Finance Committee on April 17th, 2007

[The Chair, Conservative, Brian Pallister]

Welcome to our guests, and welcome back to work, committee members.

Pursuant to Standing Order 108(2), briefing on automated teller machine fees and electronic payments, I welcome our witnesses today. Thank you very much for your submissions earlier to the committee.

You have been told that you'll have five minutes, and I want to make it clear to you that I will have to hold you to that. I will give you an indication, if you wish to make eye contact, that you have a minute remaining or less, and then we'll unceremoniously cut you off to allow for exchange with committee members.

I welcome you and again thank you.

We'll begin with Nadia Massoud, assistant professor, finance and economics, University of Alberta. Nadia, you have five minutes.

[Dr. Nadia Massoud, Assistant Professor, Finance and Economics, University of Alberta, As an Individual]

I want to indicate from the beginning that I am here without any agenda. I'm just expressing my views in terms of research.

I started my interest in this area of research based on a personal experience. I was a PhD student at Queen's University--I had moved from Waterloo--and when I was on Queen's campus I couldn't find an ATM machine for the Royal Bank, my bank. The only ATM machine that was available around the building was TD. After paying the fee a few times, I decided I was going to avoid this and I switched from Royal Bank to TD.

Then I sat back and asked what the issue was and why banks tend to do this. I picked my thesis and I wrote three papers, published in top journals, A journals, and basically what I looked at was the following. I looked at banking competition on two fronts. The first one was basically the provision of the general banking services like credit cards, ATM machines, mortgages, and all different services. The second one was just the ATM service.

It is a competitive environment. What I found was that banks actually, in a competitive environment, provide an ATM surcharge higher than the marginal cost. This is the first finding. The second finding is that banks usually subsidize their members. The price can even go to zero. A possible solution is to go to zero. The third finding is the banks over-provide the ATM network.

Then I collected U.S. data and I tested those findings, and I found support for those results. What I found from my empirical testing is that banks that charge higher fees manage to increase their market share. This is a result of switching. Also, I found that smaller banks, if they increased their ATM surcharge, don't manage to increase their market share.

The economic explanation behind these findings is the following. Banks set their ATM fee based on two factors. The first factor is the direct impact of the revenue generation from the ATM service. The second impact is their expectation of consumer behaviour: if I expect the consumer to change his behaviour, then I should increase the ATM surcharge. What we found was that the indirect impact has a stronger effect than the direct impact. This is all driven based on competition, but the main competition is not the provision of ATM service, but the provision of general services like bank accounts, mortgages, and many other services if you choose to be a member of that bank.

In addition, one of my studies was to look at the U.S. experience with the ATM surcharge. In the U.S. what happened was that in 1996 the bank Interac laws were removed and banks were allowed to surcharge. Immediately, the year after, more than 50% of banks started to surcharge the ATM fee, and by the year 2001, 90% of those banks had started to charge. Consumer activists started to look at this issue. We're talking about 1998-99. They said this was anti-competitive, anti-consumer, and it hurt smaller banks in comparison to larger banks. They started to look at those issues. Some communities, such as Santa Monica and San Francisco, actually took action and backed initiatives to ban the surcharge. They took the case to the Supreme Court, and the Supreme Court decision in May 2003 basically ruled against the ban.

If we look at the U.S. experience, it has been going on for the past 10 years. Our reaction was a little bit late and came just recently.

My view is the following. It is competitive. And I'm not supporting banks; this is based on economic theory. This is not research, but I looked at empirical regularity. I looked, for example, at a comparison with the U.K. In the U.K. they don't surcharge for using different ATM machines, but in the U.K. it's not banned.

[The Chair, Conservative, Brian Pallister]

Thank you very much.

We will continue, but before we continue with the witnesses,

we have two very important tasks this morning. The second is the vote in the House of Commons and the first is the election of a new Vice-Chair of the Finance Committee,

and I will ask our clerk, Elizabeth Kingston, to take over at this point.

[The Clerk of the Committee, Ms. Elizabeth Kingston]

Thank you, Mr. Chair.

We will now proceed with the election of the second Vice-Chair of the Finance Committee.

I'm ready to receive nominations to that effect.

Monsieur St-Cyr.

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

I move that Mr. Paul Crête be elected Vice-Chair of the Committee.

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

I'll second that.

[The Clerk]

Is it the pleasure of the committee to adopt the motion that Paul Crête be nominated as second vice-chair of the Standing Committee on Finance?

[Some hon. members]

Agreed.

Hear, hear!

[The Chair, Conservative, Brian Pallister]

Monsieur Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I hope you will always be this happy to have me.

[The Chair, Conservative, Brian Pallister]

We'll continue now with our witnesses.

Duff Conacher is with us this morning on behalf of the Canadian Community Reinvestment Coalition.

Mr. Conacher, you'll have five minutes. I'll just give you an indication when you have a minute remaining so as not to have to cut you off without your knowing.

Please proceed, and welcome.

[Duff Conacher, Chairperson, Canadian Community Reinvestment Coalition]

Thank you very much, Mr. Chairman and committee members, for this opportunity to present on this important topic, which may seem like small change to some people. Certainly the banks try to make everybody think that it's just about small change. But it's actually a very important issue, not only of consumer protection but also of bank accountability.

I would like to thank the Committee for inviting me to make a presentation today.

I'm here representing the Canadian Community Reinvestment Coalition, which since early 1997 has been a force for increased bank accountability, consumer protection, community economic development, and the banks' role in service lending and investment across Canada. The coalition is made up of 100 citizen groups from across Canada in the areas of anti-poverty, community economic development, consumer, labour, youth, and women's groups, representing a total membership of more than three million Canadians.

The coalition has seen, through the last round of Bank Act changes, Bill C-8, with about 75% of its recommendations implemented, but unfortunately key gaps were left in every single area, including the area of service fees. As a result, the banks are still allowed to do pretty much whatever they want with Canadians' money and charge them whatever prices they want.

You've seen Mr. Raymond Protti, in his swan song presentation as head of the Canadian Bankers Association, present on March 26 these two documents to you. The problem with these documents is that while they provide lots of information, they withhold a couple of key pieces of information that are needed to determine whether the banks' prices are fair.

First of all, they withhold the key information of what it cost them to provide each service and product. Without the costs, you can't figure out what their profit margins are; and if you can't figure out their profit margins, you can't determine whether they're gouging.

Secondly, they withhold the savings that they have realized from withdrawing full-service banking by shutting down branches and firing thousands of staff in the past 15 years. As a result, we don't know how much that withdrawal of full-service banking has saved them and allowed them to become even more profitable.

Essentially, the federal government in the past 15 years has continued to allow gouging of all customers, but at the same time it has allowed a two-tiered banking system to be created where wealthy people receive full-service banking in branches, and less wealthy people are pushed to use bank machines or gouging cheque-cashing companies.

I'm going to examine briefly all the banks' arguments that are presented in these two documents. They can be easily summarized. There are lots of pages here, but actually mostly half-truths and many irrelevant claims.

First of all, the banks claim that their fees are fair. Again, this can only be proven if the banks disclose revenues and costs so that profit margin can be determined. The banks are refusing to disclose their exact revenues and costs, even though they have admitted in these documents that they know their exact costs. They do not cross-subsidize the cost of any division of their operation, so they must know their costs.

The banks claim that they only charge a so-called “convenience fee” to use another bank's machine or a non-owned bank machine. In fact, the banks have doubled the cost of using another bank's machine. They used to charge us the Interac fee. They've added the convenience fee post-2000. They've doubled the cost. Even if the convenience fee were eliminated, they would still be receiving revenue from the Interac fee.

The banks claim their fees are comparable to other countries. In fact, fees in eight countries, according to their own documents, are lower overall, including the Netherlands at 66% lower. The banks in the Netherlands also have a much lower interest spread. So they've been able to figure out how to have lower fees and a lower interest spread and still be profitable.

The banks claim that non-bank-owned machines are competitors. In fact, such machines are partners with the banks, not competitors, as they only facilitate customers accessing their bank account, and the banks save money because they pay no operating costs for these machines.

The banks claim that they are serving Canadians well. In fact, they've shut down full-service branches across the country.

They claim competition will work, so regulation is not needed. Regulation is definitely needed, because if competition worked, at least one of the banks would have lowered or cut the so-called convenience fee in the past six years, and none of them has.

The overall solution—

[The Chair, Conservative, Brian Pallister]

Sorry, Mr. Conacher, to cut you off. We will have time for exchange with committee members, but your time is up.

[Duff Conacher]

Perhaps I could just say one other sentence.

The overall solution is an audit, looking at what happened in the past 15 years and annually in the future. If that audit is not done, nothing that you recommend will protect consumers, nothing will hold the banks accountable, and the gouging will continue.

[The Chair, Conservative, Brian Pallister]

Thank you, sir.

We'll continue with the Canadian Consumer Initiative. John Lawford, counsel, is here.

Mr. Lawford, you'll have five minutes.

[John Lawford, Counsel, Canadian Consumer Initiative]

Thank you.

I'm here today to present the position of five of the six members of the Canadian Consumer Initiative on bank fees. We're also here to present the views of the Canadian Consumer Initiative as a whole on electronic payments. I don't believe I'll have time to address our electronic payments submission. Suffice it to say that we were here in February and that we're making the same submission.

We've noticed that something odd has been happening over the last decade with automated banking machines and fees. While there are more ABMs and more competition, prices have increased and service has decreased. Canadian consumers are calling on elected representatives to help them out of this obviously dysfunctional market.

Consumers are irked, or annoyed, as the Prime Minister might say, with bank fees in general and convenience fees in particular. The issue goes beyond fees, however, and what may well be at stake is the sustenance of competition in the automated banking machine market.

Economists recognize that convenience fees are first and foremost an anti-competitive weapon in the hands of network participants who wish to preserve their market share. It's therefore crucial for your committee to look in depth at the ramifications of the issue of convenience fees.

Bank income from service charges has been growing fairly steadily over the last decade and the last five years. They now top $4.6 billion for the six largest banks. In the same period, banks have eliminated 25% of their branch network, mostly in rural and low-income neighbourhoods. They've reduced the number of their own banking machines in the past five years and now own less than a third of ABMs deployed in Canada. Most have exited the market for point-of-sale payment as well.

Banks therefore invest less in equipment, have fewer tellers for transactions, and yet increase the income from new charges and fees. It should come as no surprise that consumers are angry, and they do not feel they are sharing adequately in increased cost-efficiencies enjoyed by the banks.

The Canadian ABM market was completely transformed by the consent order approved by the Competition Tribunal in 1996. This order allows providers other than financial institutions to enter the market for installed shared ABMs. There are now more than a hundred that have done so, operating 35,000 ABMs. Yet the number of shared ABM transactions has been steadily declining since 2000.

The unavoidable result of fewer transactions in a market served by more ABMs is that the number of transactions per ABM has dropped significantly. In time, the profitability of operating ABMs may become an issue for the non-bank operators, especially if market forces prompt consumers to prefer using their own bank's ABMs rather than other providers' machines.

This is exactly the effect the convenience fees tend to have. They are done so that banks can make their own customers loyal and deter them from using other banks' equipment. Economists call this effect the substitution effect. If a customer from Bank A can keep using Bank A's ABM, which he finds convenient, while switching to Bank B as a customer, Bank A loses.

The development of ING Bank is an example of what can happen. Customers switch from a “big six” bank to ING to enjoy better rates, but keep using their old bank's ABMs.

