Finance Committee on April 17th, 2007

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Thank you, Mr. Chairman.

I want to thank all of you for being here, and particularly to apologize--even though we couldn't do anything about it--for the rather disjointed nature of the hearings. In fact we weren't even quite sure whether we'd get to the hearings before the vote and all those good things.

Today we're studying, according to the motion before the committee, electronic transfers, automatic banking machines, and especially choice and competition for consumers, which I think most of us feel is a good thing.

When we talk about regulating banking fees or regulating ATM fees or even regulating where banks have to offer services, there is quite often what's called the law of unintended consequences. It looks as if you're helping somebody, but really the equal and opposite reaction can actually be to constrict the service, to bump up fees in other areas. By trying to do good here, you can actually cause harm in a number of other areas.

That's really what I want to focus on. For example, let's suppose that we forced the banks to reduce ABM fees. Then let's suppose the banks say, “Well, if there's not much profit in it for us, why should we put up machines and maintain them and make this all available?”, thereby handing the market over to the white label machines that actually charge more fees than the banks. There are a lot of these scenarios that bother me. I don't think any of us would disagree that we want to help people who have trouble accessing bank services, etc. But by trying to do that, are we actually driving the paradigm in other ways that are not as desirable as we had first thought?

I would like to have some commentary on that, because I think a responsible committee will want to look at what I call those unintended consequences. Do the witnesses here see that as an issue?

I'll start with Mr. O'Connell and then Mr. Cran as well.

[Mark O'Connell]

I think that is an issue. The scenario you painted is a possibility. Perhaps a greater possibility would be that the regulation of the bank side, the 32% side of this marketplace--and one of the witnesses mentioned that consumers usually act rationally in a marketplace--would probably push the white label market entirely out of existence because the consumers would be going to the low-cost provider.

We would eliminate a vibrant industry in Canada. If we can use history as our guide, I think we'd find ourselves back in 1996 with 18,000 ATMs across the entire country, and therefore, as an unintended consequence, with a reduction in the access points that we have. To say that ATM branches are going to be springing up in all of the rural areas, I think, is a little bit far-fetched. We would have the consumer losing in having fewer access points, as we had in 1996. We'd have an entire industry wiped out.

And by the way, that industry also shares a portion of its revenue with the sole proprietors who usually rent the space of that ATM. So there's an entire other industry that is benefiting from that white label industry, which we can't forget as well.

I think you're right, you would have some unintended consequences, and I see it as a lose-lose scenario.

[Bruce Cran, President, Consumers' Association of Canada]

The Consumers' Association has taken the view that this piece of the marketplace is working very well. We like it as it is. We don't want any changes; we see no reason to change.

When we came out with our position several months ago, after Mr. Layton made his statement, we had 3,000 to 4,000 e-mails, 90% of which were supporting our view. There were a smattering who didn't think the system was very good, but mainly because they thought the banks were making a huge profit. The criticisms we got were not relative to the reality of what was happening. The fact that 75% of people are making their withdrawals at their own branches and not paying fees is, I think, a very significant item.

There was a little piece of misinformation this morning from one of my colleagues—I've forgotten which one here—who mentioned that you are charged fees by credit unions. It's my understanding that with any credit union, if you belong to one, you get free access to your money at any other, no matter which province it's in.

In effect, what we have is a system that's working very well. If you don't want to take money out from a second bank's machine and pay $1.50 extra, you don't have to. Obviously people are very well aware of that. If you don't like the banks, you can go to the credit unions.

My organization looks for choice. We also look for consumers to help themselves where it's possible. I haven't seen any real arguments that there's anything wrong with the system we have operating now. My advice to the committee is, why fix something if it's not broken?

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Cran.

Thank you, Madam Ablonczy.

We have about two minutes until the vote, so we will recess again and reconvene as soon as we possibly can following the vote.

[The Chair, Conservative, Brian Pallister]

Welcome back, committee members. Other committee members will be floating in here as they get reorganized, but out of respect for the time of our witnesses and because committee members can review, of course, the proceedings tomorrow in committee evidence, we'll continue with testimony and questions now.

I see my colleague from Winnipeg North has a lovely plate of fruit and salad, but I think she'll defer for six minutes while she asks some questions, so we'll proceed now with Madam Wasylycia-Leis.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you, Mr. Chairperson, and thank you to all the panellists for your patience as we go back and forth to the House for these votes.

