Many Canadian credit card issuers have raised rates and fees recently. Scotia and National Bank of Canada are the latest.
We believe market dynamics will continue to force Canadian credit card issuers to find ways to increase portfolio profitability. We explain below.
Scotia Bank Changes
Scotia has announced that effective August 1st, 2016, they will either be adding or increasing fees on cash advances, dishonoured payments, overlimit fees, and promotional rates, including balance transfers.
Scotia has mostly implemented changes to what we would consider “hidden” fees and “penalty” fees. We consider hidden fees to be those which are typically found in the small print, such cash advance fees and balance transfer fees. Penalty fees are those that typically affect derogatory behaviour such as a dishonoured payment, or going over your credit limit, etc…
In some cases Scotia is raising rates to benchmark levels charged by other leading credit card issuers. In other instances, they are clearly charging at the higher end of the pack.
Scotia’s changes are as follows:
- Cash advance fee at a domestic ABM from $2.50 to $3.50 (BMO, TD, RBC, CIBC are all at $3.50)
- Cash advance fee at an international ABM from $5.00 to $7.50 (BMO, TD, RBC, CIBC all charge $5.00)
- New – Scotia charging a $4.00 cash advance fee for cash-like transactions (gaming, wires, foreign currency, travellers cheques, money orders and gaming chips.
- Raising promotional low rate fees to 3% of the amount of each transaction under a promotional rate offer. A promotional rate means “the rate is lower than your preferred annual interest rate.” May apply to cash advances, balance transfers and/or Scotia credit card cheques.
- Dishonoured payment fees from $42.50 to $48 (CIBC and BMO are at $40, RBC at $5, TD at $48).
- Overlimit fee of $29 will apply to the Scotiabank Visit Infinite card.
The big take-away from Scotia’s changes? Stay away from Scotia’s cash advances – especially when travelling to the United States.
Not only will you be paying 22.99% interest from the moment you take out your cash advance, you’ll also be paying a cash advance fee between $3.50 to $7.50 at the ABM, plus the ABM operator’s withdrawal fee of $3.00 or so. That means if you take out a cash advance of $100, you’ll be paying between $6.50 to $10.50 in fees alone, plus 22.99% interest!
National Bank of Canada Changes
National Bank has announced that they will be increasing cash advance interest rates and penalty rates on cash advances, effective June 1, 2016.
National Bank made the following changes:
- Cash advance and balance transfer rates increase from 21.99% to 22.99% (this is in line or lower than most other issuers)
- Cash advance and balance transfer penalty rates increase from 26.99% to 27.99% (this is in line with the penalty rates of most other issuers)
Despite the fact that National Bank has increased its rates so that they are in line with those of its competitors, it still raises the question, why rates are increasing in a historically low interest rate environment?
Why The Increase in Rates & Fees?
In general, Canadian credit card issuers are doing well. However, there have been several market dynamics that have forced some to look for creative ways to increase revenues.
First, the Canadian competitive landscape is demanding that issuers make their rewards programs richer. As a result their rewards costs are increasing. Issuers are rewarding customers more per dollar spent and as reward programs become easier to redeem through cash back schemes and the like, breakage is decreasing. The more consumers get, the less goes to the issuer.
Second, Canadian cardholders are revolving less. Revolve is defined as the percentage of a credit card portfolio’s balances that generate interest revenue. Since 2009, Canadian issuers have seen revolve rates drop dramatically, reducing interest revenue. One way to offset the impact of decreasing revolve rates is through increasing interest rates.
Why are Canadians revolving less? As more migrate from cash and debit to credit, they use credit cards as transactional tools, as opposed to a credit facility. Secondly, we suspect Canadians who do carry a balance are becoming more savvy, and using cheaper lines of credit to pay down credit card balances.
Third, interchange revenue is uncertain. Both Visa and MasterCard committed to reducing their average portfolio interchange rates, as part of the voluntary code of conduct. Interchange is one of the key revenue drivers of an issuers credit card portfolio – especially for rewards cards. Issuers are navigating the lower interchange revenues in merchant categories like wholesale clubs (Costco), and the associated impact on interchange revenues.
Fourth, new payment intermediaries like Apple Pay will apply additional pressures on interchange revenues. Apple Pay is charging approximately 15 basis points per $1, which is about 10% of average issuer interchange revenues.
In general, cardholders who pay down their balances every month and stay within the rules, will be impacted least by issuer changes. However, things are getting a little more expensive for those who are a little less disciplined with their plastic.
All that said, Canadian banks continue to benefit from increasing credit card spend, and portfolios continue to grow as a result. However, with so many shifting market forces, we can expect plenty of change in Canada’s credit card market in the near future.