Convenience fees are designed to act as a counterweight to this substitution effect. What this means is that for banks, convenience fees are not merely an opportunity for windfall profits; they are a strategic weapon to retain customers in a market where competitors of all types are multiplying. It should therefore come as no surprise that they have not taken well to the notion of waiving convenience fees.

While banks may see a benefit in convenience fees, however, non-financial-institution ABM providers may be slowly getting strangled, as consumers would rather find one that is from their own institution than pay convenience fees. In such a scenario, competition may be drastically reduced, and in fact the very reason for a shared ABM network may be threatened as investments dwindle and the network's usefulness becomes lost on consumers.

Therefore, in order to ensure the network's survival, convenience fees should be dropped. It is unclear, however, that the non-financial-institution providers can currently survive without such income, and financial institutions are unlikely to agree to it. On the other hand, decreasing the number of shared transactions may push non-financial providers to increase fees in order to maintain revenue, in effect hastening their own demise as customers flock to cheaper means of payment.

As to the next steps, the issue of convenience fees must be understood in a more global context. Canadian consumers wish for an inexpensive, viable shared ABM network to be maintained as they experienced it, for the most part, before the banks started introducing convenience fees. Therefore, we have four recommendations for this committee.

First, the committee should require that banks provide and put on the public record accurate data regarding the costs associated with providing deposit and retail payment services to Canadian consumers, the total income for such operations, the net income derived therefrom, and the appropriate breakdown of data needed to understand specific aspects of ABM fees.

[The Chair, Conservative, Brian Pallister]

I'm sorry to cut you off. However, we have your recommendations in your written submission, as you know, and I know the committee members have familiarized themselves with them.

We'll continue with my fellow Manitoban, Andrew Douglas, who is here on behalf of Supporting Employment & Economic Development Winnipeg Inc.

Welcome, sir. It's over to you.

[Andrew Douglas, Asset Building Program Manager, Alternative Financial Services Coalition, Supporting Employment & Economic Development (SEED) Winnipeg Inc.]

Thank you for the opportunity to address this committee on behalf of the Alternative Financial Services Coalition in the north end of Winnipeg.

The north end is an inner-city community and one of the poorest in Canada. Although community members face many barriers and challenges, the people of the north end are strong, resourceful, and carry within them a strong sense of social justice.

Over the past decade, the Alternative Financial Services Coalition has been working with community members to develop financial services that increase opportunities and improve economic well-being. This work has an emphasis on cooperation, education, self-reliance, and social dignity. I'd like to talk to you about how fees incurred by low-income individuals when accessing their own money from ATMs have a negative effect on families and communities.

Before leaving Winnipeg, I stopped by my credit union to withdraw cash. I only withdrew enough to pay for the cab ride to and from the airport. For the rest of my expenses, I was fairly confident that I could use my debit card. I knew, though, that any withdrawals made from an ATM in Ottawa would carry extra fees, because my credit union does not have any branches in Ontario. But this is not the experience of most people in Winnipeg's north end.

In order to speak with you today, I have chosen to travel some distance from my credit union. The ATM fees I would need to pay in Ottawa would be because I left my community. Today in the north end, in other low-income communities in Winnipeg, Manitoba, and in Canada, many individuals and families are paying those same ATM fees not because they've left their financial institutions but because their financial institutions have left them.

In the past, there were mainstream banks at most major intersections, but those branches closed. Sometimes the banks left an ATM. In many cases the branches sat vacant, but they're not vacant any longer. Payday lenders, cheque cashers, and other fringe financial institutions now occupy those buildings. White label ATMs are sometimes the only access that individuals have to their money.

They're left with some unattractive choices. They can travel by bus for miles, often with children and strollers, to the nearest bank branch. They can use the nearest ATM, which may not belong to their financial institution and will involve extra fees, or they can give up on having a bank account and settle for the unfair charges and fees of the many neighbourhood cheque cashers. Low-income families should not be forced to make a choice of the lesser of three evils.

