Finance Committee on May 28th, 2009

[Douglas Whalen]

Credit unions tend to have very different business models for how they deliver an Interac service, let's say, versus a Maestro service. There are very different cost structures associated with those two deliveries, so the credit union as a card issuer really needs to be able to set which channel that would come down, because the costs would need to be reflected in that.

We are concerned with making sure that on the merchant's side it's a fair and level playing field in terms of making sure that, say, undue pressure isn't brought to bear to limit the opportunities and options out there.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Thank you.

I'll shift over to liability. The new chip cards are coming out. I've heard conflicting stories on the chip cards. The big concern is the shifting of liability. You can correct me if I'm wrong, but my understanding is that with the new chip card it will be a safer system. It will be safer for the users, as well as the merchants and the banks, and the liability is shifting from the banks to the individuals. Or is it just shifting to the individuals who don't change over to the chip by 2010 or 2011?

The question I have there is on the cost for the equipment. For those who are leasing, I understand that it's just a matter of shifting the lease. Is the lease rate going to remain the same, more or less? Or is it going to be something much more expensive? On the corporations--I guess this would apply mainly to the larger merchants who have their own equipment--is there anything built in there so that they can acquire new equipment, or do they have to buy new equipment and bear all the costs themselves?

[The Co-Chair, Conservative, James Rajotte]

Mr. Campbell, a brief response, please.

[Terry Campbell]

I would say that's primarily a question for the acquirers. I know you had them here the other day. They're the ones who put the machines on the desk.

The basic thing is that it is more secure. It really is in the consumer's interest, because it's very traumatic to have your card compromised. This will take care of that.

This has been under way for a long period of time. There is going to be an end date. In the shifting over to the new system of chip, there will be no shifting of liability. The banks will still have that burden of liability. However, it should be a much better system all around because of the chip.

[Anthony Rota, Liberal, Nipissing—Timiskaming, ON]

Other than....

Sorry, Mr. Chair.

[Terry Campbell]

As you say, when you're renting it or leasing it, there's no cost to that merchant.

[The Co-Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Dechert, please.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Thank you, Mr. Chair.

Ms. Hughes Anthony, you mentioned in your presentation that approximately 70% of Canadians pay off their credit card balances every month. By contrast, in the U.S. it's only about 50%, and the same in Australia. It's 56% in the U.K. You also mentioned in your materials that the delinquency rate in the U.S. is much higher than in Canada.

Can you tell us how credit card interest rates on Canadian cards compare with those in the U.S., the U.K., and Australia, given those circumstances and facts?

[Nancy Hughes Anthony]

May I ask Terry Campbell to answer?

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Sure.

[Terry Campbell]

I would say there are two things.

First, when you're comparing rates, the key point is precisely the point that you raise. For 70% of Canadians, the effective rate is zero. For Americans, that's a much smaller rate.

To do a real card-by-card comparison, you have to look across the board. Of course, interest rates tend to be affected by the local economic conditions, inflation rates, the strength of the economy, and so on. You'd have to look at the low-rate cards, the premium cards, the standard cards.

I think Canada compares very well. If you look at fees, and certainly compare with the United States, our closest competitor, we have fewer fees and we have lower fees.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

In terms of interest rates, can we do some analysis of the range of interest rates that consumers pay in the U.S. on credit cards versus in Canada? One would expect, given the more favourable situation in Canada, that interest rates would be somewhat lower.

[Terry Campbell]

We can do a comparison, but again, you have to bear in mind that they are very different markets. With U.S. cards, yes, you have an interest rate, but you have a whole bunch of other fees that you would not find here.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Okay. Understood.

I have one other question for you. Can you explain to us how banks arrive at, say, a 19% or higher interest rate on credit cards at a time when interest rates are at historic lows in terms of prime rates? What is the average effective yield to banks on rates for credit card interest?

[Nancy Hughes Anthony]

Once again, as I think I explained earlier, very often people do misunderstand the issue about the relationship to the Bank of Canada rate.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

No, I understand that point.

[Nancy Hughes Anthony]

So I think we can set that one aside.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

I'm asking how you get to 19%.

[Nancy Hughes Anthony]

You know, I think, once again, there are cards that are prime plus, the very low end of the market. There are cards that go up to higher rates.

Jim, do you want to take this one?

[James Sallas]

Let me try, because this is a difficult thing to try to understand.

What happens is that a comparison is drawn between the Bank of Canada rate and the 19%. You go, “Wow, that's much too much.” But what's really driving it in there, and the biggest cost in there, is the cost of credit losses. That is a bigger cost component than in fact the cost of funds to supply the credit.

If you do some rough math, just very quickly, 70% of customers pay the balance every month, 30% don't.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

And that effectively reduces your yield.

[James Sallas]

That reduces your yield.

Now, one way to think of it is that industry statistics for the last quarter would suggest that loss rates in Canada are running at about 4.5% on credit cards, but that's across the whole population of 100%. In terms of those 70% who pay off every month, you can't rightly attribute any losses to that population. It's the 30% who don't.

So if you have 4.5%, divided by 0.03%, all of a sudden the attributable loss rate to that 30% of the population is in the 14% range. Now you have 19%, less 14%, less the cost of funds, another four percentage points, and pretty soon you're down to a margin of 1% or 2% plus interchange.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Can you say that this is a kind of average yield rate that banks earn on credit cards?

[James Sallas]

In today's market, with today's loss rates, that's a pretty credible example, I think.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

If you could demonstrate that, I would think it might be helpful to consumers.