I really appreciate the panel today. I think this is going to be very important as we sort through the whole issue of electronic banking and ATM fees.

I also wanted to particularly thank Andrew Douglas and Jerry Buckland for coming today and giving some validity to what I have been harping at for many months—maybe years—here at the committee and in the House. I'm not sure everyone always believed me when I talked about a community as large as north end Winnipeg that has been abandoned by the banks, where we've seen 10 bank closures over the last decade, and where in fact the choices are payday lenders and other fringe financial institutions or private label ATMs, basically. We have two credit unions. We have one that is restricted in terms of membership. One is Polish and one is Ukrainian; one is open, and one is closed. And that's it.

As a result, the community really fought back against all these bank closures, without success, except that we got a little bit of money from the last bank closure, from CIBC, to help start a study into an alternative financial community services centre. That centre is now up and running. Andrew Douglas mentioned it; Jerry Buckland was instrumental in its formation. It probably is the first of its kind in the country and it's playing a vital role where the banks have failed us.

I wanted to say that, and I wanted Andrew and Jerry to talk for a minute about this.

You've heard now, as you sat through this, the whole notion that we need choice and competition. That's the mantra of the government side, and I think maybe of the Liberals too, from what I've heard today, regardless of which people fall between the cracks. And you've heard a lot about unintended consequences: that if we do this, or reduce fees, or put some pressure on the banks to change that or be more accountable, there's going to be this huge falling out in terms of access for consumers.

And yet no one of that group and others has talked about the unintended consequences of a system that has allowed banks to shut down their branches willy-nilly, take away their ATMs, and leave private label machines that charge up to $6.15 per transaction.

I think it's about time we heard from some folks at this table who think it's okay to have this system how they can explain and account for that kind of charge—especially the Consumers' Association of Canada, which claims to represent consumers—when it is happening in areas where in fact seniors and low-income people are taking 20 or 30 bucks out of a private label machine and are charged up to $6.15.

Let me start with Andrew and Jerry, and if time permits—I hope there's time—I could hear some accountability from the others on those questions.

[The Chair, Conservative, Brian Pallister]

Briefly, Mr. Douglas.

[Andrew Douglas]

Yes, thank you.

Our goal in setting up this community financial services centre—an answer that was put together in consultation with the community—was to find ways of keeping as much money in the community's pockets as possible. Recognizing that lots of the family members in our areas are receiving social assistance, employment and income assistance, for them to get that small cheque and then have to lose a good hunk of it through ATM fees or cheque-cashing fees just isn't good money management. We didn't feel right putting folks in that kind of position. On the one hand, to train folks in money management and ways of saving their money and, on the other hand, to see that there was no opportunity for them to practise it just did not feel right.

So I think, before passing it over to Mr. Buckland, as Judy.... I'm sorry.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Nobody says Wasylycia-Leis here. It's okay.

[Andrew Douglas]

We feel there is a responsibility on the part of the financial institutions. As a committee here, it's looking at ways to have community reinvestment, and to have that be a formalized process whereby banks and credit unions have a choice to, hopefully, come back to communities and make sure the services are available, and to find other ways of being a part of the community. Financial institutions don't operate in a vacuum. They were once a part of the community and should be once again.

[Jerry Buckland]

I think that in some ways we have seen unintended consequences of the way in which banks have performed in the last maybe 10 or 15 years for inner-city neighbourhoods with withdrawals of the bank branches. Certainly in Winnipeg's north end, and I think in other inner cities across the country, you can see this. Fringe banks have moved in as a result. The consequence for low-income consumers is high fees and limited services that are really dead-end services. You can't develop a savings scheme, you can't build a credit rating at a fringe bank.

So I think the solution is for banks and credit unions to work together to use these fantastic technologies, which many middle-income people take for granted, to reach into those low-income neighbourhoods.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Buckland. Your time is done.

Mr. Cran, you alluded earlier to the revenue generated by banks. You addressed that issue just briefly, or touched on it. I'm curious as to what data you have, or your organization has researched, that would tell you that the fees derived by banks from their ATMs are in line in any way with the costs of providing the service.