Communities like Winnipeg's north end are for the most part still operating in cash. When individuals are withdrawing cash from an ATM, it's generally in smaller amounts, such as $20 here and $20 there. For smaller separate withdrawals, ATM fees account for a much larger percentage of the withdrawal amount. Some could argue there's an easy solution: one could make withdrawals of larger amounts and make fewer of them. But encouraging this would discourage the act of saving and would increase the risk of robbery and assault.

For many Canadians, easy access to our money through bank branches and ATMs anywhere at any time is a basic convenience. However, for low-income communities, white label ATMs are often all that's left. Having to pay a high fee to access their own savings is simply a harsh reminder of what was lost when banks abandoned their neighbourhoods.

But there are opportunities to turn things around. In the north end, community members, the Alternative Financial Services Coalition, and community-based financial institutions such as Assiniboine Credit Union are testing a model of providing financial services that are affordable, accessible, and appropriate to the unique financial needs of the community, including financial literacy, special accounts, and microloans.

But for now, it will only help some of the people in one of Winnipeg's low-income neighbourhoods. We need to address this issue for all low-income Canadians. ATMs fees should not be a barrier between families and their savings.

Thank you for your consideration.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Douglas, and good for you for ignoring those distracting bells.

Committee members, we will continue with another presentation. I believe we'll have significant time, and perhaps even enough for two more presentations.

We'll continue with Mark O'Connell now. Mr. O'Connell is the president and CEO of Interac Association. I welcome you. Five minutes to you, sir.

[Mark O'Connell, President and Chief Executive Officer, Interac Association]

Thank you, Mr. Chairman and honourable members, for giving me this opportunity to tell you about Interac Association.

In a private not-for-profit association, our eighty-plus members have cooperated to build a national payment network that allows Canadians to access their money at any time, from just about anywhere in Canada. It offers two shared electronic financial services to Canadian consumers: Interac shared cash dispensing at automated banking machines, and Interac direct payment at the point of sale.

Shared cash dispensing allows cardholders to make cash withdrawals from ABMs not belonging to their own financial institution. Interac direct payment is Canada's national debit service, allowing consumers to make purchases by using their debit cards at more than 400,000 merchant locations from coast to coast. Through the success of these Interac services, Canadians enjoy a standard of banking convenience that is virtually unmatched around the world.

Our membership at Interac includes banks, credit unions, trust companies, payment processors, terminal deployers, and merchants. These members compete vigorously with one another in the provision of Interac services to Canadian consumers and merchants.

The members built the systems that enable the network to continuously operate in the 24/7 environment. We built and maintain the equipment that links the systems together. In addition, Interac sets and enforces the payment rules that govern the transactions over the network, we provide common marketing activities, and we provide security support for our members. Security support includes initiatives such as the fraud alert system and support of the migration of systems to chip technology to combat debit card fraud and to protect cardholders.

Interac Association does not set or regulate fees charged by our members to consumers or merchants. In fact, as an association of competitors, competition law expressly prohibits us from setting or influencing this marketplace pricing. We are, however, committed to full and fair fee disclosure for consumers. Our regulations require ABM operators to display their fees, providing consumers with an opportunity to cancel a transaction if they do not wish to pay the fee.

Interac Association does have a role in setting service pricing between our members. We set an interchange fee of 75¢, which is paid by the customer's financial institution to the ABM operator. This fee is designed to partially compensate the ABM operator for the service of providing cash to the financial institution's customer.

Canada's ABM marketplace is vibrantly competitive. The result is convenience and choice for Canadian consumers. In 1996, the Competition Bureau required our founding members to liberalize access to Interac services and removed the existing prohibition against surcharges. This enabled ABM operators to charge fees directly to consumers, encouraging new competition and promoting expanded ABM deployment. That gave birth to the white label industry. Since then, the number of ABMs in Canada has more than tripled, from 18,000 bank-owned ABMs then to roughly 55,000 ABMs today. Non-financial institutions now own and operate greater than 60% of these ABMs.

