Finance Committee on May 28th, 2009

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

I'm going to go back to the chip card and the chip, because the chip applies to both debit and credit. Would you say generally that chip cards exist so that you can have less fraud, and you're concerned about fraud? I see nodding heads everywhere.

[Cathy Honor]

Yes.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

Okay. Would you clarify that in general, as I think RBC said, your fraud issues have been going down over the last--

[Cathy Honor]

Up.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

You're saying they're going up.

Is it fair to say that when you're moving to this new technology, this chip card, you are now passing on that fraud-related cost to merchants?

[Cathy Honor]

No.

[Siobhan Coady, Liberal, St. John's South—Mount Pearl, NL]

You're saying no. It's my understanding that debit cards especially will pass the cost of fraud to the merchant.

[Nancy Hughes Anthony]

No, that is definitely not the case.

It's unfortunate that the cost of fraud is increasing generally. The bad guys, unfortunately, are continuing to get smarter and smarter all the time.

[Cathy Honor]

The chip will prevent fraud. The chip is being implemented around the world. If a merchant doesn't put in a chip reader and therefore is preventing it, then they would be responsible for fraud. As long as they put in a chip reader, the issuer is responsible for fraud.

[The Co-Chair, Conservative, James Rajotte]

Thank you, Ms. Coady.

Go ahead, Mr. Vincent, please.

[Robert Vincent, Bloc, Shefford, QC]

Thank you, Mr. Chair.

I would like to continue along the same lines as my colleague. He said that the Bank of Canada interest rate is 0.25%, and that money could be borrowed from this institution. But the interest rate you charge on credit cards may vary from 18% to 19.5%. If we compare that to the Bank of Canada interest rate, is your rate not much too high for consumers?

[Nancy Hughes Anthony]

No. As I just said, the Bank of Canada rate accounts for less than 1% of the cost of funds for banks. Banks have to find sources of funds in Canada and abroad, and the cost they pay is much higher than the Bank of Canada rate.

I will ask my colleague to continue.

[Robert Vincent, Bloc, Shefford, QC]

Is money available from the Bank of Canada? Can people borrow whatever amount they wish from the Bank of Canada at the rate of 0.25%? Otherwise, is the Bank of Canada talking through its hat when it tells banks and credit unions that it is making money available to them at a very low rate in order to get the economy going?

[Terry Campbell]

I'm going to have to speak in English.

The Bank of Canada rate is literally an overnight rate. It only applies to that overnight settlement; that's literally all it is. As Ms. Hughes Anthony said, it's less than 1%.

Let's look at credit card interest rates. A lot of people talk about 19%, and so on, but there is a wide array of low interest rate cards. You have to look at the whole array of interest rates available. That's the first point.

The second point, again, is that when you look at how cards are used, 70% of people pay them off. So, in effect, the interest rate is 0%. From the bank's perspective, that means there is an interest-free period of up to 51 days that has to be managed, and it's unsecured credit.

You also have to take into account all of the costs of issuing the cards and running the system. We talked about fraud a moment ago. There was half a billion dollars of fraud last year. That was actually up 34% from the year previously. All of that has to be managed in terms of the offering of that card.

We talked about the chip and security. Again, that is a continual battle to keep ahead of the game. All of that also has to be reflected in that card.

All of those things are taken together, and we've seen the risks growing. This is unsecured and relatively risky credit, and it must be priced accordingly.

[Robert Vincent, Bloc, Shefford, QC]

What is the difference between the money you need from the Bank of Canada and the money you need overall for credit card payments? If you tell me that 70% of people pay off their credit card balance, that means that only 30% of them are using your money. So, the total amount of money you need is much less than it is for others. The money you need can come in part from the Bank of Canada, and the money consumers have in their bank accounts, on which you pay 0.75% or 1%, should be enough to cover the rest.

You said we could find out the interest rates on the Internet. I therefore did a little test. I entered the amount of $2,500 at 18%. Did you know that if consumers pay the minimum monthly amount required by the credit card company, it will take them eight and a half years to pay off the $2,500?

