Finance Committee on March 22nd, 2007

[The Chair, Conservative, Brian Pallister]

I call the meeting to order.

I invite the witnesses to come forward.

Pursuant to Standing Order 108(2), this is the briefing on automated teller machine fees and electronic payments.

I welcome our witnesses. I thank you for being here.

We will allocate five minutes, as you have already been informed, for each presentation. To the witnesses, I will give you an indication when you have one minute remaining. I will then have to cut you off after your five minutes has elapsed, and we will leave time for questions for committee members. Thank you again for taking the time to be with us today; it's much appreciated.

We have a bit of housekeeping before we commence. Following the presentation we have one hour for the ATM presentations and one hour for the electronic payments. I will carry on to allow an hour for each panel, so we will go a little long. Next week we will move to deal with estimates. Following the break week we will continue our discussion on the topics we're dealing with today.

First of all, from the Canadian Bankers Association, we have Mr. Raymond Protti, president and chief executive officer. I understand he is not long for his position, but welcome here today, Mr. Protti.

Five minutes is yours, sir.

[Raymond Protti, President and Chief Executive Officer, Canadian Bankers Association]

Thank you very much, Mr. Chairman.

I have with me Karen Michell, who is the vice-president of banking operations and who knows and understands the ABM system well.

You're quite correct, Mr. Chairman. After 39 plus years, this will be my final appearance in front of the finance committee. I must say that I've always been received with extreme courtesy by the members of the committee in all the appearances I've had. I want to thank all of you for that courtesy, and the former members who used to serve on this committee as well. I wish you nothing but the best in your deliberations on this and the many other issues you have in front of you.

I will respect the five minutes.

You have received a package from us that's being distributed by the clerk. It contains a submission of 38 pages, which describes many of the features of the ABM system.

I'm going to turn your attention, please, to a slide deck that's in there, because I'd like to walk you through that slide deck. I apologize in advance. It will be quick, but I want to demonstrate some of the features of the system that we currently have in place.

Perhaps you can turn to slide 2, which reads “Competition, choice access and convenience”.

I remember intently the days when I started here as an economist with the Bank of Canada, when I had one choice to get cash. That was to go up Sparks Street to my bank and be there between ten o'clock and three, Monday to Friday, and that was it.

Today we have a branch network of 6,000. We have almost 16,000 bank-owned ABMs, and now of course, a big feature of the system, 35,000 non-bank ABMs, and 571,000--a truly explosive growth--in direct payment, point-of-service facilities. Even in that, of course, I'm not mentioning telephone banking and Internet banking. So there has been an explosion in the last 40 years in terms of what's available.

If you turn to slide 3, I want to point out that Canadian consumers have the highest ABM access in the world. The slide speaks for itself. The U.S. ranks third, and the U.K., against which we're frequently compared, ranks 22 in terms of ABM access in the world.

On slide 4, I want to emphasize this quickly, because there are different types of ABM systems available. Each of the major banks in Canada runs its own proprietary network, which is available as a delivery system for their own clients. Banks invest in these networks, and when bank clients use their own bank's ABM systems, they are doing so in a closed system and they don't pay fees for using their bank's own machines.

If we go to slide 5, this is a complicated slide. I won't spend time on it, but Ms. Michell and I would be pleased to come back to it if you'd like. It describes the process that's used when the non-client chooses to access funds from another bank's ABMs. It's a complicated system, but it works, and it's called shared cash dispensing. I won't spend any more time on it, but I would be delighted to come back to it if you'd like to have a more detailed description.

If you turn to slide 6, I want to have a quick word about the fact that our system is a low-cost, pay-for-use system, which we feel is very transparent and fair for consumers because the price they pay for their retail banking services, including ABM access, is low compared to other countries. We've done a quick comparison here, which highlights some of the issues we need to think about when we look at ABM transactions. For some countries, like the U.K., they will have no convenience fee charged for the use of bank-owned ABMs, but as you see on the chart, you will pay substantially more for some basic banking services. So it's difficult to compare one system to another, but you have to bear in mind that the pricing of a lot of products and services can and will differ substantially across countries.

On slide 7, these are very expensive systems to run. Three out of four Canadians have told us they're delighted with the technology that's available. We spent $33 billion amongst the six largest banks in the last decade. We spend about $4.5 billion to $5 billion a year now to keep the system running.

