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CIBC picks up Costco credit card business
September 4, 2021
10:22 am
AltaRed
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Per Norman1, I think at least some folk will eventually be attracted to one or more of CIBC's investment products. I see the emails and promotions almost monthly in either my email or when I login to the home page to see my credit card balances (the only business I have with CIBC is their Dividend Visa card).

It may not entice anyone who posts here, but CIBC doesn't need to capture more than a few percent of their CC holders to make it worthwhile to open a bank account or purchase GICs, etc. The real money as you suggest is being made on unpaid card balances and merchant fees. It doesn't cost CIBC hardly anything to add another CC card to their back office CC operations.

September 4, 2021
10:40 am
BestBankerEver
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Just a question. Does CIBC offer MasterCard? Or will the new Costco card be Visa? My wife has a CIBC Visa card and I just did a quick check and see no Master Card.

I found my answer.

September 4, 2021
1:33 pm
Norman1
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Loonie said

It's true that they will WANT to steer these new customers towards other products. But CCs are particularly lucrative on unpaid balances. After 3-4 years, the bank has recouped its loan and the rest is a very rich gravy - maybe for decades to come - and they will still come calling for the principal in the end.

I doubt it was lucrative. If the return on investment was something like 12% or 15% per annum, Capital One wouldn't get rid of the Costco MasterCard arrangement.

As well, there are cheaper ways to get those unpaid balances than paying Capital One for their credit card book. For example, CIBC could offer a $50 gift card and free balance transfer to the Costco MasterCard holders who apply for a CIBC Visa card.

Whether it turns out as hoped, CIBC is motivated by the cross selling possibilities to the millions of Costco cardholder/members. This is from the CIBC press release:

"We are excited to partner with Costco, one of the best and most recognizable brands in Canada for providing unparalleled value, to enhance the rewards program and deliver even more value to their members," said Laura Dottori-Attanasio, Group Head, Personal and Business Banking, CIBC. "This relationship enables us to diversify our credit card portfolio in everyday rewards, grow our market share in payments, and provides a meaningful opportunity to deepen relationships by meeting the financial needs of Costco members."

"We're looking forward to welcoming Costco members to CIBC, and we're committed to providing a great client experience and earning more of their business through our expert advice and industry-leading solutions as we help make their ambitions a reality."

September 4, 2021
6:51 pm
Loonie
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I'm really surprised you would be convinced that their PR blurbs tell the real story. No PR rep worth their keep is ever going to say, "we're really excited about acquiring all those CC balances, especially the ones that never get paid off, because that's a big profit centre for us."

CIBC's interest rate on CCs is about 22%, and you want me to believe they disdain this? I thought the FP article made it clear that they wanted a bigger share of the CC market.

However, I do agree that, down the road, CIBC will want more revenue from these new cardholders. I am doubtful that they can get it. When it comes to wealth management, the big banks are indistinguishable for the most part. And, for DIYers, CIBC doesn't stand out for the quality of its in-house ETFs.
Costco has a lot of small business people who are members. None of the big banks have a stellar reputation in dealing with the small business owner.

Interesting old prediction here about how the Capital One relationship would likely fail:
https://www.greedyrates.ca/blog/4-reasons-capitalone-costco-canada-partnership-might-fail/
supports some of what you are saying.

September 4, 2021
11:00 pm
Norman1
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Loonie said

CIBC's interest rate on CCs is about 22%, and you want me to believe they disdain this? I thought the FP article made it clear that they wanted a bigger share of the CC market.

Not if the card issuer has to hand most of that 22% per annum money over.

Only about half will carry a balance. So, the overall return is diluted to 11% per annum on the outstanding balances.

There can be a negative spread between the interchange received and the rewards. Current MasterCard core interchange is 0.87% for tap, 0.92% for chip-n-pin. If the reward is 2%, then the spread is around -1% of each charge.

If half is paying off and re-spending each month, then that 2% reward will hit the issuer -1% x 1/2 = -0.5% per month = -6% per annum overall!

Subtract the 6% from 11% and one gets just 5% per annum net.

Now, the card issuer can get really screwed if there is a 3% reward category, like that 3% on restaurants on the Capital One Costco MasterCard. Spread is around -2% for that category.

