canadian Credit Card Market: Tough Sledding.”

“The key indicators for the Canadian credit card market are not great,” McGinnis tells Payments Business.

According to the latest data compiled by the Canadian Bankers Association (http://www.cba.ca/contents/files/statistics/stat_creditcarddelinquency_en.pdf), the delinquency rate for credit card debt over 90 days due, as at April 2010, was 1.29 percent. This compares to a rate of 0.85 percent at April 2007.

The credit card annualized net loss rate at April 2010 was 4.89 percent, up from 3.08 percent at April 2007, the Canadian Bankers Association says. Both the net loss rate and the delinquency rate figures are based on data supplied by Visa and MasterCard.

As at May 2010, 0.42 percent of total Canadian household mortgages were in arrears, compared to 0.25 percent at May 2007, according to the Canadian Bankers Association.

"The events of the past year have significantly unsettled the credit card market in Canada,” McGinnis says. “The level of competition for customer accounts has been increased by both new entrants and the legalization of dual network-branded issuing. At the same time, the economic recession is driving up household debt levels as well as card delinquencies and write-offs. Factoring in the cost of rewards programs, some card issuers will struggle to preserve profitability in the near term.”

McGinnis says that the reason why so few Canadian credit card issuers have launched cards on both the Visa and MasterCard platforms is because they are not yet convinced they can make money from duality. “They are still trying to figure it out,” she says.

Currently, the only major issuers to be on both the Visa and MasterCard platforms are RBC, with its WestJet co-branded MasterCard, and CIBC, which recently bought Citi’s Canadian MasterCard portfolio. In addition, BMO has acquired the Diners’ Card Canada franchise.

McGinnis says that Wal-Mart Canada is pushing its new Rewards MasterCard very aggressively. “I think it will hurt Canadian Tire’s MasterCard program, and to a lesser extent President Choice Financial’s MasterCard,” she says. “However, Presidents Choice is in the grocery business and people always need groceries, whereas Canadian Tire and WalMart are in similar businesses.”

Source: Financial Consumer Agency of Canada and Mercator Advisory Group


 
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