The Canadian card payments channel has grown well although cash continues to dominate. Changes to regulation and promotion from banks and retailers makes contactless a area likely to see high adoption in 2014. CI looks at the latest data from the country.
The Canadian card payments channel recorded growth during the review period (2008-2012). In terms of the volume of cards in circulation, the card payments channel posted a review-period CAGR of 4.55% to reach 153.1m cards in 2012. Growth in consumer spending, a shift in consumer preference towards cashless transactions, and the increased acceptance of cards by retailers contributed to the growth of the Canadian card payments channel. The volume of cards in circulation is expected to post a forecast-period (2013?2017) CAGR of 4.66%, to reach 190.8m cards in 2017.
The Canadian card payments channel has positive growth potential
The Canadian card payments channel grew substantially both in volume and value terms during the review period. In terms of the number of transactions, the channel grew from 7.2bn in 2008 to 8.5bn in 2012, at a review-period CAGR of 4.27%. Debit card transactions were the key driver, followed by charge cards. The growing demand for prepaid and credit cards among Canadian consumers also contributed to the growth of the number of transactions during the review period. Over the forecast period, total card transactions volume is expected to post a forecast-period CAGR of 3.57%, to reach 10.2bn in 2017.
In terms of transactions value, the Canadian card payments channel grew from CAD580.5bn (US$544.1bn) in 2008 to CAD662.2bn in 2012. In value terms, the channel is expected to post a CAGR of 3.97% over the forecast period from CAD695.0bn in 2013 to CAD812.2bn in 2017.
Consumer preference for cashless payment provides growth opportunities
Consumers are slowly moving away from cash and adopting other modes of payment such as cards and electronic fund transfers. While cash continues to be an important part of the payments system, it is increasingly being displaced by non-cash channels. The share of cash transactions fell during the review period, from 2.3% in 2008 to 2.0% in 2012. To capitalize on this, banks and other card issuers have been adopting various marketing and pricing strategies with the aim of encouraging customers to use card payments. Offers such as discounts, rewards points, increasing daily limits for cash withdrawals and insurance cover are common strategies that banks are employing. Growing consumer preference for cashless payments and the introduction of new card products are expected to increase the number of cards issued over the forecast period.
Contactless cards likely to change the market structure with enhanced security measures
Commercial banks and retailers have been aggressively promoting contactless payment technology to increase the speed and convenience of payments for consumers. The technology also offers improved security and helps to control fraudulent transactions. The major contactless payment technologies used in Canada include Interac’s Interac Flash, Visa’s payWave and MasterCard’s PayPass.
Interac Flash is a contactless payment system embedded in Interac debit cards. Cardholders simply show their card to a reader that supports Interac Flash to instantly make a payment from a bank account without inserting the card or entering a PIN. It also provides cardholders with security against fraudulent activity. Secure chip-processing technology is used to protect the card from fraud such as skimming, counterfeiting, and electronic pick-pocketing. A number of banks, including Royal Bank of Canada (RBC) and TD Canada Trust, are circulating debit cards with this technology.
Visa payWave enables cardholders to make contactless payment transactions using cell phones with near-field communication (NFC) technology. To complete a transaction at the merchant’s contactless payment terminals, the cardholder’s mobile interacts with a banking payment gateway server through a contactless reader. Visa’s prime competitor, MasterCard’s PayPass technology, functions on similar lines, transmitting and receiving information wirelessly and enabling cardholders to make payments using their mobile phones.
New government regulations to protect consumers and increase transparency
Through Bank of Canada and the Department of Finance, the Canadian government has been focusing on improving on infrastructure and legal support services to increase the efficiency of its payment systems and bring them in line with international standards. To achieve these objectives, the Department of Finance formed the Task Force for the Payments System Review in June 2010, with the objective of reviewing the Canadian payments system and providing recommendations. The Ministry of Finance implemented the Code of Conduct for the Debit and Credit Card Industry in Canada with the aim of protecting merchant and consumer interests. In addition, the government implemented a new set of regulations for the credit cards category which are intended to protect consumers by enhancing disclosure and increasing transparency. These new regulations, which came into force on January 1, 2010 and were amended on September 1, 2010, are expected to improve transparency.