[Bruce Cran]

I don't think we're particularly interested in getting involved in that. What we're trying to do is to evaluate whether this $1.50 is a reasonable charge. When this came up, that's what we were looking at. We've kept our focus at that level. One day we will probably do some research into the areas that some other people have brought up here, including what you're discussing there.

At this point we're not looking at that. We're saying that Canadians generally don't mind this $1.50.

[The Chair, Conservative, Brian Pallister]

I just want to be clear on that, Mr. Cran. You're not suggesting the $1.50 charge that you've referenced is fair, justified, or right; you're simply referring to the fact that it's generally palatable among the Canadian public to have it in place. Is that correct?

[Bruce Cran]

Yes, sir.

[The Chair, Conservative, Brian Pallister]

Okay. Thank you, sir.

We'll continue with Mr. McCallum now, for five minutes.

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

Thank you, Mr. Chair.

Thank you for the patience of all the witnesses, with two votes intervening.

I guess my question has to do with what exactly people want the government to do. I think my colleague asked a question or two on that, and I'm not sure he got a terribly clear answer. I'm a little bit with Diane Ablonczy on this, which is a rare event, but it's a question of unintended consequences. As a simple matter of economics, it seems to me that if, for example, you ban fees on bank machines giving money to people from other banks, then there will be far fewer of those machines. If there are far fewer of those machines, people will have to use the white label machines, which are now 60%-plus of the market and cost a whole lot more.

I don't understand what the NDP is proposing, or what others are proposing to do, because it seems to me that you could easily end up hurting the very people you are trying to help. I haven't heard a clear answer on that. I'd like Mr. Conacher, who wants to speak, to answer briefly, and then Mr. O'Connell would be a good intervener as well.

[Duff Conacher]

The lowering of one fee will just be replaced by the banks' adding a new fee or increasing other fees. The banks have said that, although the bank official who said that to The Globe and Mail did not want to be named. As a result, the only solution is to regulate the banks as providers of essential banking services--services as essential as heat and hydro and telephone for living in today's society--as other essential service companies are regulated. That means you need to do an audit, looking back over the past 15 years and annually in the future, of the revenues the banks have received from each fee for each service and product, the cost the banks paid to provide each service and product--

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

I read your press release, but what do you want to come out of that? What action do you want to take?

[Duff Conacher]

You also need to look at the effects on competition and whether there actually is competition in many areas of the country for banking service providers that are providing services in the ways that Canadians want to bank. When you look at those, I think you will find monopolies and duopolies across the country for these essential services. You'll find that the banks have saved hundreds of billions by withdrawing full-service banking.

The government should then require the banks to give something back finally, in setting up machines, in setting up full-service branches for access to basic banking services, at least, in many areas of the country where they've been shut down. There will be no effects at all in terms of access or what is out there already, because you'll simply be asking the banks to give back based on the savings they have realized and the costs they've imposed on the country. That's what they did in the U.S. twenty years ago, but we still don't have it here.

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

Thank you, but I still don't understand.

And I'm now going to turn to Mr. O'Connell.

If the banks are required to have zero price on all these machines, I still don't really understand how they'll have any machines at all. I'd like to ask you, Mr. O'Connell, about this issue of unintended consequences.

[Mark O'Connell]

As I said before, I think we must be careful. We're here to talk about the ABM industry, whether consumers are being adversely affected and whether this industry is competitive. My colleagues keep branching out into an overhaul of the banking system, whether it's in the rural areas or in the cities, so I'm going to try to keep it on point.

I won't make assumptions as to what the banks will do, as Duff has done, as far as their fees are concerned. I will say that I know the investment certainly will not go into a network if it is not cost-effective. As Nadia's research has indicated, they will not be investing into that network. History is our guide. We will see a shrinkage of services in the ABM channel from the banks.

And as I said, you then have the other issue of the white label industry being wiped of the face of the marketplace as well. That will again adversely affect the consumer.

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

Maybe I could ask Professor Massoud for a dispassionate academic view on this subject.

[The Chair, Conservative, Brian Pallister]

It will have to be a very brief dispassionate academic response.

[Dr. Nadia Massoud]

I investigated this point in particular, and my research was funded by the Schulich School of Business. I looked at the consequences of a policy of banning the ATM surcharges, and the main result would be lower ATM density. The fee is higher for the bank member, so the fee is switched from the foreign users of the ATM to the bank's own members. That does not improve things, but is just a switching of behaviour.