Slide 8 is a critical slide. Canadian consumers are making a lot of choices from a whole array of options available to them. Very importantly, over 75% of bank ABM cash withdrawals are clients using their own bank's ABMs. No convenience fee applies. What you will also notice on that chart is how the number of shared ABMs is increasing, but, very importantly, the number of withdrawals from ABMs not owned by a consumer's own bank is decreasing.

Why is that? If you turn to slide 9, you'll see that one of the reasons is the very explosive growth in the consumer use of point-of-sale and cash-back services that are available in grocery stores, pharmacies, drug stores, and liquor stores. There is an absolutely explosive growth in the use of Interact direct payment terminals, with a growth from 253,000 to 570,000. Ms. Michell and I are prepared to talk in more detail about the extensive use of this system.

To use up my last 30 seconds, the bottom line is that we feel there has been a development that leads to tremendous choice and competition in the banking system and with the credit union system. We feel the system is low-cost. It's a pay-for-use system that is transparent and fair for consumers, and we're making extensive investments to improve that system continuously.

Thank you, Mr. Chairman.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

We continue now with Lew Johnson, professor of finance at Queen's University.

Welcome to you, sir, and over to you.

[Dr. Lew Johnson, Professor of Finance, School of Business, Queen's University, As an Individual]

Thank you, Mr. Chair.

I've been asked to appear before the committee to give my views on ATM fees. I have not formally studied the issue, but I have read much of the literature and am aware of the issues involved. I have co-authored three books and numerous articles and book chapters on the Canadian financial industry, so I'm certainly aware of the issues and can speak to the question as an informed, dispassionate consumer.

ATM fees are contentious. In fact, one might say they're thorny. Given the views of my co-panellists, I might describe myself as a rose between two thorns.

I will argue that not all ATM fees are bad, but not all ATM fees are justified. To address this, I think it's useful to sort ATM fees into three categories. One is own-bank fees, the second is interbank fees, and the third is white label machine fees.

When most people speak of ATM or ABM fees and the controversy about them, most people are referring to the interbank fees, which I think are the ones with the highest profile. Nonetheless, the other fees exist in the system and should be addressed.

On the own-bank fees, most of us don't even realize we pay them, because they're covered by most bank plans. At my bank, I downloaded from the Internet a little thing at the bottom, and that's the per transaction cost if you don't have a plan. Most people have a plan so they don't pay it. Nonetheless, at my bank, it's 60¢ per transaction for an own-bank withdrawal. It's important to put that into perspective. It's a dollar if I go to a bank and see a teller to withdraw my money.

The issue isn't paying to withdraw your money. That's an embedded principle, or at least an embedded practice. The issue is relative pricing. The key is, what is relative pricing? My bank charges 60¢. Evidence from the U.S. is that the cost of a transaction, including amortization, salaries, and technology costs, is about 27¢. If we assume the U.S. experience is transferrable and we allow for exchange rates, then the banks get about a 100% surcharge on their basic cost. I would argue that this surcharge is probably reasonable.

The banks would argue that it's reasonable because of convenience. Well, the new system is not necessarily convenient. By commodifying the banking system, what they have done is actually restrict consumer choice. I haven't moved in 25 years, but I'm on my fourth bank branch. My account is in its fourth branch. The two closest to me have closed, and it's now extremely inconvenient for me to find money. That's not because I've changed banks, but because of the rationalization and reallocation of resources. The banks have in fact restricted choice for many people. I would argue that this is particularly a problem for students, seniors, and people living in rural areas.

That's for own-bank fees. Interbank fees are over $1.50. I would argue that these fees are probably too high and that a reasonable charge for an interbank fee is the same as an own-bank fee. I understand that there are switch costs involved through Interac and that there are interbank charges involved. These are small, and I think they can be accepted by the banks as a cost of doing business.

I recognize that this would introduce a moral hazard problem, where the banks would have little incentive to install and maintain machinery and the systems. However, as the physicists say, that's an engineering problem. I think it's readily resolvable by such things as shared revenue mechanisms or common platforms.

Turning briefly to the white label machine fees, these are pure convenience and outside the banking system. They are there for consumer choice, usually at awkward times and awkward hours. If consumers choose to use those machines, then they should bear the cost of using those machines. It is not the case for interbank ATMs, because even rational consumers, at normal business hours and in normal locations, often find that their access is restricted.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

We will conclude our presentations now with Michel Arnold, who is here from Option consommateurs. Over to you, pour cinq minutes, monsieur.

[Michel Arnold, Executive Director, Option consommateurs]

Mr. Chairman, members of the committee, thank you for inviting Option consommateurs and giving us an opportunity to express our views about automated teller machine fees.