If the 3% category attracts lots of use from those who pay off each month, then the category could hit the card issuer as much as -2% x 1/2 = -1.5% per month = -18% per annum, more than the diluted 11% per annum from interest charged!

September 5, 2021
4:54 am
KamWest
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BestBankerEver said

I feel Costco in more in bed with Apotex than us "members". I can say..I no longer trust Costco.  

Buy Costco stock and reap the profits, been a proud owner of an ever expanding Costco portfolio for years.

September 5, 2021
11:28 am
Loonie
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There are an awful lot of "ifs" in your last post, Norman, too many to make the conclusion reliable.

But I'll add one more. If the CC business was as unrewarding to issuers as you suggest, then it would die.

And I'll add one fact. The issuers decide what percent reward we will get on our purchases, not us. They chose to offer 3% on restaurants; we have no say in the matter. I thought at the time it was an odd choice, but I'm sure they had a business case for it. Perhaps they think that Costco members, who buy massive amounts of groceries, don't eat out much.

September 6, 2021
6:10 am
savemoresaveoften
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Norman1 said

Loonie said

CIBC's interest rate on CCs is about 22%, and you want me to believe they disdain this? I thought the FP article made it clear that they wanted a bigger share of the CC market.

Not if the card issuer has to hand most of that 22% per annum money over.

Only about half will carry a balance. So, the overall return is diluted to 11% per annum on the outstanding balances.

There can be a negative spread between the interchange received and the rewards. Current MasterCard core interchange is 0.87% for tap, 0.92% for chip-n-pin. If the reward is 2%, then the spread is around -1% of each charge.

If half is paying off and re-spending each month, then that 2% reward will hit the issuer -1% x 1/2 = -0.5% per month = -6% per annum overall!

Subtract the 6% from 11% and one gets just 5% per annum net.

Now, the card issuer can get really screwed if there is a 3% reward category, like that 3% on restaurants on the Capital One Costco MasterCard. Spread is around -2% for that category.

If the 3% category attracts lots of use from those who pay off each month, then the category could hit the card issuer as much as -2% x 1/2 = -1.5% per month = -18% per annum, more than the diluted 11% per annum from interest charged!  

I am sure the banks have cracked the math like u did and decided its a profitable business (taking into account cross selling products to the newly acquired customer base).
Capital One dont have that kind of cross product selling leverage and yes it ends up not that lucrative. Any CC offers that are too generous will cease to exist over time. Just like no fee premium card is now a past. To offest the $100+ AF, they throw in the 3% restaurant / groceries as perks.
I used to have the Driver's Edge which gives me 2% on all purchases and can redeem when I get a new or used card. The card has no annual fee either. They eventually decided there is meat for me but bones for them 🙂
Like you said, if all CC holders are like me which is to cherry pick their offer and pay off balance every month, its a losing business to the issuer.

September 6, 2021
2:19 pm
topgun
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42%-53% who do not pay balance support a very profitable product for credit card issuers to support rewards programs and support a 2% delinquency rate. Many other variables not known.

Have a Great Day

September 8, 2021
9:37 am
Norman1
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Loonie said
There are an awful lot of "ifs" in your last post, Norman, too many to make the conclusion reliable.

Yes, there are lots of variables. But, I've shown how a card issuer can collect 22% per annum and end up with a loss leader that isn't worthwhile keeping.

Card issuer does decide the reward rate, like 3% for restaurants only. But, the issuer cannot prevent people from using the card for restaurants only and another credit card for other spending.

I was looking at the Capital One Costco MasterCard in particular and how it may not be very profitable for Capital One. The credit card business can be quite profitable if the rewards are not overly generous.

With a straight ½% cashback, one gets a interchange-reward spread of around +½% and 11% + ½% x ½ x 12 = 14% per annum return on the funded balances. That would be a keeper for the card issuer.

But, not many people are going to apply for a ½% cashback credit card when Tangerine Bank, for example, is offering 2% cashback on two or three categories and ½% cashback on the rest.

