Cash Back Cards Are Poised to Shake Up Canada’s Credit Card Market

Money back cards with accelerated rewards dominated our recent MoneyScreen payments test of proposed and existing cash back cards and other payments methods. The cards with accelerated earnings were particularly appealing to big spenders. The payments schemes with the biggest average monthly spend were cash back cards with accelerated earns. People acquiring the top 5 of these cards expect to spend 50% more than average.

Many of the attributes driving frequent card usage were accelerated cash back offers like “2% on grocery, 1% all” and “5% on rotating categories”. Security features such as “freeze it” were also important drivers. One of the ideas we tested (unbranded) was “Discover it”, a cash back card with security features that is currently available in the U.S. It ranked in the top 5 concepts, indicating combining cash back with security features is currently white space in the Canadian market.

In the U.S. cash back cards are gobbling up share, just as our MoneyScreen testing predicts. Current adoption levels of cash back cards are roughly twice as high in the U.S. as they are in Canada, indicating plenty of potential for this type of payments solution.

Tangerine Money-back MasterCard—tested unbranded—was the most popular of these cash back cards. It also attracted the biggest spenders—and appealed most to coveted Gen X rotators. That’s an enviable acquisition profile.

Big Brands Beware

It is no accident that an upstart brand with an outsider image like Tangerine attract so much attention. We tested many ideas, both branded and unbranded, and consistently see both interest and spend being higher with unbranded offers—indicating a thirst for alternatives to the status quo.

This is part of a trend everywhere we look—people are increasingly less trusting of big institutions, big companies and big brands. Our research has shown a lack of trust is hurting large consumer goods companies in general, and in food in particular. A lack of trust is also smothering the growth of the sharing economy.

This puts the established providers at an active disadvantage, and opens the door for outsider brands to rapidly snap up share.

Anchoring Effect

Part of the appeal for the accelerated awards, such as “2% on grocery, 1% all” is that the lower number serves as an anchor that makes 2% seem large. This anchoring effect was first described by Nobel prize winning behavioral scientist Daniel Kahneman and his colleague Amos Tversky in the 1970s. Anchor effects, have been shown to have significant impact, even when people are aware of them and are rewarded for being unaffected by them. Therefore, an offer like “1% cash back and 2% of the category of your choice” is always going to punch above its weight.

A Delicate Balance Demands Exacting Design

Because accelerating awards are such a powerful driver of acquisition, it will be easy for cash back to ignite a credit card arms race. In the U.S. cash back awards have become considerably richer than they are in Canada. But U.S. issuers have many more revolvers—people who carry a balance on their card. They effectively fund the ability of the awards to be so lavish. Canada, with its lower level of revolvers, is a riskier place to fund a generous accelerating award program.

The need to find the delicate balance between offering enough to attract customers, while not losing money, is not unique to cash back cards. We also see this with travel rewards. Both these situations point to the need for an exacting design of the product. That’s why we developed SmartChoice, a one-of-a-kind product optimization methodology. Our clients engage thousands of consumers in evaluating how an offer can be maximized to improve adoption and profitability. You can efficiently evaluate and war-game thousands of potential product designs and select the winning strategy, based on modeled impact to your profit and loss statement.

Accelerating Change

The credit card market in Canada is at a pivot point. Cash back cards are poised to grab more share. Big brands are vulnerable to upstarts. And the stakes are high in card design. These all point to a need for timely, insightful information. MoneyScreen and SmartChoice deliver the powerful insights issuers need.

MoneyScreen benchmarks and tracks payment innovation across all aspects of the industry and provides access to well profiled consumers for ongoing concept development and testing. Offers are evaluated in an extensive online survey where consumers are asked to evaluate one offer at a time across a series of diagnostics. In addition to capturing appeal and appetite for the product, we go deeper and measure impact on spend, barriers to adoption as well as which features are most important in driving acquisition and, separately, long term usage of the product.

For more information on MoneyScreen and our database of payments benchmarks, or about our SmartChoice solution for optimizing your credit card offer please contact: