Finance Committee on April 19th, 2007

[The Chair, Conservative, Brian Pallister]

So in effect, part of the reality of a fee structure is that it helps each of your institutions protect your existing client base. Is that not true?

[Tim Hockey]

True.

[The Chair, Conservative, Brian Pallister]

Yes. And is the concern in lowering fees, which a number of witnesses have alluded to the possibility of, that this would therefore result in less ability to protect your own institutional client base from erosion by competitors?

[Tim Hockey]

True. We think our own customers would not necessarily be amenable to the fact that non-customers...and you've heard this example in the press. It would be like being a member of a gym and having non-members of the gym being able to use it for free. It goes against common business practices.

[The Chair, Conservative, Brian Pallister]

So there's an aspect of institutional protection in the presence of these fees. That is a reality.

Mr. Thibault.

[Robert Thibault, Liberal, West Nova, NS]

Merci.

I'd like to take it back and look at what we've heard so far in committee, both this morning and in other instances.

Prior to 1996 we had an evolving industry. The ATM industry had evolving service out there. We had a collective monopoly in the large financial institutions. The bank owned and controlled the Interac service, kept other people out by having huge or very high membership fees, and didn't permit people to charge convenience fees. Private sector operators who didn't have the full service, who wouldn't have been in the banking service, couldn't have access, couldn't compete, couldn't get in. So we did have a joint monopoly, or a collective monopoly.

With the decision of the board in 1996 lowering those membership fees, or permitting access to competitors through the Interac network, permitting convenience fees, we've had the evolution that we've seen now, where we have a variety of fees charged--from $3 to zero in most cases, depending on where you are--and a lot of choice, a lot of points of access.

I look at that evolution and say, if Parliament gets involved and all of a sudden we start regulating fees--or eliminating fees, as the NDP is suggesting--I would surmise that the risk is that we would reduce service, that we would reduce choice, and that we would reduce the points of service.

Do any of you disagree with that point?

[Jim Westlake]

I'm glad you had time to stay and ask your question. I agree wholeheartedly with that.

[Robert Thibault, Liberal, West Nova, NS]

If there's no disagreement, I'll accept that as your view of the facts. But there are a couple of areas where I do have concerns.

Perhaps I'll start with you, Mr. Westlake, with regard to the first area, the captive market. I recognize it's not the purview of Parliament; it's the purview of the individual operators, I guess--the universities, the airports, and those institutions. But where you have a large market of people who are pretty well captive to that locale and you limit the choice of machines in those areas, where you have one institution that bids on that market, then the clients of other institutions won't have free access to their money. They will have to pay convenience fees. It's similar to airports. That is a concern to me.

I would ask, in your discussions and through the Canadian Bankers Association or however, that you consider finding a fair way to give reasonable access to all institutions, from credit unions to the large banks, to give some access to those captive markets.

Is that possible?

[Jim Westlake]

I think I mentioned earlier in my comments that we are not the ones who make that decision. We'd be delighted to be on every university campus, in every airport, and we'd be happy if our competitors were there so that we could all have that access for our own clients. We would like that. We're not able to put that in. It is up to the individual institution when they come out and say that they want exclusivity.

Our competitive response, because we're trying to follow our clients--I'll use universities as the best example--is that we know that we have so many clients at those universities, so we try to get as close as we can. We're restricted from being on campus. We've put 1,200 ATMs in Canada within three kilometres of the 229 universities and colleges. That's been our response because we're not able to go on campus.

[Robert Thibault, Liberal, West Nova, NS]

I recognize the point, but could there not be an agreement, while not everybody would necessarily have machines in all institutions, that when you have privately operated public institutions like airports and universities, whatever institution wins the contract will not charge convenience fees to members of other financial institutions, including the credit unions? There is a difference between that and competing stores or competing service stations or corners. There is more of a captive market, and they are, for the most part, the people with the least ability to pay these fees.

Would that type of discussion, that type of negotiation be possible?

[Jim Westlake]

Under the agreement, if an airport came and said, “Here's the deal. Please bid”, it would be, I think, impossible for us to win the bid and then give everybody access to the ATM without a fee.

[Sonia Baxendale]

I think the other key point is that a large proportion of those machines are white label machines, so we don't influence or control or have any ability in that case. Hence, I think the result for many of us, in order to serve that customer base, is to find locations as close as possible to be able to serve those customers.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Thibeault. Bon voyage.

We continue now with Monsieur St-Cyr.

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

Thank you, Mr. Chairman.

I'd like to get back to the issue of costs because that seems to be very important.

I must say that your strategy completely escapes me because people are telling us that they can't make the link between the cost of service offered and the fees that they must pay for that service. You're telling us that you do not want to reveal the cost for competitive reasons. We're getting somewhat contradictory statements here. Indeed, you're also telling us that you're extremely transparent, but you don't want to give us the figures. That seems strange to me.

I might have something to propose here and I hope that you will agree with it. Let's say each one of you, the banks and financial institutions, are asked to submit your figures to an independent organization, such as the Competition Bureau. That organization would keep that information confidential. It would simply give the committee the average that is calculated given the various figures. That organization could appear before the committee to tell us, overall, the difference in the cost of a transaction from one bank to another, from one institution to another, be it 25¢, 35¢, $1 or $3. Would you agree to this approach, in order to help us make the right decisions, or is legislation the only way to go for us to obtain that data?

