Finance Committee on April 19th, 2007

[Jim Westlake]

I'm sorry, I don't know.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Okay. Does anyone else know?

I will pursue, then, the issue of unintended consequences. I suppose, as one of the parties in this esteemed chamber thinks it appropriate, we should abolish all electronic fees. What would be the unintended consequences of abolishing those fees? I'll start possibly with the TD or BMO. What would be the more obvious consequences?

It would seem to me that if fees were abolished, the revenue to pay for the system would have to be made up somewhere, so presumably that would be on the spreads or on the general monthly fee that's charged to customers. Presumably you wouldn't be as enthusiastic about putting new machines around the country and would not be as enthusiastic about competing with each other for seniors and youth. Possibly there would be other consequences.

I'd appreciate any response from either Mr. Hockey or Mr. Hodgson.

[Christopher Hodgson]

I mentioned in my comments that the U.K. model was not a model that we should follow. I think that's a good comparison to make here, because in the U.K., in fact, there's a significantly smaller number of ABMs per capita than we have here in Canada, and they did abolish convenience fees. What they've done, then, is package those into other fees. I could give you examples of what would be charged for things like NSF cheques and different things for which we charge $10 here. They charge £10 to £12 there, which is $30. They're built into other products and services.

With less investment in the ABM network, there likely would be more costs in other products and services, so I think you would see less choice and less convenience.

I would make one other point. After listening to some of my peers here today, I would say we've made collectively as a group in ABMs, or will have made by the end of next year, about $75 million in upgrading our ABM system. It's all part of an integrated platform; it is not just about ABMs. When we open new branches, that's part of our branding. It's part of our marketing, and it's part of convenience. If we were to abolish fees, there would be an impact for consumers and Canadians. There would be a pass-on at some point.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Mr. Hockey.

[Tim Hockey]

Mr. McKay, I think you mentioned most of the consequences. Even though it's a hypothetical situation, I would add that there would be an impact on another industry, called the white label industry. If the bill you mentioned were to pass, and fees for banking machines owned by the banks--and I think we've articulated that that's only about 30% of the network in Canada--were abolished, then the banks generally would probably not invest in that particular network. There would be an impact on the white label industry. These companies do actually pay rents to many small businesses across the country. They would be now competing against a relatively free network access. That would be another possible unintended consequence.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So the supreme irony of all of this would be that the white labels would have to, in effect, constrict their network because they would be charging and the banks wouldn't be charging, and everybody would then be hustling off to use the bank networks. The irony would be that you'd, in effect, drive customers to the banks.

[Tim Hockey]

It's possible that would be an outcome. It's tough to say.

[John McKay, Liberal, Scarborough—Guildwood, ON]

In my last couple of minutes, I just want to go to the credit unions.

You have, in effect, a free exchange among your membership. In fact, it's expanded through this other Exchange network. It makes perfectly good sense as a business model for credit unions because a lot of credit unions are small and are not nationwide. Yet you came to the conclusion that regulating fees was actually a bad idea.

I'm curious as to how you actually ended up with that conclusion. Could you expand on that?

[David Phillips, President and Chief Executive Officer, Credit Union Central of Canada]

I don't have much more to say than what's been said. The concerns we have are that it may have this effect: pricing would be less transparent, and it would affect the supply of ABM machines in the market and the convenience for Canadians. So we are not predisposed to support that as a solution.

We find that our approach is working pretty well for our members. We're interested in expanding our network, actually, our surcharge-free network, and I would hope that a year from today I could come back and tell you that it's larger than it is right now. But we can do that without any form of regulation.

[John McKay, Liberal, Scarborough—Guildwood, ON]

So those financial institutions that are clearly in it for profit, which is apparently a bad word around here, and those financial institutions whose membership have a cooperative model both say effectively the same thing: regulatory interference is not the way to go; the competition model is in fact the way to go. Is that a fair statement?

[David Phillips]

That certainly is our view, and I expect that it is the banks' view.

[The Chair, Conservative, Brian Pallister]

Mr. Crête, you have seven minutes.

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

Thank you very much for your presentations. Our fellow citizens are very interested and concerned about this question. When you pay fees, you always want to know whether or not you're getting your money's worth.

Mr. Hockey, do you have a total cost-recovery policy with regard to your ABM facilities? Does your bank keep separate accounts about this? Are your costs covered? Do you make any profit from the fees collected at ABMs or is this an attraction cost for your institution?

[Tim Hockey]

The simple answer is yes, we do look obviously to cover our costs as a private organization that is responsible to our shareholders and our customers. We obviously try to make sure we're covering the costs.

I mentioned the very large investment we made in completely upgrading and replacing our entire ABM network. Those are not investments we make lightly. We always have a business case for that. So we do look to recover our costs over time, and certainly not in any particular given year.

The issue of fees and costs in particular, I know, are of interest to this committee, and it's a complicated question to answer. First, I'm not about to disclose my cost structure, especially with my competition sitting right beside me. That is proprietary information, and we do compete strongly. I would say that because, as we all mentioned, a good proportion of our own customers use our own very large networks absolutely free, there is an element of saying that the charges being incurred by other banks' customers to use our network are more, obviously, than the cost to maintain that network. It is a rather complicated formula, which I don't think any of us would be willing to go into in any great detail, for proprietary reasons.

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

You've illustrated the complexity of the issue very well. As a citizen, banks are a specific market, and you are saying that we, as elected officials, cannot find out from you or from another company what the actual profits are from this aspect of your production. Therefore, all kinds of rumours can circulate. Wouldn't you be better off making that information public, without necessarily giving exact figures, so that the public can be the judge?

Your presentations focused a great deal on the availability of service. Virtually none of the briefs talks about the profitability of these facilities. Without giving figures, because this could harm you from the competitive standpoint, what kind of information could you give us to enable us to evaluate this issue?

[Tim Hockey]

I think the best way to look at the overall profitability question.... No private enterprise will break down discrete costs and discrete revenues to look at line items. It's just too competitive a marketplace to allow that sort of disclosure.

The competitive market does actually moderate itself. If profits are excessive, then other entrants enter that marketplace. The white label industry is a classic example of exactly that. After the competition tribunal order was made in 1996 and surcharging was allowed, this industry sprang up out of nowhere as a result of meeting a consumer need, at a rate that consumers were obviously willing to pay for the additional convenience of having a machine in a local convenience store, less their costs. And they are able to make a profit to continue to operate.

I understand that it's not exactly a satisfactory answer to be told that we don't disclose the individual line item on profitability, but I think you can understand the competitive issues.

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

My question is for any of the bank representatives. Would you be in favour of our reintroducing the amendment that had been proposed by the Liberal government in the fall of 2005? This amendment sought to broaden the mandate of the competition commissioner in order to allow her to conduct market studies, without there being any evidence of collusion necessarily, but simply to obtain information? Wouldn't that be one way of allowing you to provide readily comparable information in the future, while still protecting your competitive position?

[Tim Hockey]

I will defer to my colleagues to get off the hot seat, but I would say I don't know the details of the particular proposal you're talking about. I do know that in the course of this issue there have been many references to studies on the overall cost of banking, whether it be U.K. studies or U.S. studies or from independent bodies.

There is a lot of information, some of which the other bank representatives and I have referred to, that would suggest the overall cost of a complete banking package in Canada is incredibly strong and positive for consumers, as compared to our competitors worldwide.

You can always look at anybody individually and say that's a particular fee. I think the representatives from the CBA have said it's like judging the overall cost-effectiveness of a grocery store based on the cost of milk and the price of milk. It's inappropriate; you have to look at the complete basket of goods. We think that has been done over and over again, and we are very competitive. We know it.

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

The issue of milk is a significant one. One could consider that milk is an important product and that ready access by everyone is necessary and thus regulate that product, regardless of the fact that the business itself is profitable.

One of the difficulties that was raised on Monday is that people on welfare are encouraged to use direct deposit by provincial government ministries. However, they often live in regions where there's no bank branch and no free-of-charge banking institution. In that case, out of a $600 cheque, a welfare recipient must pay 3, 4, 5 or $6, which represents a very significant expense.

What are the banks prepared to do in that regard? You can answer that later.

[The Chair, Conservative, Brian Pallister]

Thank you very much.

We will continue now with Mr. Wallace.

[Mike Wallace, Conservative, Burlington, ON]

Thank you for joining us this morning for this discussion we continue to have on this item.

I have a couple of questions. Our NDP colleague brought forward two things during the discussions, and I want to clear the air on both of them.

First, there was a discussion that the banks were running the system, in the sense that when organizations like airports and universities were looking for suppliers of ABM services, the banks were determining whether that would be a sole source or not. So I'm going to leave it open to anybody who has bid on it, and maybe you could also comment on why you're promoting the fact that you're around universities and not on them if you're not the sole provider now.

Is there anybody from the banks who wants to comment on that? Let's start with the Royal Bank.

[Jim Westlake]

Yes, thanks for the question.

Certainly we would be delighted to be on more universities. I mentioned in my remarks that we are or will be on 37 campuses with some installations we're doing.

When we get a request for proposal, the educational institutions point out that they want exclusivity. We bid on that basis, and frequently we lose out to white label providers who are willing to pay higher fees and then pass on that charge. We will only incur the standard charge and no more. So I think we're relatively at a competitive disadvantage on that with that cost structure.

[Mike Wallace, Conservative, Burlington, ON]

Okay. Does anybody else want to comment?

Before I get into some other questions, a number of the banks own white labels and so are abandoning marketplaces and allowing their subsidiaries, through ownership of white label organizations, to take up that space and charge more and make more money.

A relatively old show, Marketplace, mentioned both Royal Bank and CIBC in January 2000, so if either bank wants to comment on that, Sonia, that would be.... Ms. Baxendale.

[Sonia Baxendale]

Certainly.

CIBC does not own any white label machines and does not have any relationship of that nature with white labellers. As you correctly stated, in about 2000 when CIBC was starting up a separately branded organization known as the Amicus division, we owned a very small number of white label machines. That division was not built with the intent of becoming a white label operator or expanding that into our CIBC network, but simply as an alternative branding for our Amicus strategy at that time.

[Mike Wallace, Conservative, Burlington, ON]

Does the Royal Bank have any comment?