Today Canadians indeed have vast choice, and that choice is a direct result of the introduction of fees and the liberalization of the ABM marketplace. Consumers' choices for access to cash also include many low or no-cost alternatives. For example, most consumers do not pay a fee when withdrawing cash from their own financial institution's ABM or in-branch. In fact, roughly 75% of ABM cash withdrawals are made by customers using their own banks at no additional charge. Furthermore, we have seen a precipitous decline in the use of Interac shared cash dispensing, as many consumers are opting for lower-cost ways of accessing their cash, such as cash-back at the merchant, and Interac direct payment itself. Some 65% of Interac direct payment customers say they have used the cash-back option this year, up from 54% in 2000.

In summary, Interac Association is a not-for-profit organization made up of a diverse membership that competes vigorously with one another to provide customers with 24/7 access to their money. The diversity of the parties and the competitive marketplace enable consumers to enjoy a standard of banking convenience that is virtually unmatched around the world.

Thank you very much.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. O'Connell.

We'll continue with Jerry Buckland, who is here on behalf of Menno Simons College.

Welcome to you, sir, and five minutes is yours.

[Jerry Buckland, Professor, International Development Studies, Menno Simons College]

Thank you very much, Mr. Chairperson and committee members.

I'll give just a bit of background about my research. I've been studying the phenomenon of financial exclusion, initially looking at Winnipeg's north end, which Andrew Douglas has already referred to. I'm in the first year of a three-year study, with funding from SSHRC, looking at financial exclusion in three inner cities in Toronto, Winnipeg, and Vancouver.

I co-authored a report looking at some macro-statistics regarding financial exclusion and have submitted that as a brief. What I want to do now is just provide one point of context that I thought I could contribute, and then refer to the ATM fee question.

I noticed that in your March 22 meeting there was reference to particular groups that face specific challenges in regard to financial services. I'd like to pick up on a particular group that I think faces this challenge, and that is low-income people.

One way to think about the financial service sector, in my mind, is to think about it as having a supply side and a demand side. For low-income people, on the demand side, I think there's evidence that things have worsened for them. There's evidence that in the 1990s incomes of low-income Canadians stagnated and that wealth and income inequality has grown. What this means is that increasing numbers of people--and to an increasing extent, I think--have fewer incentives to be banked.

With the limited data available, I estimate that roughly 5% of Canadian adults are unbanked. And up to 10%, in addition, are under-banked; that is, they have a bank account but hardly use it. Possibly up to 16% of low-income Canadians are unbanked.

On the supply side of the question, I think there's already been a reference to a two-tier market in the financial sector, and I think there's evidence of that in many inner cities. By that, I mean that the main tier is controlled by banks and other service providers, while the second tier is controlled by fringe banks--pawn shops, payday lenders, rent-to-owns, and so on. These fringe banks are particularly focused on low-income Canadians.

For instance, in Winnipeg, I found, from the Financial Consumer Agency of Canada's data set on bank branch closures, that from 2002 to 2005 the majority of branch closures in Winnipeg occurred in low-income neighbourhoods, and that's referenced in my brief. On the other hand, fringe banks are seeing great opportunities to make profits in inner-city neighbourhoods. Again, for instance, in Winnipeg's north end, in 1980 there were 20 bank and credit union branches and only one pawn shop. By 2003, a reverse had happened. There were five bank and credit union branches and 18 fringe banks.

So how does this segmentation of banking affect a growing number of low-income Canadians? This relates to my final point regarding ATM fees. In the studies I've conducted, I've found that most low-income people--like most people, I would argue--generally behave rationally; that is, they choose financial services based on various costs and benefits they see.

The three costs I wanted to pick up on are the explicit costs, or fees, one faces. The ATM fee, the inter-bank fee, and the white label ATM fee are the costs we're talking about the most here. But for many low-income Canadians, that's one of many costs they face. There are implicit economic costs that low-income people face. For instance, bank branches have been shutting down in low-income neighbourhoods. They don't have telephones, they don't have Internet, and therefore they have to travel further. The costs to them are going to be greater. So they face more implicit economic costs.

