Consumers look to cash in over the next several months, as a softening housing market spurs banks to shift their focus to credit cards as a larger source of lender income.
Mortgage lending is traditionally the largest source of banks’ funding – and while it continues to be the main breadwinner, recent restrictions to cool the markets are now being felt in bank coffers.
These market changes include a recently imposed monthly cap on mortgage guarantees at $350 million for each mortgage lender. As the spread of mortgages narrows and becomes less attractive, banks look to make up the lost profit through credit cards.
Credit Cards Mean Easier, Faster Profits
Although credit cards have a higher default rate, they offer the opportunity for a higher profit margin. As the saying goes – the higher the risk, the higher the reward. Consumer debt has skyrocketed over past several quarters, fueled by ultra-low interest rates. The debt-to-income ratio hit a record 163 per cent in the third quarter of 2012, before falling slightly to 162 per cent in the most recent quarter, according to Statistics Canada.
Consumers Can Expect New Credit Card Options
The battle between CIBC and TD over the fate of Aeroplan credit card holders only emphasizes the importance of the big banks retaining high margin businesses. As mortgage loans are expected to dwindle over the next several months due to fixed mortgage rate increases and tougher qualification restrictions, higher spread credit cards look to pick up the slack.
“Credit cards are important to the banks because it’s a high-spread product and because it’s a high fee revenue business on top of that,” says Peter Routledge, a National Bank Financial analyst. ““Affluent people are spending more money, feeling more confident about the economy and they’re using their cards more frequently.”
At first it looked like TD would swoop in and take over Aeroplan, but CIBC has been fighting tooth and nail to keep at least half of its clients. Specifically, CIBC values its clients with further CIBC products, such as mortgages, lines of credit and chequing accounts. Losing customers with multiple CIBC accounts for be devastating for the big bank. Regardless of the outcome, it looks like consumers will benefit in the end with a greater choice of low and no fee credit cards and a new opportunities to earn Aeroplan points. You may be flying on that trip London, England sooner than you think!
Canadian Tire’s Credit Card Business Up for Sale
Aeroplan isn’t the only credit card up for grabs. Canadian Tire is looking for a financial partner for its $4.4-billion MasterCard business. Canada’s largest sporting goods retailer is looking to cash in on its lucrative credit card business. It already offers no-fee banking through its Canadian Tire Financial Services. Finding a partner would help build its financial services business even further, which typically offers higher profit margins than its retail business.
It all comes up to down to the banks winning new customers and upselling them to their various high margin products. “If you can bring in new clients to your bank and cross- sell them other products, that’s a very attractive value proposition,” says Linda Mantia, executive vice president of cards and payment solutions at Toronto-based Royal Bank.