BUSINESS

The new card wars

Banks add inducements to sell their plastic

BARBARA WICKENS June 28 1993
BUSINESS

The new card wars

Banks add inducements to sell their plastic

BARBARA WICKENS June 28 1993

The new card wars

BUSINESS

Banks add inducements to sell their plastic

BARBARA WICKENS

A new car. A down payment on a first home. Extra cash.

Those are just some of the inducements that Canada’s major financial institutions are offering to lure customers to their newest generation of credit cards. The competition among the five largest banks, the predominant issuers of credit cards in Canada, is particularly fierce as they jostle to gain market share. In doing so, they have divided into two main camps: those that offer such “bells and whistles” as earning credit towards major purchases, and those that offer savings through low-interest rate cards.

Said Kevin Choquette, a financial industry analyst with brokers Lévesque Beaubien Geoffrion Inc. in Toronto: “Banking is basically retailing and bankers have finally discovered that. As a result, we are seeing some imaginative product innovations.”

Canadians have become keen consumers of mass-market cards sinçe the Royal Bank introduced Chargex, later renamed Visa, in 1968. According to the federal department of consumer and corporate affairs, which issues quarterly reports on credit card costs, there were an estimated 55 million credit cards in circulation in Canada as of June 1. That works out to 2.7 cards for every adult over the age of 18. Of the total, Visa

and MasterCard account for 24.4 million cards, department stores 17.5 million and gasoline companies 3.4 million cards. American Express, enRoute and other retail store cards account for the remainder. For consumers, that translates into a bewildering array of choices. Among them, the banks offer more than 30 different types of Visa and MasterCard credit cards, ranging from basic ones with low annual fees and midrange interest rates, to premium cards with high annual fees but many added features, including travel insurance and instant cash on credit, to the newest cards. “The

Shopping for a new credit card deal

Creditcard*

Interest rate Annual tee Selling Feature

Tied for lowest interest rate available

Tied for lowest interest rate available

5% of total purchase amount to be applied towards the purchase or lease of a GM vehicle

Same as the GM Card but to be used for a Ford vehicle purchase

Lower interest rate than a standard credit card

MasterCard FirstHome Program

*New cards recently introduced by banks

5% of total purchase amount to be applied towards the down payment on a first home

overall credit card market is saturated,” said Doreen Guthrie, a project consultant with the Canadian Consumers’ Association in Ottawa. “It’s getting kind of confusing.” Still, the banks are clearly hoping that customers will find room in their wallets for yet another card—or, better still, will replace cards that they currently hold. In March, the Toronto-Dominion Bank and General Motors of Canada Ltd. announced the introduction of The GM Card, in which five per cent of the total of each purchase put on the card goes into a rebate account. Customers can amass up to $500 a year (by charging $10,000 a year on the card) for seven years, allowing them to apply $3,500 to buy or lease a new GM vehicle. “We believe we are really providing added value to customers,” said David Livingston, vicepresident of TD Bank Visa, which announced last week that a record 503,000 people had applied for the GM card. Added Livingston: “People can use their card the way they have always used their card and earn points towards a car as well.” In April, the Canadian Imperial Bank of Commerce and Ford Motor Co. of Canada Ltd., introduced a similar card. The CIBC Ford Visa, however, lets customers eam a total rebate of $3,500 for a Ford vehicle two years earlier than the GM card.

The Bank of Nova Scotia and the Royal Bank have chosen a different tactic—relatively low interest rates. Last October, the Scotiabank introduced Value Visa, a no-frills card with a 10.5-per-cent interest rate, since

_ reduced to 9.75 per cent.

The Royal added a lowrate payment option to its Visa Classic credit card in December. It too currently stands at 9.75 per cent (That compares with personal loan rates that range from nine to 12 per cent, depending on the individual’s creditworthiness. Said Bob Juneau, senior vice-president of card services with the Royal in Montreal: “Our emphasis is to get that interest rate as low as possible. That puts money back in the consumer’s pocket today."

The Bank of Montreal has a foot squarely in each camp. “There is no one card for everybody,” said Jim Brophy, the bank’s vicepresident of sales and marketing. “As the largest card issuer in Canada, we are trying to meet the needs of

Potential Drawbacks

No bonus from buying

No bonus from buying

User may pay more in interest charges than save towards a car

User may pay more in interest charges than save towards a car

Interest is charged to card from time of purchasing an item

User must hold a mortgage for five years with Bank of Montreal, which might not have the best rate

BUSINESS _

all our customers.” In January, it introduced its Prime Plus MasterCard, with an interest rate pegged to the prime rate—the rate the banks charge their most creditworthy customers—plus 5.5 per cent. (As of June 18, the interest rate was 11.5 per cent.) Then in May, the bank introduced its FirstHome Program, in which anyone with a MasterCard and a chequing or savings account at any Bank of Montreal branch can contribute five per cent of all purchases on the card, up to $2,500, towards the down payment on a first home.

Industry analysts say that intense competition on the credit card front is new for the banks. Lévesque Beaubien’s Choquette said that the banks’ retail divisions, which look after individual customers, have subsidized their corporate divisions for almost 20 years. That occurred, he said, mainly because the banks were run by traditional, conservative corporate bankers. But a new generation of bankers is now in senior positions at most of the major banks. ‘They are taking a much different approach,” said Choquette. “Each product is becoming a battleground.”

The banks also took a severe drubbing in the fall of 1991, when the House of Commons consumer affairs committee took them to task for high interest rates on credit cards. Committee hearings brought the issue to light and seemed to inspire a new wave of competition. The CIBC and the Bank of Montreal tested the waters first, issuing cards offering bonus points for travel programs. When they proved a success with their limited target audience, business travellers and other upscale consumers, the banks then moved to offer perks that would appeal to a wider audience.

Spokesmen for most of the banks declined to comment on how well their newest card offerings were faring, saying most of them had been issued too recently for them to know. Alain Tuchmaier, an industry analyst with Toronto broker McLean McCarthy Inc., however, said that he expects TD Bank and CIBC to do well with their car cards. That is because those cards reward customers who use their cards most frequently—and the banks profit from each transaction. Tuchmaier also said that banks that have opted for cards with lower interest rates “incur more risk of delinquency” because such cards appeal to customers who do not always pay off their balance within 21 days.

But what is good for the banks’ shareholders is not necessarily good for the banks’ customers, said Bob Kerton, an economics professor with the University of Waterloo in Ontario. “The noise in the marketplace makes it very difficult to know where the real bargain is,” said Kerton, who is also a consumer advocate. “Consumers should know that there is a price attached to all the bells and whistles.” As for any product, credit card customers will do well to remember the old maxim—let the buyer beware.

BARBARA WICKENS