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.