have led to a robust cards market in Canada. Despite the threat of
a downturn, the industry continues to innovate through
comprehensive loyalty schemes and technological advancements
designed to cut fraud. Truong Mellor
The Canadian economy has maintained a healthy growth level in
recent years, something that has been a major factor in the
development of consumer expenditure.
Unemployment rates have fallen to historic lows, while the
constriction of the domestic labour market has resulted in
significant growth in wages. The end result has been a consumer
base that has been more willing to spend and accumulate debt, even
during periods of relative economic sluggishness.
While the recent consumer downturn in the US has had economic
repercussions to the north, the Canadian cards market has proven
resilient to this for the most part. Card payments are firmly
entrenched as a means of expenditure, so while people continue to
spend on non-discretionary items the industry remains relatively
buoyant. Recent figures have shown that both the number of card
transactions as well as their overall value has been increasing
over the last two years.
“In terms of card sales, we haven’t witnessed a huge decline,” says
Rubina Havlin, vice-president of domestic credit cards for
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“What we have been monitoring is the retail purchase volume and the
average ticket spend, but there hasn’t been anything dramatic
What the industry is likely to see is a slowdown in credit card
spending, as consumers cut back on discretionary items. In order to
adjust to these changes, card issuers are increasingly focusing on
consumers that they feel will be less adversely effected such as
the high net worth segment.
Rewards remain competitive
Where a lot of the battle for market share and product
differentiation between the card issuers in Canada is being fought
is within the rewards space.
Travel rewards in particular have been traditionally competitive.
Although the domestic tourism industry has not seen any significant
growth in recent years, Canadians have been travelling more both
inside the country as well as abroad. This has led to increased
card spending within this sector, and issuers have been quick to
capitalise on this with a slew of products offering various
sophisticated travel rewards and air miles programmes.
“Issuers are really focused on utilising rewards to incentivise
consumers, and they are looking to consolidate their spend on one
card,” explains Havlin.
“The key focus is trying to get their everyday spend on our cards
and away from some of the private-label and second-tier
The First Class Travel Infinite Visa card offered by Toronto
Dominion (TD) Bank is not aligned to any specific travel provider
or airline, which makes it attractive for those consumers looking
for flexibility. This is also a feature of the Capital One Reward
Miles MasterCard, which also comes with no annual fee. Many
travel-orientated cards come laden with annual fees and relatively
high interest rates when compared to other cards in the
The Mosaik MasterCard with Gold Air Miles offered by Bank of
Montreal (BMO) has a lower interest rate of 11.4 percent but comes
with a higher annual fee of C$125 ($99), but given that a large
number of Canadians continue to eschew the practice of revolving
balances, they may opt for higher APR rates if the rewards package
is more enticing.
Canadian cardholders have also grown increasingly savvy when it
comes to these rewards programmes, and look for hidden fees and
redemption restrictions. As a result, issuers have had to make
their offerings more enticing to remain competitive, and many will
allow customers to transfer rewards points between consumer and
small business cards.
Issuers looking to boost spending volume on cards have also focused
on the travel rewards sector.
Consumer surveys in Canada have demonstrated that although cashback
is frequently identified as the loyalty reward that cardholders
most want, information gathered by issuers regarding acquisition
and subsequent spend indicates that travel-based rewards schemes
are in fact the most compelling feature for potential
According to some observers, a large part of this discrepancy may
come down to aspirational tendencies within the consumer market.
However, should the economic environment become more challenging in
Canada, consumers may look for products that offer them more on the
non-discretionary spending front.
“Consumers are really looking for more value, and that is putting a
lot of pressure on the issuers to look at their economics,” says
“Consumers will be more vigilant, but everyday spend will continue.
I think perhaps consumers won’t have six or seven products in their
wallet, they may consolidate more and be a little more prudent
about it, and make sure that the return is high for whatever card
Credit cards remain popular in Canada, and in 2007 it was estimated
that there were around 64.1 million in circulation, an increase of
3 million from the previous year.
Just over 42 percent of these cards – 27 million – are currently
considered active, due to having a balance on them. This figure
includes those accounts that are paid off in full every
Generally speaking, Canadian consumers are a lot more conservative
in their spending habits than their neighbours to the south.
The nationwide delinquency rate reached 0.9 percent at the end of
the fiscal year 2007 after remaining static at 0.8 ever since 2003.
By comparison, the delinquency rate on credit cards in the US
reached 1.19 percent in the first quarter of 2008, and in some of
the states hardest hit by the housing crisis this figure has
reached as high as 1.72 percent.