There are, additionally, implicit social costs that low-income consumers face in terms of accessing banks. We've heard this again and again: low-income people go into banks and feel that they don't get a level of respect that they would get in other places. In fact, in some cases people feel they receive more respect in fringe banks. So there are social costs, I think, associated with this.

For many low-income people, the implicit economic and social costs of using banks are heavy, and ATM fees add one more cost. For instance, for many low-income Canadians, white label ATMs are not convenient. They are simply the only option they have.

So to address the problem of financial exclusion, what I think is needed is to look at the supply side in a broad sense. What's needed are more branches, more technologies, and more services for low-income people.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

We'll continue with Jeremy Trigg, president of the Exchange network. Welcome to you. You have five minutes.

[Jeremy Trigg, President, The Exchange Network (FICANEX)]

Good morning. Thank you for giving me the opportunity to address the committee on this important issue of ATM surcharging.

FICANEX Services is the operator of the Exchange and is owned by a number of smaller Canadian financial institutions. It has two core principles for the Exchange network, one of which is no surcharging, and the other is full functional access, including deposit taking, transfers and balance inquiries. At this date the scope of the network is 2,150 ATMs, operated by 244 financial institutions, in all provinces. Of the 244 financial institutions, all but eight are credit unions, and the balance are chartered banks.

The network is seen to offer choice for smaller financial institutions and gives customers of these financial institutions locations to perform surcharge-free transactions. In terms of surcharging, I think it's very important for the committee to understand there are three types of fees that change hands within the financial institution sector. There is interchange, paid by the card-issuing financial institution to the ATM owner—and in this light I'm going to refer to it as a financial institution. There are service charges, paid by the cardholder to their own card-issuing financial institution. And there are surcharges, paid by the cardholder to the ATM owner—and again, in this light I will refer to it as a financial institution.

We must be careful not to look at surcharges in isolation, because it's important to understand what the implications may be if indeed surcharges are regulated. Fees generated by ATM owners, be they surcharges or interchange, go towards covering the operational costs of ATMs. Any reduction in the surcharge revenue received by ATM owners may have two sets of unintended consequences.

Financial institutions will either work together to increase interchange fees, those paid between the card-issuing financial institution and the ATM-owning financial institution, to compensate for lost revenue. The card-issuing financial institution will simply pass this on to its cardholders, and therefore, instead of being surcharged, the consumer will be service-charged to a greater degree.

The other option available is that because the business case for ATMs—and we do have the greatest convenience in the world here in Canada.... If we take away the income side of the picture, given the cost of operating these, a number of locations will close down and there will be reduced convenience for Canadian consumers.

The Exchange's approach is to mimic the large proprietary networks of the five big banks in the country—though you may ask why I am saying this when I'm running a network that doesn't surcharge. Our network is larger than the smallest of those and about half the size of the largest; therefore, transactions made by Exchange cardholders at ATMs that display the Exchange logo will go without surcharges.

Having said that, every single one of our financial institutions also belongs to other networks. They all belong to Interac. Many of them belong to a credit union network known as Acculink, and internationally they belong to networks like Plus, Cirrus, and the Exchange in the U.S. Transactions made by cardholders on ATMs with those network symbols will be processed under the operating rules of those networks, which may include surcharging. So a Royal Bank cardholder, for example, who is not a member of the Exchange will be surcharged when using an Exchange ATM.

FICANEX believes that surcharging in general discourages a wider use of ATMs, and tends to push Canadians to use their own financial institutions. This is an impression that the Canadian Exchange spends a lot of time and effort trying to overcome, because it's seen as the norm. Nevertheless, it is critical to realize that any reduction in surcharging is either going to result in higher service charges ultimately or will reduce convenience for Canadian consumers.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

We'll conclude our presentations with Mel Fruitman, who is here on behalf of the Consumers' Association of Canada.

Over to you, sir.