Banks put high price on loyalty programs.

‘We did not want disruption’

TORONTO• They say you can’t put a price on loyalty. But what about a loyalty program?

That’s a question the CEOS of two of Canada’s biggest banks contemplated openly this week after a consortium led by Air Canada struck a tentative deal to buy back the Aeroplan rewards program from Aimia Inc.

On Thursday, Canadian Imperial Bank of Commerce president and chief executive officer Victor Dodig, whose bank was part of that consortium, highlighted how important the move was for his company, which has been issuing Aeroplan-linked credit cards for more than two decades.

“We did not want disruption to the portfolio,” Dodig said during a conference call. “We did not want disruption for our clients. We did not want disruption for our shareholders.”

After a back-and-forth over the price — including a recommendation at one point from Aimia’s largest shareholder, Mittleman Brothers, that Aimia take no less than $1 billion for Aeroplan — the parties involved said Tuesday that they had struck an agreement that would see Aimia sell Aeroplan to the consortium of CIBC, TorontoDominion Bank, Air Canada and Visa Inc. for $450 million in cash and the assumption of approximately $1.9 billion of Aeroplan Miles liability.

While saying some details still had to worked out, Dodig called the price CIBC is paying for its share of Aeroplan, in terms of the impact to the bank’s capital, “small and manageable.”

“Truly, it’s one of these things where we looked at it and said ‘let’s not disrupt our clients,’” he explained. “We can have Path A, where we don’t do it, and we’ll just invest in Aventura (CIBC’S loyalty program), and then see some portfolio runoff in Aeroplan. Or we can have Path B, keep Aeroplan stable, invest in the consortium, it’s good for all stakeholders, and that’s truly what’s driven us all, and the economics are completely manageable.”

In announcing the deal, the companies said the transactions was subject to a number of conditions, including “completion by the Consortium of credit card loyalty program and network agreements for future participation in Air Canada’s new loyalty program.”

That future participation could be key. CIBC noted in its third-quarter results that if the deal is finalized, “this arrangement will allow our Aeroplan clients to transfer their Aeroplan Miles to Air Canada’s new loyalty program, expected to launch on or after June 30, 2020.”

CIBC sold around 50 per cent of its Aerogold Visa portfolio to TD in 2013, in a deal valued at approximately $3.5 billion. However, CIBC also entered into a 10-year agreement with Aimia that allowed the bank to remain an issuer of Aeroplan-plan related travel credit cards.

Asked by an analyst on Thursday if it is now his expectation that CIBC will remain as an Aeroplan participant after 2020, the year Air Canada’s agreement with Aimia for Aeroplan was to expire, Dodig said he “absolutely” thought this would be the case.

“In the end, our clients hold a lot of these loyalty points,” he said, adding that he had received emails from some of those clients relaying their thanks for the move.

“That’s just a signal to me that we’re doing the right thing.”

The banks are putting an emphasis on their loyalty programs as they face a number of challenges, such as high consumer debt and competitive pressures from fintech start-ups.

There is also a cut coming in 2020 to Canadian credit-card transaction fees, which was trumpeted by the federal government earlier this month. Moody’s Investors Service recently noted that higher interchange fees have helped fund the travel and reward programs that make premium credit cards attractive to Canadian consumers.

“Banks target these ‘prime’ customers for crosssell into profitable multiproduct relationships,” the agency said.

CIBC was not the only bank with loyalty programs on the mind this week. Royal Bank of Canada president and chief executive Dave Mckay noted Wednesday that there had been a lot of talk about recent “disruption” in rewards and loyalty programs.

While Mckay focused his remarks on the looming transaction fee cut, the CEO also touted the “comprehensive and superior value proposition” of his bank’s RBC Rewards program, with its five million customers.

“We believe that having control over our proprietary loyalty program — along with leading scale and partnerships — makes RBC Rewards a unique and privileged asset,” he said. “With card purchase volumes up 11 per cent, we are growing organically and at a premium to the market.”

He said the size of the program was particularly important as it gave the bank “the flexibility to offset much of the potential impact from the reduction in interchange fees.”

Mckay’s comments come just months after RBC announced a new “next generation loyalty platform” named Ampli, in conjunction with Westjet Airlines Ltd., in June.

RBC and Westjet have already partnered on a reward-offering credit card, but Mckay also framed the bank’s direction as a counterpunch to foreignowned platforms, telling reporters that “we don’t want to be buying back our clients through someone else’s channel because they’re living their lives there.”

For Dodig, loyalty programs such as Aeroplan and Aventura (the portfolio for which the CEO said was “growing significantly”) have a real impact on his bank, which he said tries to always focus on the client.

“I truly believe that philosophy is paying dividends in terms of our share price, in terms of our earningsgrowth profile and a diversification of our earnings,” Dodig said.

“That includes this deal with Aimia and the consortium.”