Have you thought about expanding your card payments business up north?
Globalization remains top of mind for many financial institutions. Some banks are already immersed in the international payments business, but many more remain wary of cross-border expansions. Regardless, bankers looking to expand their card services are increasingly seeing international growth as the strategic way forward and are eagerly eying the Canadian market.
Canada is an ideal first step into foreign markets. With a much smaller population than the U.S., but with a comparably affluent economy and a similar urban culture, Canada makes a lot of sense.
But what about barriers to entry?
True North Strong and Free
Despite having a significantly smaller population (36 million compared to 320 million), the Canadian market is remarkably similar to the United States’. Both countries share comparable levels of income, literacy, education and unemployment. In addition to the obvious geographical proximity – emphasized by the fact that the vast majority of Canadians live close to the U.S. border – Canada is a sizeable market with strong growth opportunity.
The Canadian prepaid card business is less mature than the United States’, but is growing at a similar pace. There is strong uptake of both consumer- and corporate-funded cards, with government-funded cards lagging in usage but expected to grow quickly. Prepaid products on offer are also similar between the countries, with consumer cards covering general purpose reloadable cards, as well as various gift and travel card schemes, and corporate cards for purchasing, insurance, payroll and consumer/partner incentive schemes.
The Canadian open-loop prepaid market for consumer- and corporate-funded segments totaled CA$3.1 billion in 2015 and is expected to continue to grow. Like the U.S., the general purpose, reloadable and open-loop card segments form the basis of the prepaid business. In 2015, reloadable cards totaled over CA$1.8 billion loads, with an average load of CA$2,016 per card; meanwhile, open-loop and gift cards totaled over CA$1 billion, with an average load of CA$83 per card. Those numbers are similar to the U.S. market, according to The Canadian Open-loop Prepaid Market 2015 – Mercator Advisory Group, June 2016.
While it is true that the general purpose reloadable card market in Canada has lower average loads than the comparable U.S. segment, as the Canadian public finds more use for prepaid cards, this segment is likely to grow in both total volume and average card loads. In 2015, open-loop and gift cards averaged CA$91 per card compared to around $102 in the United States (CA$118), with general purpose reloadable cards hitting an average load of CA$2,016 per card compared to $2,515 in the United States (CA$2,892), according to The Canadian Open-loop Prepaid Market 2015 report. In other words, the Canadian prepaid market may be less mature than the U.S., but it’s catching up fast.
Break for the Border … or Bust
Canada certainly does not represent a culture shock to American banks with its comparable business environment, but there are barriers to entry. For example, let’s say you’re an issuing bank in California looking to break into Canadian card services. Because you’re probably prohibited from issuing Canadian cards, you’ll need to find a local partner issuing bank. There is also the matter of currency. Foreign exchange fluctuations will directly impact your business, and all internal and channel systems must be able to offer multi-currency services. And don’t forget about remittances. Additionally, almost one quarter of the Canadian population considers French their first language – highlighting how language and interface considerations impact channel applications, websites and call center support environment.
Of course, operating cross-border also means a different regulatory environment, which may vary from province to province, just as they do by state. Regulations unknown in the United States need to be addressed, along with different reporting and risk management regimes. From a purely logistical perspective, card fulfilment and cross-border shipping also will impact distribution costs – so much so that it probably will be advantageous to find a local distribution partner. In order to operate, banks also need to connect to INTERAC, the Canadian interbank network, so they can properly process payments and transactions, especially outside the major cities. Lastly, while Canada is a largely urban population, there are enormous regions of sparsely populated, rural areas with little or no distribution points, connectivity, ATMs or financial service providers – how are these customers to be reached?
So, is it Worth it?
Canada is a small but growing market that strongly resembles the U.S. prepaid sector three-to-five years ago. Space remains for an innovator to make a big impact on prepaid card payments, with services such as expense management, person-to-person payments, remittance and loyalty programs designed for low point earners. There is also an opportunity for government-funded prepaid schemes to dramatically grow the sector.
If your aim is global expansion, you will eventually need issuing bank relationships across the world, and Canada is a great stepping stone for international prepaid card expansion since it operates with a less overwhelming suite of product offerings, and is far easier for U.S. institutions to enter than Europe, Asia or Africa. But you must be prepared, and waiting puts you at risk of losing out to competitors.