Mr. Tremblay.

[Michel Tremblay]

Indeed, we're trying to be as transparent as possible, but this is not always easy because we're talking about a marginal cost, the average cost, and it's not easy to identify that cost. It depends on the type of ABM, or the type of transaction. However, we did take some action.

I'd like to refer to the letter that Mr. Raymond, our president and CEO, sent to the Minister of Finance. In that letter, he states that he would like to point out that the direct income that we receive from ABMs is approximately comparable and equivalent to the direct costs of managing these systems. I think a sentence like that should be reasonably satisfactory to you...

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

So, since these figures are public, because of the letter, you would be prepared to submit them to an organization so that we can calculate the average for the industry.

[Michel Tremblay]

That's not what I said. In fact, I did not say that we wanted to disclose the costs per transaction, which is a much more precious and fundamental piece of data in terms of competition. I simply wanted to say how far we were prepared to go, by explaining clearly that the total direct income is roughly comparable to the total direct costs, taking into account the nuances in the measurement of income and costs.

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

If we wanted to get some idea of the market, of the unit cost, could you give that information—not disclose it publicly—to an independent, reliable and credible organization that would keep it confidential and that would calculate the average? You don't seem prepared to do that either.

[Michel Tremblay]

That's not true only of ABMs. It would be the same for all our activities: we don't disclose our costs as a general rule.

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

Is that the case for all the banks? Are there any that would be prepared to disclose that data to the Competition Bureau, for example, if it were to keep the information confidential and not disclose it to your competitors but give us only the average? It seems to me that would not be highly compromising information. Since there is competition on the market supposedly, generally speaking the average should always be the same. It would be surprising if the transaction fees of one bank were $1.50 and those of another bank 18¢. So those fees must be quite similar.

[The Chair, Conservative, Brian Pallister]

Do you have any questions, Mr. St-Cyr?

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

That was a question. According to what I'm hearing, if members of Parliament want to obtain figures to know what they're going to vote on, they have no other recourse than to demand them by legislation. We're proposing a method that seems to me perfectly acceptable, that would not harm you from a competitive standpoint, that would enable us to make the right decisions. But obviously, there's no enthusiasm for it here and no one is prepared to accept it.

Am I mistaken when I say that no one is prepared to adopt a solution which would not disclose the figures to the general public but that would enable us to get the industry average?

[Jim Westlake]

I'll comment on cost generally, if you want.

To my knowledge, there is no accounting convention for the way that you account for ABMs. I can tell you that at Royal Bank we do not have a separate P and L that adds up our ABM costs. If we were even to submit it to your point--which I would not want to do--I can tell you that I don't know where you'd even start asking what to include.

We have all of the hardware, software, development, and innovation costs. We have the cost of getting money there. We have signage that we put on the machines. We provide security. We repair machines that are damaged. There is all of information technology, maintenance, general administration, service, staffing, and armoured truck services. We pay over $40 million a year to just get cash to the machines. There is research and development. There are premises costs. How much of your premises do you allocate to a machine, if it's sitting in a branch? There are communications and debit card issuing, when we issue the cards to the people. There are payments to retailers and how they go. There is the cost of funds, and the lost opportunity for money sitting in the machines.

What does an ABM cost? That is not an easy question to answer.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup, monsieur.

C'est terminé, Monsieur St-Cyr.

It would seem, however, Mr. Westlake, that by enunciating the various categories, as you have just done, you have presented yourself with a communications opportunity here.

A number of our witnesses are obviously concerned about banks' overcharging for said services. Without revealing any explicit, specific competitive numbers, there is an opportunity for one of you or all of you to communicate with those who are concerned about the degree of revenue you generate from said charges, and the degree of reinvestment and maintenance investment that you make in said service.

That's just a thought.

We continue with Mr. Del Mastro now.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chairman.

I'm going to reference the same January 2000 article that my colleague referenced earlier. A postscript to the article reads: “It hasn't happened, but someday you just might find an additional surcharge whenever you use any bank machine but your own”. So about seven years later, we see that actually has happened, and there is a fee that's charged whenever you use any bank machine other than your own.

My urban colleagues on my left and right are going to shut down here for a second, but I'm going to use a bit of a farm analogy.

On the farm, we'll string up an electric fence that keeps a cow in the field so it doesn't go into an adjacent field. I think we could actually draw a bit of a parallel and say the banks are putting up a bit of a fence around their own customers, and that there is a bit of protectionism in saying, “If you use our machines, we won't charge you; if you use anyone else's, we'll hit you for it”, as a customer retention method.

There are six major chartered banks in Canada. I understand you don't want foreign competition coming in and eating up your market share. You don't want near-banks, you don't want credit unions coming in and competing on the same level as you have. Perhaps you have additional costs and so forth. But amongst the six major chartered banks, would you consider an agreement whereby you wouldn't charge another bank's customers for use at your own ABMs?

Mr. Hockey, would you like to answer that? Would you consider that?