Canada's Relationship Advantage

  When it comes to credit card debt, Canadians do it right-from a consumer advocate's point of view, that is. They pay off balances and rarely slip into delinquency.
  Despite a proliferation of the types of credit cards available south of the Canadian border, one thing remains constant, and that's Canadians' reliability. Their happy habits are partly a result of national culture and partly engineered by government regulations.
  Key is the fact that most Canadian customers concentrate their banking relationships with just two financial institutions. That comes in handy when a card account starts to sour. All Canadian banks have the so-called right of offset-the right to withdraw funds for credit card payments from a cash account held by the same person at the same bank. Effectively, Canadian credit card accounts are secured if they are held by consumers who have a savings, checking or investment account with the same bank.
  The right of offset is a big advantage that the U.S. issuers invading the Canadian market can't capture because most offer only credit cards. Well-established Canadian banks are happy to let the U.S. brands slug it out for what they believe will always be a smaller, somewhat more volatile, slice of the market.
  But despite the advantages the established banks have, executives at both Visa Canada and MasterCard Canada say that they've noticed no difference in the delinquency rates for cards issued by Canadian banks compared to those issued by Canadian subsidiaries of U.S.-based companies. Since 1996, McLean, Va.-based monoline Capital One Financial Corp. has been flooding Canadians' mailboxes with low introductory interest-rate offers. Wilmington, Del.-based MBNA Corp.'s MBNA Canada unit has been in the market since 1997. Neither MBNA nor Capital One would comment for this story.
  Currently, 23 banks issue Visa or MasterCard cards in Canada, according to the Canadian Bankers Association. Canada remains a non-dual country, in which an issuer can only offer either Visa or MasterCard products, but not both brands.
  Besides Capital One and MBNA, both of which are MasterCard issuers, other U.S.-based issuers with a significant Canadian presence include American Express Co., Citigroup Inc.'s Citibank, and retailer Sears Canada, an affiliate of Sears, Roebuck and Co. that now, like its American cousin, is issuing a MasterCard. Minneapolis-based U.S. Bancorp issues Visa commercial cards in Canada.
  MBNA had $2.5 billion (U.S.) in managed Canadian outstandings last year, up 30% from 2001, and good for about 8% of the bank card market. As in the U.S., MBNA issues most of its cards through affinity groups and has endorsements from 450 Canadian organizations.
  Capital One had $5.4 billion in international loans at the end of 2002, mostly in the United Kingdom and Canada. The issuer did not break out outstandings by country.
  More Choices
  The entry of U.S. players, particularly the monolines, has brought more product choices and lower annual fees to the Canadian card market, formerly the near-exclusive domain of five large national banks and a handful of regional and local banks and credit unions. Customers will follow through on their urge to find interest-rate bargains from the newcomers, says David Stafford, vice president of credit cards for Toronto-based Bank of Nova Scotia (ScotiaBank), one of the Big 5. But they still hold onto their cards from the indigenous banks with which they have had longstanding relationships.
  "The average Canadian has two to three banking relationships," he says. "The average Canadian does spread around some business, and share of wallet. But from a retention standpoint, we see a certain amount of balance hopping as opposed to outright account closing."
  What is surprising is the relative stability of credit quality despite the market changes. Only 0.7% of Canada's 49.4 million accounts are 90 days or more delinquent-a percentage that hasn't substantially changed in three years, according to the Canadian Bankers Association (chart, page 51).
  In fact, the quality of Canadian cards improved in the last quarter of 2002, according to Moody's Investors Service's Canadian Credit Card Index. Chargeoffs on card receivables dropped to 2.61% from 2.89% in 2001's fourth quarter. While that's high for Canada, the chargeoff rate is still half the U.S. rate. Thirty-day-plus delinquencies stood at 2.29% of receivables, down from 2.48% a year earlier.
  Other numbers indicate that Canadians are more comfortable overall with carrying higher levels of debt. The Canadian Bankers Association reports that outstanding balances on cards as of the end of 2002 hit C$43.99 billion, about 13% more than the year before (chart). That tracks with the 12% increase in the number of cards in circulation.
  Payment ratios, meanwhile, have drifted downward to the current 30% from the historic high of 36%, says Benjamin Tal, an economist with CIBC World Markets in Toronto. That's still about double the U.S. average.
  Finally, Canada's household debt-to-income ratio now stands at 102%, including mortgage debt. "That's an all-time high," says Tal.
  Partly because they can afford it, and partly because of the incessant direct-marketing campaigns that the U.S. issuers introduced-and Canadian banks matched-"debt is no longer a four-letter word" to most Canadians, says Tal.
