Canada’s payments market has
been in the spotlight following the government’s publication of a
Voluntary Code of Conduct, which calls for self-regulation in the
industry. Much of the attention has focused on the effect it will
have on the domestic debit network, but it could also herald
significant changes to card issuers.
The credit card industry has been hit by a ‘perfect storm’,
with record net losses driven by increased debt and consumer
bankruptcies and increased government regulation, according to
A report published by Deloitte in
Canada in the wake of the recently published Code of Conduct in the
country points to a significantly altered payments market in which
consumers are likely to benefit. The emphasis is now on card
issuers to change their strategies to adapt to new market
realities, according to Pat Daley, leader of Deloitte Canada’s
payments practice. As discussed in other pages of Cards
International (see pages 26-27), some issuers have sought
to de-risk their payments business by moving into prepaid cards,
but this is not the only solution for struggling credit card
“In response to existing and
emerging market forces, credit card issuers are considering a
number of options, from redefining their business and operating
models to exiting the business altogether,” Daley said.
The research, Charting a New
Course for the Credit Card Industry, showed falling levels of
interest income have impacted revenue, while the higher costs of
funds and greater levels of credit and fraud losses have added to
costs, squeezing margins from both sides.
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As a result, credit cards have
moved from being one of the most profitable areas of lending to one
of the most risky and unprofitable.
In response to this, some issuers
have set up project management offices to execute quick changes to
product pricing and lines of credit to quickly address the issues
of rising unemployment and subsequent delinquencies. Others have
taken a longer term approach, revising business, governance and
The big winners from the shifts in
the industry appear to be banks rather than monoline card issuers
because of their broader funding base, more diversified operating
platforms and stronger customer relationships. Monolines face
headwinds from their reliance on securitisation for funding loans
and higher charge-off levels because of elevated levels of customer
turnover. There is also competition from non-traditional players
like PayPal, which is stealing market share in the online
“A successful strategy is no longer
about maintaining a high level of originations, but instead about
picking the right portfolio of customers likely to deliver the
highest return,” the report said.
“This requires a more targeted
approach to business development and an increased emphasis on
customer retention. Issuers need to improve the customer experience
and focus on maintaining and retaining profitable customers.”
Interchange, as it has been for
some time, is another area of uncertainty in the industry. Merchant
associations in Canada estimate they paid C$4.5bn ($4.3bn) in 2008
on interchange, representing about 2% of sales. Under the
government’s recently published Voluntary Code of Conduct, which
aims to promote fair business practices in the debit and credit
payments market, merchants will need to be provided with clear
information regarding rates and fees, meaning they can offer
discounts to consumers paying by alternative methods.
The report identifies four key
shifts in the market over the last 20 years:
- The shift from credit to
- An increased emphasis on loyalty
- The increase in diversity of
payment method (see chart); and,
- A change in from factor, from
mag-stripe to chip and more recently to contactless.
One of the main challenges facing
payments organisations now compared to 30 years ago is that there
is a much more cluttered payments landscape. Pre-1990, the industry
was dominated by credit products, but during the decade consumers
became more familiar with debit card payments through the
development of the domestic not-for-profit debit network, Interac.
Another major shift has been the prevalence of rewards programmes,
and a move towards annual fees which steadily moved the industry
from a focus on lending to a focus on spending.
“The consequence of all these
shifts is that credit products can no longer be managed in
isolation as a stand-alone product,” the report said.
The report suggests a multi-faceted
approach, with credit cards seen as part of a general e-commerce
solution. This involves offering a range of settlement options, for
example with prepaid and credit features, and combining a physical,
plastic-based product and an online e-wallet, so customers do not
have to reveal account details online.
It may also make sense for issuers
to provide deposit services. This could mean allowing consumers to
prepay credit cards and rewarding them with better credit interest
rates if they can demonstrate greater levels of liquidity.
Credit card businesses experience lower credit loss rates when
their customers also have a deposit relationship with them suggests
the use of customer loyalty programmes and bundling products, for
example deposit products, as a way of developing this.