I suspect Capital One projected that most of the Costco members would be mesmerized by the 3% and 2% cashback categories and use the card for all their spending. Then, most of their spending, including vacations, services, and even purchases at Costco, would end up in the "other" category that only had ½% to 1% cashback.

I think many members eventually realized that and used another more rewarding card for the "other" purchases.

September 8, 2021
11:07 am
Loonie
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It may be that CapOne was constrained by Costco.
But we have to accept that we will never know the details of these arrangements and there will always be a lot of "if's". Maybe CapOne was just too greedy. Any profit is a good profit in my books if it's fairly reliable and net of costs. It's the whole CC industry that decided to compartmentalize rewards, not just CapOne, and of course it was because they wanted and thought they could get a bigger piece of the pie. No other reason to do it. Certainly not because they love their customers, I would wager that the majority of people don't realize their options, never heard of the Tangerine card, and aren't particularly discerning about which ones they get. Someone told me recently that they thought you had to use the card that your bank offered! sf-confused

We use single universal percent based card for pretty well everything. It's a fee card, but worthwhile considering our spending. That's another issue for CapOne perhaps. And I think it will be for CIBC as well. If Costco shoppers are indeed "affluent" (I actually doubt this although some are) and big spenders, they will find it more worthwhile in most cases to get and use a card with better perqs.

I remember watching people lined up to sign up for the CapOne card when it first came out. Looks don't always tell the story but they didn't look especially affluent to me except inasmuch as they all had cars. I remember wondering to myself, how many of them realize they aren't getting any premium with this card for shopping at Costco, and how many of them have big restaurant budgets. I remember that even you were surprised when I pointed out that the reward for shopping at Costco was only .5 percent. However, the ones lining up were only a subset of cardholders.

I could undoubtedly devise a different set of "if's" and come up with a different conclusion, but it doesn't seem worth the trouble. I'm sure you already know it.

September 11, 2021
7:51 am
Doug
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Loonie said
CIBC has made a deal with Costco. The CIBC card will come out next year and will be automatically sent to CapitalOne Costco cardholders (or so the article suggests).
There is an article in FP but I don't have a link.
Apparently Costco cardholders have over $3 billion in outstanding balances, which CIBC wants to acquire as their total would then be about 13 billion. (Good grief! - and the article says Costco cardholders are considered affluent!)

There used to be a saying levelled at those with many opinions but few financial resources, which was "if you're so smart, why ain't you rich?" This humongous debt load, at only one bank and at horrendous interest rates, suggests a better one might be, "If you're so rich, why ain't you smart?"  

Well, you have to remember $3 billion in outstanding balances is at the time quoted. That doesn't mean the same cardholders hold $3 billion outstanding balances next month. Additionally, missing from the equation is the number of cardholders. Still, that number did surprise me a bit given that Capital One was always one of the largest credit card issuers without the Costco business. By comparison, PC Financial holds about $5 billion in credit card balances and Canadian Tire Bank about $3-4 billion, making the Costco card the third largest single credit card brand in Canada.

How profitable it'll be for CIBC, if at all, is an open question. Analysis seems to suggest they're buying it for the cross-selling opportunity to attract more CIBC banking and investment clients. sf-cool

Cheers,
Doug

Full & Fair Disclosure: I hold CIBC common shares, as well as common shares in BNS, HSBC, TD, and CWB.

September 11, 2021
11:31 am
Loonie
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Good point that the balances may not be as great by Jan 2023 when CIBC takes over. As the Cap One card is disappearing, people may use it less and start looking at and using other cards. CIBC is not announcing its "details" until the new year.

I guess CIBC is desperate for new customer possibilities. Personally, I can't think of many reasons to do business with them. I have a seniors chequing account there and that's all. Last year I took advantage of a promo they had on an esavings account. They keep trying to get my CC and loan business but I haven't borrowed a cent since mortgage decades ago. To me, they don't seem too smart.
I guess they will be calling up the credit reports on all these new customers, at least the ones they don't already have . But if they keep offering them products they don't want, how will it work?
Yesterday, spouse got an offer from them for a fee-based travel CC where they said they would give us back up to $800. That's a really silly offer as people our age travel less and less, not more and more. We would find it too much trouble to switch everything around as there is little difference from one card to another.

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