  While Canadians have become less averse to carrying some card debt, they remain quite conservative about paying their bills.
  "We know that the (U.S. issuers) have not gained significant market share," Tal says. "They have changed some of the dynamics in the market, but they have not totally changed the equilibrium of the market-not yet."
  'Fuller Relationship'
  U.S. issuers simply lack the critical mass to dislodge the prevailing attitude about paying back debt.
  "The fact is that many of our customers, even though they may only have a credit card relationship with a particular institution, they have a fuller relationship with the institutions that have been here for many years," says Richard Pyves, senior vice president of marketing for Visa Canada. "Low and no annual fees have made a difference. But even though the consumer is aware of low rates, the bank brand is still a determining factor."
  The fact that delinquency rates are trending down simply proves the rock-ribbed Canadian culture, says Walt Macnee, president of MasterCard Canada, based in Toronto.
  "The arithmetic of growing balances creates the opportunity for growing delinquencies," he says. "But over a long period of time, the (low delinquency rate) goes right back to consumer behavior. It's not the result of arithmetic."
  With just a few banks that have branches, automated teller machines and advertising nationwide, Canadians grow up with the idea that they have plenty of access to "their" bank, for whatever purpose, whenever they want, says Joseph M. Polard, general manager of Victoria, British Columbia-based collections agency Accounts Recovery Corp.
  "The loyalty factor is big," Polard says. "When we get cards (account holders) of MBNA and Citibank, the loyalty that people have to them is not what they have to their bank. They'll keep their financial institution clean, but are much more likely to slow down on the other issuers that they don't have a relationship with."
  It's impossible to overestimate the right of offset in tamping down delinquency rates, according to Polard. Nine times out of 10, he says, a customer with a card from a traditional Canadian bank also has another account with that bank, especially checking and savings accounts and mortgages.
  Standard credit card account contracts grant banks the right to reach into that same consumer's other accounts for payment. The arrangement holds for all sorts of loans, not just cards that are specifically designated as secured accounts.
  "When you sign the Visa agreement, you agree that they can offset the amount of delinquency from your savings account. And that happens," says Polard.
  Approval Needed
  The offset doesn't happen automatically. "If there's money in the current account and it's owed for the Visa, the branch manager has to approve it and make sure that the funds in the checking account aren't coming from a government-issued account," explains Polard.
  This arrangement provides a fail-safe both for consumers, who minimize the chance of having a credit-dinging late payment, and for banks, which get their money. Along the way, delinquency rates deflate.
  While Polard says that his agency's experience is that "the new (i.e., U.S.-based) account will be the first one they default on," he adds that the monoline banks are upping the ante by offering consolidation loans. These plans scoop up all the debt on a customer's assorted credit cards and consumer loans and puts it on one card-a card issued by a bank that may not be able to take advantage of the offset rules.
  Even when consumers slip into delinquency, collectors can tap into their lingering loyalty to their bank. "It's not uncommon to find that somebody has defaulted on their credit card but are current on their mortgage," says Polard. "That's often right in the bank's credit file."
  It would seem to be preaching to the converted to urge Canadians to learn how to be more financially savvy. After all, points out Pyves, nearly 60% pay off their balances every month or nearly so, and bank card debt as a ratio to household debt is entrenched at 5.9%.
  Apparently on the theory that there is always room for improvement, the Financial Consumer Agency of Canada, a federal agency, is busy publishing consumer financial how-to manuals. One favorite topic is how to decipher credit card contracts, figure interest rates, and compare competing offers, says Isabelle P. Rodrigue, a consumer-education officer with the Ottawa, Ontario-based agency.
  'Complicated Product'
  "It's becoming a complicated product," says Rodrigue. The agency was scheduled to post in May a chart comparing all credit card offers currently sponsored by Canadian banks.
  The agency doesn't have jurisdiction over collections practices. There is no national equivalent to the federal Fair Debt Collection Practices Act in the U.S. Instead, each province sets and enforces its own collection policies.
  Canadians who do get behind in their accounts are likely to be much more receptive to a collector's call than are telemarketing-weary Americans, says Polard.
  "There's not as much telemarketing in Canada, so people do answer their phones," he says. "The person you're trying to get hold of may actually pick up the phone or let you start talking."
  That could change if the monolines shift from primarily direct mail to telemarketing-driven campaigns. Once Canadian consumers start bracing for the deluge of calls that annoy so many Americans, their attitude towards picking up the phone and talking with a stranger is bound to change, predicts Polard-and not in a way that will benefit collectors.