Growth in payment infrastructure supported an increase in card use
Banks and retail outlets in Canada expanded their infrastructure networks during the review period. The number of automatic teller machines (ATMs) installed increased from 57,900 in 2008 to 60,346 in 2012, at a review-period CAGR of 1.04%. The increasing acceptance of debit and credit cards at retail outlets and a consumer shift towards direct card purchases resulted in a rising number of point of sale (POS) transactions during the review period. The number of POS terminals in Canada recorded a review-period CAGR of 5.93%, rising from 630,534 terminals in 2008 to 794,000 in 2012. With a further increases in the volume of POS terminals and ATMs, the use of cards as a payment method is expected to register widespread acceptance over the forecast period.
Budget-conscious consumers shifting away from credit cards to prepaid and debit cards
The financial crisis changed the perception of the country’s middle classes towards the use of credit cards. Economic contraction made both public and private entities increase their focus on efficiency and working at reduced costs. A shift in consumer preference towards non-credit cards has resulted in the use of debt-free platforms such as prepaid cards. Corporate and government entities are also increasing their use of prepaid cards for employees and welfare payments. Over the forecast period, the prepaid card category is expected to increase its share of the channel from 20.6% in 2012 to 31.0% in 2017.
M-commerce to change the dynamics of the cards and payments industry
M-commerce is growing at a fast pace in Canada and is acting as an engine of overall e-commerce growth, converting potential brick-and-mortar sales to digital sales as consumers use their smartphones in-store. This has been encouraged by an increase in smartphone use. The increasing capabilities of smartphone devices, an exponential rise in mobile device applications, and falling prices have been instrumental in driving the market for m-commerce.
To take advantage of the growth, the Canadian Imperial Bank of Commerce (CIBC), in collaboration with Rogers Communications, introduced a joint mobile payment solution using Rogers near-field communication- (NFC-) enabled smartphones in 2012. Notably, Google is investing in its NFC-enabled Google Wallet service in Canada as well as AT&T, Verizon and T-Mobile are collectively developing the Isis mobile payment network which is expected to be launched in 2013.
Cards targeted at specific consumer groups
Banks and other card issuers have been focusing on various customer segments by offering customized products. Leading banks such as CIBC, RBC and Bank of Montreal (BMO) offer specific cards for retail and corporate customers. A number of banks are also actively targeting younger customers. CIBC offers the CIBC Classic Visa Card designed specifically for students. Other banks such as BMO, Scotiabank and MBNA have also introduced credit cards in Canada to attract students.
The growing number of leisure and business tourists has also created significant business opportunities for travel card providers, and many leading banks and card providers have issued travel cards targeting this demographic. One example is TD Canada Trust’s TD First Class Travel Visa Infinite card.
Canadian banks are also making efforts to target the high-income population, which traditionally exhibits a greater willingness to use non-cash payments such as credit, debit and prepaid cards. HSBC Premier MasterCard, RBC Royal Bank Visa Platinum and TD Platinum Travel Visa Card are examples of cards issued to cater to this segment. Banks are also targeting individuals with poor credit histories with secured cards.
Increasing adoption of near-field communication
An increasing number of banks and telecommunications companies in Canada are enabling NFC payment technology for smartphones. In collaboration with Rogers Communications, CIBC introduced a joint mobile payment solution in 2012. This allows cardholders to pay for small-ticket items via a mobile device at participant retail outlets.
Visa also enables its cardholders to make contactless payment transactions using their cell phones with NFC technology. Its proprietary technology ‘Visa payWave’ is installed in a mobile phone and interacts with a bank’s payment gateway server to transact at the merchant’s contactless terminal. Similarly, MasterCard’s ‘PayPass’ technology allows the cardholders to pay for items through mobile phones. The growth of contactless payments and NFC is expected to provide more mobile customers with an advanced and efficient technique for payment.
Increased installation of POS terminals at retail outlets to encourage card-based payments
The increasing acceptance of debit and credit cards at retail outlets, coupled with a consumer shift towards debit card purchases, resulted in an increasing number of transactions at POS terminals during the review period. ATM transactions are expected to decline as consumers move away from cash-based payments, and customers can access cashback, discounts and reward points with the use of cards at POS terminals. The number of POS terminals in Canada recorded a review-period CAGR of 5.93%, growing from 630,534 terminals in 2008 to 794,000 in 2012. The number of terminals is expected to post a forecast-period CAGR of 2.53%, to reach 905,755 in 2017.
Debit card transactions at POS terminals formed 85.1% of Canada’s total debit card transactions, while credit card transactions at POS terminals formed 98.7% Canada’s credit card transactions in 2012. The increasing number of terminals at retail outlets is expected to drive card-based payments over the forecast period.