June 15, 2010

Citi cards deal first major move into duality, Burbach says

by Robin Arnfield, News Editor

TORONTO--CIBC’s deal to buy Citigroup’s C$2.1 billion Canadian MasterCard credit card portfolio marks the first major move by a Canadian bank into both Visa and MasterCard issuing, says IDC Financial Insights senior analyst Rob Burbach.

Since November 2008, when Canada’s Competition Bureau ended its ban on duality, Canadian financial institutions have officially been able to issue and acquire both MasterCard and Visa credit cards. However, prior to CIBC’s deal with Citi, there had been very little obvious change in the credit card market, with only one major Visa issuer, RBC Royal Bank of Canada, launching a MasterCard-branded credit card, in partnership with WestJet Airlines.

“This transaction seems predicated by Citigroup's continuing needs to raise capital and rationalize its operations, and is a good fit for CIBC, whose main retail strength is in its credit card franchise,” Burbach tells Payments Business. “This is the first major move of a Canadian bank to issue both MasterCards and Visa across a wide range of credit card choices. It will be interesting to watch how CIBC chooses to brand the acquired MasterCards, and to see the level of differentiation between MasterCard and Visa, if any, that will exist.”

Burbach speculates that the deal may also precipitate a rush for the other Canadian banks to offer both MasterCard and Visa with a wide range of features.

On June 15, 2010, Wal-Mart’s newly licensed Wal-Mart Canada Bank launched the Wal-Mart Rewards MasterCard.

Cardholders earn 1.25 percent of their purchases in Walmart Rewards for virtually every dollar spent at Walmart Canada and 1 percent of their purchases in Walmart Rewards when used elsewhere.

“With WalMart announcing the launch of its MasterCard-branded retail card tied to a loyalty program, Canadians are likely in for a new round of credit card competition linked to more targeted loyalty rewards, especially now that Shoppers Drug Mart has cut the value of its Optimum reward program,” says Burbach.

CIBC said on June 14, 2010 that with the acquisition of Citi’s MasterCard portfolio, it will become the largest dual credit card issuer in Canada. As at April 30, 2010, CIBC had over C$14 billion in outstanding Visa credit card balances.

The MasterCard portfolio that CIBC is buying includes accounts associated with co-branded Petro Canada credit cards that offer the "Petro Points" rewards program.

In a statement, CIBC said that the acquisition “is expected to be accretive to CIBC's earnings during the first year following its closing. In addition, prior to closing, non-performing accounts will be removed from the acquired portfolio and from Broadway Credit Card Trust ("the Trust"), which has securitized certain Citibank MasterCard receivables.”

Completion of the credit card portfolio acquisition is subject to several conditions, including obtaining regulatory approval as well as approval from Broadway Credit Card Trust’s note holders. CIBC says it expects these conditions to be met, and the acquisition to be completed, by the end of its fourth quarter on October 31, 2010.

In a separate announcement, CIBC also signed an agreement to renew its contract for U.S.-based TSYS to process CIBC Visa consumer credit cards. The terms of the multi-year contract were not disclosed.

In a statement, TSYS quoted February 2009 data from U.S.-based cards industry research firm The Nilson Report, according to which CIBC ranks as the number one issuer of credit cards in Canada based on dollar volumes outstanding, and TSYS processes 44 percent of all Visa and MasterCard credit card accounts in Canada.



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