Capital One operates in three markets, the US, Canada, and United Kingdom. Capital One Canada reduced Canadian card volumes substantially since December 2020. At that time, Canada represented 5.4% of Capital One’s $105 billion consumer receivables. As of their June 30 SEC filing, Capital One’s Canadian portfolio fell from $5.7 billion to $3.0 billion in June 2021. Canada is the only Capital One market that shows a significant decrease; credit exposure in the United Kingdom was flat at $2.7 billion for the same period, and U.S. cards had a nominal decline from $98.5 billion to $95.3 billion. This decrease is consistent with many other U.S. card businesses. Capital One’s move makes sense, particularly as the Canadian market navigates through COVID.
It is interesting to note that the U.S. State Department recently raised its travel advisory to Canada. The new rating is “level 3-reconsider travel”. All thanks to COVID. A buzz kill for me, who loved to eat at Canoe in the TD Tower in Toronto, but that’s another story. Back to business…
Capital One did not renew the relationship, and CIBC agreed to acquire the portfolio at C$3 billion, or USD 2.4 billion, according to Financial Post. CIBC’s press release points out:
- Today’s announcement reflects CIBC’s strategic focus on growing its Canadian consumer franchise. The portfolio acquisition significantly grows and diversifies CIBC’s credit card portfolio in the everyday rewards category, complementing the bank’s strength in the travel rewards space. In addition, this agreement with Costco will provide an opportunity to deepen relationships with new clients from across Costco’s large and growing member base.
We think the move is a four-way win.
- For Capital One, the move accelerates the Canadian exit. Capital One has a healthy business in the U.S. There is more than enough opportunity on this side of the 49th parallel. Capital One has an excellent opportunity to serve the U.S. college market with the Quicksilver Student Cash Reward card and the recent overhaul of their Spark Business card. In these uncertain times, focusing on two significant contingents in the large U.S. market seems like a better idea than taking over the Canadian market. Don’t forget Chase exited Canada in 2019, though Citi still has an office in Mississauga, Ontario.
- For CIBC, the Costco deal fills the void for an issuer who bet so heavily on an air travel credit card. Canadian air travel is half of what it was pre-COVID, and on August 29, 2021, only 82,268 people passed through the gates at the top 8 airports. That’s certainly not enough to base a credit card co-brand business.
- For Mastercard, the issuing relationship is secure for the network.
- For Costco, the assumption is they got a better deal than Capital One would offer. These days, card issuers are looking harder at the revenue dynamics of co-branding and revenue sharing, as Chase did with the Amazon co-brand.
We like the deal all the way around and noted in our recent Co-Brand report that the market is significantly changing. Revenue dynamics are more important than ever, and the co-brand card product is in a state of flux.
Overviewby Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group