[Nancy Hughes Anthony]

I will make two brief comments.

The banks fund themselves globally, and they tend to fund themselves on a matching basis. They need so many funds for the short term; they have so many mortgages at five years and so many mortgages at ten years, and they need to match those funds in the global market. So there are no funds actually set aside for which it's said, these are for credit cards.

But I would also point out, Mr. Vincent, that a credit card is only one type of financing. Someone might be better off with a line of credit. They might be better off with a short-term loan. A credit card is not the potential answer for everybody's financing needs. People have the opportunity to shop around for the type of credit card they need, but they might be better off with a line of credit at a totally different interest rate, if they want to hold a balance for some period of time.

[The Co-Chair, Conservative, James Rajotte]

Thank you. Merci.

We'll go now to Mr. Wallace, please.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

I want to thank our guests here today.

To start off, I want to thank the Canadian Bankers Association. I've asked them for information, which I've been able to use for my constituents at home to explain the banking situation in this country, including credit cards. They've done an excellent job of providing that information, and I appreciate that effort.

And, to be frank with you, as Canadians, we're pretty proud of the banking system we have here compared with what's happening south of the border and elsewhere in the world, and I appreciate the work the banks do. However, there are problems, and that's why you're here.

Nancy, I'll ask you a question first. You talked about disclosure and transparency, and you think you've been pretty good about it. I happen to be a customer, so I can say this. To my friends from the TD Bank who are here—that is, Mr. Sallas—here is the agreement that I hold up here. It's four or five pages, printed on both sides with very small print. Then we have the actual agreement that I signed, with very, very, small print. Let me just read you a little bit here. You talked about interest rates and being transparent on interest rates, so I read:

The preferred variable annual interest rate for the TD Emerald Visa Card is one of the following: “TD Prime” + 1.9%, “TD Prime” + 3.9%.

“TD Prime” means the annual interest rate established and reported by us to the Bank of Canada from time to time as a reference rate of interest for the determination of interest rates that we charge to customers of varying degrees of creditworthiness in Canada for Canadian Dollar loans.

That is not very transparent. That's not very clear, in my view. Do you agree that we need to clean that up, as has been announced, so that consumers at least know what they're signing up for?

[Nancy Hughes Anthony]

I would agree, but I would also say, Mr. Wallace, that we, as an industry, need to respond to the cost of borrowing regulations, and chances are that behind every one of those darn little paragraphs there is a regulation that makes us explain that. So now we have a whole bunch more regulations, which we're going to have to add to.

That said, I know there are some suggestions in the regulations the government has brought forward--for example, to put a box very clearly on an application that will provide the top statistics for the consumer. Boy, if that helps, and if that does clarify that for consumers...obviously you can't do enough to explain it.

There is a representative here from TD who I know is going to speak to every one of those little paragraphs and codicils--

[Mike Wallace, Conservative, Burlington, ON]

I don't have that much time, though.

[James Sallas, Vice-President, Personal Lending and Credit Cards, TD Canada Trust]

The only thing I would like to add is that we recognize that the words are very complicated. We've been struggling hard to try to find plain language to help explain some of these terms. However, the net result of what you have read is that the customer would enjoy an interest rate as low as 4.15% or as high as 9.15%, so--

[Mike Wallace, Conservative, Burlington, ON]

There is no way I would know that. I'm not the smartest in the toolbox, but I'm not too bad, and there is no way I would have figured that out.

Part of the announcement was the 21-day grace period. I know you have number crunchers at the bank. Have you figured out what those savings are to consumers, and would you share that with us, on average, of course?

[Nancy Hughes Anthony]

That has an industry-wide implication. It has implications for many more institutions than those around this table. The minister said, when he announced that specific change, that it probably had an impact of tens of millions of dollars. I think that is a low estimate, quite frankly. I think there will probably be more impact just on that change.

[Mike Wallace, Conservative, Burlington, ON]

Is that more impact on the consumers?

[Nancy Hughes Anthony]

That is on costs. I'm sorry, I thought your question was on costs.