For those of you who are not familiar with our group, Option consommateurs was established in 1983. We are a cooperative involved in defending and promoting consumer rights mainly in Quebec, but we are interested in many Canada-wide issues as well. For a number of years now, Option consommateurs has been actively involved in the area of financial services. One of the things we did was take part in the discussions that led to changes to the federal Bank Act.

Generally, when greater competition is allowed, we expect a drop in prices and an increase in the quality of service. In the case of ATMs, exactly the opposite occurred. Since the Competition Tribunal opened up the market in 1996 and allowed companies that are not financial institutions to establish and run ATMs, the fees involved have increased steadily. Since January 2002, convenience fees have also been charged to non-clients at most financial institutions' ATMs. At the time, we asked financial institutions why they had started charging these fees. Their answer was that if the others were doing it, why not them as well?

Since 2000, we have seen that the number of ATMs owned by financial institutions, as Professor Johnson was saying, has been decreasing, while the number of white label ATM has been increasing. Some business people have even removed the direct payment system and replaced with a white label ATM. We will see later in our presentation that it is cost-effective for business people to have a white label ATM on their premises.

At the same time, financial institutions have fewer and fewer ATMs in some neighbourhoods and in some rural areas. Have you ever tried to find a CIBC, TD or Scotia Bank ATM in east-end Montreal, an economically disadvantaged neighbourhood? Contrary to the claim made by some bankers, consumers cannot always walk to their institution's ATM to avoid the ever-increasing fees involved in a switch transaction.

According to figures from the Interac Association, 66% of consumers use the Interac network to make withdrawals from an ATM that does not belong to their own financial institution. This is what the association calls shared cash dispensing. The association also stated that in 2006 in Canada over 285 million shared withdrawals were made by consumers.

As Prof. Johnson said, there may be three types of fee involved in an ATM transaction: the lump sum amount paid to the financial institution, generally monthly; the Interac charges, which range from $1.50 to $2; and the convenience fee, which may vary from $1 to $3. The Interac fee and the convenience fee are charged when a consumer uses an ATM that does not belong to his or her financial institution.

We think that financial institutions are profiting unduly from this situation. By charging convenience fees, they require consumers to pay twice as much as previously for the same service and they are increasing their profits considerably, because, without knowing it, consumers are already giving a good percentage of the Interac fee to the financial institution or to the business that owns the ATM that they use. A few cents of the $1.50 charge for using the Interac network actually go to the Interac Association. The rest is more profit for the financial institutions or the private businesses.

Let us look at how the Interac fees are broken down—for example the $1.50 fee. A few cents of each transaction go to the Interac Association. The association gets 1¢ per message. Generally, there are two messages involved in a transaction, the request and the reply. The association thus makes 2¢. Seventy-five cents go to the financial institution or the business that owns the ATM where the transaction takes place, either a white label ATM or an ATM owned by a financial institution. The remainder, 73¢, when the fee is $1.50 and 48¢ when the fee is $1.25, goes to the financial institution that issued the debit card.

Since I have very little time left, I will move immediately to our recommendations. You will be getting a copy of my presentation and you will be able to refer to it.

Option consommateurs recommends that Parliament hold a public inquiry into all the factors involved in bank service fees, particularly with respect to payment services, and determine the profitability of the operations associated with these fees for deposit-banking institutions and, in light of the findings of the inquiry, decide whether it should introduce legislation concerning these fees, whether or not they are charged by federally-regulated deposit-banking financial institutions.

Option consommateurs also recommends that legislation be introduced to eliminate the convenience fees for all ATM operators. We must also ensure that these fees are not simply passed on to consumers by increasing the cost of other basic services.

Finally, Option consommateurs recommends framework legislation to regulate all the different types of electronic payments. Otherwise, rules and limitations on bank fees should be included in the Bank Act.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Arnold.

We thank all of you for your presentations.

We'll move to questions, beginning with Mr. McCallum.

You have five minutes, sir.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

I'd like to begin, if I may, with Professor Johnson.

If I understand correctly, you infer that the cost per transaction with your own bank is 30¢; they charge 60¢, and I believe I heard you say that's unreasonably high. Or it's not?

[Dr. Lew Johnson]

No, sir, I believe I said it was a surcharge that I didn't think was unreasonable.

[John McCallum, Liberal, Markham—Unionville, ON]

If it were the same cost for interbank transactions, that would be five times the cost, which would seem a very large markup. But you didn't say that. Can you say anything about what you think the cost is to the bank of the interbank transactions?