At present, the Canadian debit market is dominated by the national
debit and ATM scheme Interac. Run as an association model, it
continues to do so even as the duality rules that have effectively
kept both Visa and MasterCard out of the debit space in Canada are
However, the potential for issuing banks to earn more
through interchange fees with the two major global networks has
both Interac as well as consumer groups concerned, with Interac
exploring the option of moving away from its not-for-profit
structure in order to strengthen its position (see CI 407).
Debit card usage has always been widespread throughout different
consumer segments in Canada, something that comes down to early
adoption, according to Caroline Hubberstey, director of public and
government affairs for Interac.
“Canadians see that as a payment method for them,” she told CI.
“Debit tends to be at top of wallet.”
The proposed changes to the fee structure of debit and credit cards
in Canada could potentially have a detrimental effect on the
economy, according to retail interest groups.
They believe that if Interac receive the go-ahead to act as a
for-profit co-operative, this may mean that the current flat fee
per transaction may become a percentage of the transaction, which
will lead the way to higher consumer prices for those who use cards
to make purchases.
As the Canadian consumer market is already heavily banked, prepaid
cards have not been able to grab as strong a foothold as they have
in the US as a means of extending financial inclusion.
However, there remain several niches that remain under-penetrated
by payment cards where a stored-value solution would be a suitable
and beneficial fit, such as government benefits dispersal.
To this end, newcomer Pay Linx Financial has joined forces with the
Royal Bank of Canada (RBC) to create a prepaid benefits card that
will go head to head with the long entrenched cheque-cashing
business. These cards have been tested in a pilot scheme with the
Alberta state government that allowed benefit recipients to access
their funds through ATMs or POS locations for debit transactions.
RBC estimates that the prepaid market in Canada could represent a
$35 billion to $50 billion opportunity.
The year 2008 saw Scotiabank unveiling a suite of Visa-branded
prepaid cards for corporate clients, the first offering of its kind
in the country. According to Havlin, the success of these products
in the US bodes well for their launch in Canadian cards market,
which she sees as underserved in the corporate segment, as it
leverages the prepaid mechanism to incentivise both employees and
The youth demographic is another area that has been targeted by
several MasterCard issuers in Canada, primarily focusing on the
retail and online gaming sectors (see CI 407). Additionally, the
major financial players are just beginning to realise the potential
The Travel Mosaik card offered by BMO, which functions much like a
prepaid traveller’s cheque, is a good example of how many of the
larger banks in Canada are beginning to develop innovative ideas to
drive an increase in card usage and reach new market sectors.
Where the growth and increasing sophistication of travel rewards
programmes are also making their mark on the Canadian economic
landscape is in the burgeoning online payments sector.
The large majority of travel spending is done online with credit
cards, and it is one of the fastest growing segments for e-commerce
The physical landscape of the country is also playing a role in
shaping the payments sphere of the future. As bank branches and
ATMs have been shed due to rising costs and dwindling rural
populations in some remote areas, many customers affected have
moved towards internet banking facilities and even online
“The trend is definitely upward, and I think customers are a lot
more comfortable purchasing online,” says Havlin.
“And with credit cards, there is zero liability so no risk for the
consumer. As they become more and more secure about purchasing
online, the credit card is the way forward.”
Yet the threat of identity fraud and other online scams looms
large. A recent study by PayPal has shown that consumers in Canada,
the US and the UK are twice as likely to become a victim of
internet fraud than their European counterparts.
Fraudsters in Canada have already been active in targeting
consumers perceived to be more vulnerable, such as the elderly (see
CI 404). Interac currently spearheads Project Protect, a joint
education initiative run in conjunction with law enforcement with
numerous industry players.
Contactless payments are also beginning to spread across the
country. This year has seen the launch of a successful pilot scheme
of EMV compliant cards in Kitchener-Waterloo, Ontario. This
currently involves both Visa and MasterCard as well as
On the issuing side, major banks such as TD, BMO, Scotiabank and
CIBC have issued EMV cards to be used in the scheme, and many of
the country’s largest retailers were also on board. To date, nearly
2.5 million POS transactions have taken place with EMV-compliant
Although there have been concerns from the merchant sector
regarding the cost of implementation, a recent Visa report
regarding the transition to EMV predicted that merchants would see
a return on investment in POS systems within 21 to 35 months. The
reduction in fraud and administrative costs also make it a
“The feedback from both customers and merchants that have been
involved in the trial has been really positive,” says
“They are reporting general ease of use, with the only major
adjustment occurring on the credit side where PIN is replacing
signature. All the participants are gathering their learnings, and
they are going to be applying those to their implementation plans
for the national roll out, which we are expecting soon.”