[Dr. Lew Johnson]

Yes, sir. If we assume that my 30¢ model works for the cost of the transaction proper, the switch fee, which is the Interac fee, I understand is in the order of 2¢ to 15¢, which would make it, say, 35¢ or 40¢ in total. There would then be some technology costs associated with the back-and-forth exchange of information between the two banks.

But to my mind, the 60¢ own-bank fee, which I use as a benchmark, would certainly compensate the banks for their total costs and I think would be fair to consumers.

[John McCallum, Liberal, Markham—Unionville, ON]

Listening to you, then, one would think the cost to the bank for interbank might not be greater than 40¢, something like that?

[Dr. Lew Johnson]

That would be on the low side, sir. If you take my 30¢ benchmark, the switching fee of a few pennies and some.... I don't know the magnitude of the interbank exchange in information costs, but it would probably be a tad above 40¢, or probably not much more than 60¢.

[John McCallum, Liberal, Markham—Unionville, ON]

Let's say it is 60¢. You would be claiming, then, that the markup on interbank would be 90¢ or something in that order?

[Dr. Lew Johnson]

Correct.

[John McCallum, Liberal, Markham—Unionville, ON]

And you're saying the charge could be 60¢.

[Dr. Lew Johnson]

That's my view, sir.

[John McCallum, Liberal, Markham—Unionville, ON]

It's all right to have a view, but if you're the government, or you're an advocate, how do you convince the banks or require the banks to adopt your view?

[Dr. Lew Johnson]

Well, I don't normally believe in regulating prices, in any kind; I believe in markets determining prices. But we have a situation here where we don't have a totally free market. There is imperfect competition. We have a standard charge across all banks, so there's no price discrimination among the banks.

We also have a system where some consumers have limited choice. Again, I emphasize seniors, students, people in rural areas--and some professors in Kingston who have less choice than they used to have.

So I would argue that those two elements, the lack of perfect competition and the lack of consumer choice on the part of many people, would suggest, if not regulation of prices, at least some intervention in the form of suasion to banks.

[John McCallum, Liberal, Markham—Unionville, ON]

I think the minister's been trying a little bit of suasion in recent weeks.

Mr. Protti, out of a sense of fairness, perhaps I could ask you to comment, first on this notion that the cost of the interbank transaction might be 60¢ in the fee of $1.50, and second on Mr. Johnson's suggestion that at least moral suasion, if not regulation, might be in order.

[Raymond Protti]

Thank you very much for the question.

I will give a reasonably brief answer. But Professor Johnson has raised quite a few points that I will want to reply to the committee in detail on in writing, because I simply won't have time today to refute the positions he has taken on a number of things.

I do want to speak first to his point about access. It is incorrect to say that access is in any way restricted. If you can turn to the full submission in your packages, I want to point you to a chart on page 14, which is a dramatic illustration of the contrary view on the issue of access.

I recall when my only choice, starting as an economist at the Bank of Canada in 1968, was my branch on Sparks Street. I had to be there between ten and three o'clock, Monday to Friday. That was the only time when I could access cash and the only way in which I could access cash.

If you look at the access chart on page 14 of the submission, you will see an absolutely explosive growth in what we call “access points” for Canadians in the ways in which they can get cash out of their own institutions, whether it's a bank or a credit union. What this access chart reflects is that there were two to four access points essentially for 10,000 people, 20, 25 years ago. By the year 2000, because of the explosive growth in the ABM system, and then the explosive growth in the non-bank ABM system, and then the explosive growth in point-of-sale facilities, you went to about 185 access points per 10,000.

[The Chair, Conservative, Brian Pallister]

I'm sorry, sir, I have to cut you off. Mr. McCallum's time is done.

[Raymond Protti]

I will respond in writing to some of the other points.

[The Chair, Conservative, Brian Pallister]

I'd appreciate that, sir.

We will continue with Mr. St-Cyr.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

Thank you, Mr. Chairman.

Mr. Arnold spoke briefly about the famous white label ATMs, that is those that are not owned by a bank. As a consumer, I find these machine particularly offensive, particularly when I am in a business and the business person refuses to take my credit card and directs me to one of these ATMs.

Personally, I boycott these people. I refuse to deal with people who make me pay so that I pay them, so that I can pay whatever they are selling. On the other hand, I understand that in some rural areas or in some other locations it may be impossible to do that, and that there really is no choice.

Can you tell us how extensive this problem is? For example, what sort of agreements are there between the businesses that have these white label ATMs and the companies that offer this service?