Many ATMs have already been converted to accept chip and PIN cards,
while EMV-enabled POS terminals are being deployed. According to
Hubberstey, many of the major banks in Canada will start
distributing EMV cards by the end of the year. What remains to be
seen is whether this will make a significant dent into card fraud
in Canada, although evidence from countries such as Malaysia where
EMV compliance has been implemented shows fraud levels dropping
“We are learning a lot from other markets such as
Malaysia and the UK and their implementation process. Such as how
they did it, and some of the issues they may have run into,” adds
Hubberstey. “In the UK, there has been the problem of mail theft
for instance. I think our issuers will benefit from that
According to Havlin, the chip and PIN standard will enable faster
technology upgrades for the Canadian market. “Once we have those
railroad tracks in place, in the next two to three years there will
be quicker adoption of other payment technology on the chip.”
Canada’s largest bank by asset size, in 2007 cards and payments
solutions provided 16 percent of RBC’s total revenue. Credit card
balances rose to C$11.2 billion in 2007.
The bank has been one of the innovation drivers of loyalty
programmes in the Canadian market, having launched its first
rewards scheme in early 2003. RBC offers a portfolio of credit
cards that entail travel and retail merchandise, as well as
charitable donations and even financial rewards such as the ability
to apply RBC rewards points to pay down mortgages, personal loans
or lines of credit.
The bank is currently piloting a mobile peer-to-peer payments
service amongst employees and their families that allows them to
send and receive funds via SMS messages. A wider trial is expected
to follow in early 2009.
Canadian Imperial Bank of Commerce (CIBC)
The third-largest bank in Canada in terms of assets, over the last
12 months CIBC managed to increase its market share in the cards
market through the launch of new offering such as the Platinum Visa
card and free added value features such as the CreditSmart scheme
which helps customers track spending and monitor for fraudulent
The total book value of the bank’s cards business totalled C$8.8
billion last year. Income from card fees rose in 2007 from the
previous year, reaching C$270 million. However, this is still below
the C$317 million level of 2005 and C$406 million of 2004.
According to the bank, this is due to the continuing trend of
higher levels of securitised assets partially offset by higher
purchase volumes. 2007 also saw CIBC undertake a massive upgrade of
its ATM network across the country, totalling almost 4000
TD is Canada’s second-largest bank by assets. Balances on credit
cards rose to C$5.4 billion from C$3.8 billion the previous year,
and played a significant role in the bank’s total revenue for the
year, which rose by 11 percent from 2006.
Credit card lending grew by 21 percent over the last 12 months, an
increase of over C$1 billion, but provisional credit card losses
also grew by 45 percent during this period as a result of a huge
growth in this sector since 2006.
However, the bank claims that the volume growth of its cards
business will be tempered by the US economic downturn. In 2007, the
bank was the first in Canada to complete a debit card transaction
with chip and PIN technology.
Most recently, TD launched an initiative in conjunction with
Bullfrog Power to reduce the carbon footprint of its ATM network,
which totals 2,600 machines.
Card revenues in 2007 for Scotiabank were up by 19 percent from the
previous year, reaching C$366 million. Outstanding card loans in
Canada rose slightly during this period to reach C$35.4
The bank is also active in overseas markets such as Latin America
and the Caribbean, which saw a whopping 34 percent increase in
revenues in 2007 largely due to strategic acquisitions of domestic
This growth was also supported by the launch of new offerings in
these regions that sought to cater for small businesses and
entrepreneurs. By contrast, domestic card revenue grew by 9 percent
during the same period.
This growth in the bank’s consumer portfolio has seen loss
provisions continue to rise over time, as Scotiabank also begins to
focus more on emerging markets.
While card loan growth slowed down marginally from the previous
year by C$8 million to C$928 million in 2007, the strong domestic
labour market saw BMO personal loans and credit card balances rise
over the same period.
However, the bank expects that this growth will slow down over
2008, as the economy begins to struggle. The year 2007 also saw a
decrease in non-interest card fee revenue of C$185 million, due to
a decline in the provision for income taxes of C$65 million and a
decrease in net income of C$120 million.
BMO has also recently launched a new air miles programme that gives
cardholders rewards for purchases made on debit cards as well as
existing rewards on credit card spending.
The bank’s Mosaik MasterCard saw growth in the number of new
personal and small business accounts in 2007 by 28 percent and 40